All Forum Posts by: Zach Westerfield

the exact answer is, it depends.

in general... Both BRRR and Flipping create equity. In fact, i like to say that BRRR is flipping, its just flipping to yourself. SO at the highest level the main difference between the two is how do you want to access your equity?

Equity, in itself, is useless. you cannot buy properties with equity, and it is little more than numbers on paper. You have to decide how you want to use that equity. When you flip, you turn the equity into cash quickly. With a BRRR you take the same equity, yet leave it in the property (that hopefully cash flows) thus producing a return on equity in the form of a monthly payment. Both route have their pluses and negatives.

Flipping liquidates your equity into cash to use now. BRRR gives you a steady return on that equity over time. One penalty for flipping is taxes. Typically liquidating your equity through a flip-sale produces the highest tax burden on that equity.

as far as a specific property, i analyze BRRRs and Flips the same way. both need to have value added, typically through renovation. the exit strategy is all that changes. right now i need to create cash, so i am flipping more. for long term cash flowing assets (that continue to build that equity) i BRRR.

first get a good idea of what the project will cost you to clear all issues and renovate to the market standard. Then figure out what the ARV would be. does not matter if you flip vs BRRR, both of these are inputs. if neither makes sense, look for another option (clear the lot) or walk away. just because you have an in on the property doesn't make it a good deal.

i always start every project with any renovations other than pure cosmetic by talking to the local building/zoning office. Call them, or go in person and take a friendly air and tell them what you want to do, and ask if there are any building or zoning considerations you should know about. Some can be a pain to deal with, and i have had others tell me they really didnt care what i did as long as no one working on the house kills themselves or blows themselves up. 

a good contractor will also know the code and be able to answer your questions. building code varies by location, with each state setting their own code and local municipalities adding on top of it. In general, yes there are requirements for qualification for bedrooms and such. off the top of my head i know in my area in order to qualify for a bedroom it must have a certain sq ft, have a closet and have a fire egress point (window). i know a house where the owners finished in a basement and added another bedroom but when it came time to appraise it did not qualify.  

@Brandon Rouer banks are one of the biggest headaches of real estate investing. I have talked to at least 25-30 and everyone is different. Good luck!

@Brandon Rouer is the property rented out? Obviously I don’t know your tax situation, but I have had several banks “cancel out” the debt from a rental by sending them the lease (proving it’s rented for more than the mortgage payment). Basically, as long as the rent for my individual properties is higher than the mortgage payments, the bank treats the properties like they don’t exist. Then I’m just qualifying for the new loan based on my W2 salary, and debt from my personal residence

You are correct. A delayed finance does not include rehab costs. I was confused because it used to be allowed (or either the banks got away with it) so I was in-fact able to include rehab costs in my delayed finance, but that has been shut down.

One last option, on a recent podcast Brandon turner mentioned he will find a private lender to act as a “bridge lender”. He will secure a loan from them for the amount he has invested to get his cash back to work, then wait the six month seasoning period to refi and pay the investor back. It’s a very safe investment for the private money lender

@Joe Roberts let me ask my banker. I thought I had done that before, but it’s been several years so maybe it was just closing costs. Rehab on that particular project was only about 5k so it’s hard to remember

i have not heard of any commercial loans with those terms. Your best bet my be trying to find a local bank with favorable terms for portfolio loans. 

Im confused by your statement "I am not trying to pull out more than purchase+rehab". I believe you can pull out rehab costs with a delayed finance. you just cant pull out MORE than your input costs (purchase + rehab). So if you bought it for $70K, put $30K in the rehab, and it appraises for $150K, you can refi out $100K, but not $112K (75% LTV). For the BRRR strategy, the best you can do with a delayed finance is zero money out of pocket. You cant walk away with more cash than you began with.

Check out the book Estimating Rehab Costs by J Scott. Its a great place to start. Prices can vary widely even in the same market. I have been trying to hone this down for a few years. The best way I have found so far is comparing multiple quotes. Even this isnt straight forward as every contractor splits line items differently, so there is a good bit of work involved to get apples to apples comparisons. Im a data nerd at heart so heavy excel work is something I enjoy. Im interested to see if your concept of sharing prices exists. This seems to be the one area of the real estate world where investors dont readily work together. Good contractors are so hard to find most investors tend to keep them close hold. I personally believe there has to be a better way of doing business. 

Joe,

Are you looking for a commercial product or residential? I have yet to come across a lender that does not have a 6 month seasoning period on residential investment loans, but I would love to follow along and see if anyone has. 

Also, most lenders I have talked to are not going about 75% LTV on investment loans in this environment, even those that would do higher before. That's only about 5-6 lenders though.

Are you looking to pull additional cash out, or just your invested cash? If just invested cash, have you considered a delayed finance?

@Sid Desai I am not knocking inspectors, they are a valuable resource particularly for the average resident homeowner buying a home. I am just pointing out that in most cases their product is tailored for that type of client, and not necessarily for an investor looking at distressed properties. If it comes down to it and you cannot find a good licensed contractor, an inspector is always a good backup option. I WOULD NOT recommend not getting any type of inspection unless you have lots of experience in this field.