BRRRR properties are a special breed… meaning they are hard to find right now. The challenge is that when you go to refi, you have to leave 25% of the value in the property.

When you start doing the math it can get tough:

You have $20,000.  On a traditional lender you have to put 20% down.  With the amount of money you have to work with you are almost forced into a hard money lender because you wouldn’t be able to buy the house and fix it up traditionally.  But disregarding that fact for the moment, let’s run a hypothetical purchase:

Let’s say you found a house for $80,000, that for $15,000 in renovations you think could refi for $125,000.  So a $45,000 increase through rehab / forced appreciation.  

A hard money lender usually takes 2% off the top (ie only gives you 98% of the money you borrow), then charges a higher interest rate.  Let’s say 12% to keep it easy (1% a month).

If we work backwards for a moment, if the house appraises at $125,000, the bank is going to require you to leave $31,250 in equity in the property (25%) on the new value.   $125,000 minus $ 31,250 equals $93,750 that they would give you on a refi loan.  

So real quickly you will see that the $80,000 you borrowed, plus say $5,000 to close to buy the property, plus the $4,000 in closing costs to refi the property, plus the $15,000 to rehab the property, plus say 5 months interest ($4,000) exceeds the $93,750 the bank will loan you… so that spread between purchase and ARV isn't good enough to be able to get any cash out of the property.

If you bump the ARV to $150,000 (has to appraise for that - and you won't know if it will until AFTER you have bought it and done the work), the lender will lend $112,500. Your expenses from above equal $109,600 factoring in the 2% the hard money lender took off the top… so you would have a new loan and get $2,900 in cash back at closing.

Finding an $80,000 house that will ARV for $150,000 with only $15,000 in improvements is a TALL order in today's market. It is possible… we have done it a couple of times on phenomenal buys in the past 4 years, but they are very few and far between.

Then there is the risk of it not appraising, cost overruns on rehab, permit issues, vendor delays,  supplier delays,  time delays that run up the interest bill and carrying costs like insurance, electricity, not to mention the downward pressure on the market right now due to high interest rates, which will likely bring housing prices down, etc.  

If flipping, instead of holding, our rule of thumb on any flip is that we have to expect to at least clear $50,000 when we sell the property, because keep in mind you also have capital gains taxes you will have to pay which short term are your actual income tax rate, or 15% if held for over a year (with an income under ~$400,000).

If your question is, “Should I do this?“ I would say the answer is no, not with the amount of money that you have to work with.  it is highly unlikely that you can find a property at the price points mentioned, and you do not have enough in reserve to handle any mess ups. If you could partner with someone that has additional financial resources, it might be a possibility, but on your own it would be a real risky move. 

All the best!

Randy 

Hi @Alyssa Patterson, BRRRR is a great strategy, but as Randall mentioned, hard money would probably be the only option, it is tough in todays market, and can be even tougher in Denver, and having only 20K would make your margins extremely thin, and would create a lot of risk if something went wrong (rehab costing more, appraisal not coming in at ARV you were hoping for etc). What are your goals for doing a BRRRR? IF you are simply trying to add properties to your portfolio, I would recommend that you buy a home that would be a great rental or short term rental, living in it for a year and do repairs you can while living there, and then move out and rent it as soon as you have the funds for the next down payment, but that totally depends on what your goals are, I hope that is helpful!

Yeah with 20k, I would say you are better off as Ryan suggests, finding a live in flip or something you can add value too. You could also do a house hack, either option would give you a little more wiggle room and room for mistakes. The only way I would consider a BRRR (or a true flip) is if you are a good contractor/builder and can provide the labor 'free' which makes it easier to do rehab on a small budget.

I’m trying to cash-out refinance a single family home, and rent it out. Then get a loan for %80 the equity of property I just flipped and use it to Pay existing loan. Continue renting the property, then use the remainder to get another flip, fix up, rent, repeat? Does this sound correct?  I’m not looking for a quick buck, or just sell immediately just to walk away with a “big check”.  This is a long term plan. I already have someone offering me a loan for a property and flip with 15k down. If I find a property thats listed for 30% below the property vale or more. He will work with me. I have client from my massage business who is a contractor, who can help me do repairs at a discount. and I plan on doing some clean up myself. The first person I talked to was happy to give me a loan for this. I guess people are willing to work with you if the property is at enough of a discount? Let me know if this sounds right, I’m a newbie still, learning the lingo. Im 28 and I make 10-12k a month with running my massage business out of my studio apartment downtown, so doing the multi family live-in flip situation is not an option for me. Let me know what you guys think. should I explore my options for hard money loaners? Or just go with the first offer? he seemed very flexible as long as the property is worth his while. Seems plane and simple as far as that goes. Is that most hard money loaners attitude? Let me know is this is a good way to build wealth over time, it seems like it’s how a lot of people get started. 

I'm a huge fans of BRRR's. I've done 5 or so in Columbus OH.

I think with any kind of development there will always be more risk due to delays. You can't lock in permanent financing until you have occupancy and leases to show the bank. That elusive inf COC return is amazing though.

If you can find the right deal, it can make sense or if you are able to DIY the rehab to lower cost. 

Also when we say “risk” what exactly is the risk? Not making a profit? Having to go out of my own pocket on renovations? Part of me is like, so what? as long as I plan holding on to the property for 3-5 years and rent it out to good tenants, I don’t see how I can lose here if it’s a long term plan. Is there something I’m not seeing? or should I continue to just throw away my money paying 1800 a month renting a studio apartment lol. I’m willing to take those “risks” if the pay off is worth it in 3-5 years. I make decent money, Its going down the drain paying rent.

I’ll keep trying to justify doing this, until I see there is bigger reason for me not to. If that makes sense. Lol I have a lender willing to work with me, I have a cash flowing business if I need to come out of pocket. I’m using this method to build wealth over time, into my retirement potentially. Don’t you think that reward out weighs the risk of not profiting right away or having to put some more money in out of pocket. Like those are petty risks to me when I’m looking at the bigger picture. Do I sound crazy? Am I too optimistic?

Hi @Alyssa Patterson, there are still other creative ways to purchase a home that require you to put less money down. You may not be equipped with the capital yet to buy as a traditional "investor," but you can still buy a primary residence that needs repair, fix it up, add an ADU, or some other upgrade, and then move out after 12 months. This strategy is kind of like investing with guardrails so you can understand the home purchase process as well as the costs of renovation, hiring contractors, and buying something you can afford.

I routinely facilitate loans for 0% down buyers in primary residences (VA and USDA). They just have to come up with the cash for the EMD & closing costs ($8k-$12k), which you have. This way, they can enter the market and perhaps capitalize on the projected appreciation while also securing the best possible financing terms as a primary residence. It's not true investing, however you can become familiar with the process as well as own something for yourself.

 So ya sounds like what I’m trying to do, could refinance sooner than 12 months ? would I have to be the one living in it? or can I rent it out when it’s ready? How long do renovations take? Is this considering a hard money loan that you guys offer 

 I would start cold calling. That is what I did in Columbus, Ohio when I did not have a lot of money

- I do not own a single family home. I never stated I owned a home.

-I’m looking to build a portfolio of rental properties. Using the brrrr method and a hard money loan with 20k down.

-I’m not looking to live in this property or run my business out of these property. I’m looking to rent it out after renovations, refinance and repeat. 

-  Doing this investment is better than just putting all my money towards rent and miscellaneous things. Was all I’m saying. My goal isn’t to “own a home to work out of it” I’m trying to build a portfolio of rental properties. So eventually the cash flow from my rental properties will cover my living expenses. (Im aware that will take years) 

-I could try and get a loan for multi family but the people I talked to only will allow for single family. 

-I see the point in doing multi family, I was under the impression i was required to live In one of the units if I wanted a hard money loan for multi family. Is that not true?

That’s what the loaner told me to do as well, I’ll start taking those actions, thanks 

@Alyssa Patterson I feel your pain here. I was in a similar situation 4 years ago before I purchased my first property. Renting was killing me financially. I was broke 10 mins after every paycheck. 

I used the house/hack, BRRRR strategy on my first deal but it's nearly impossible do it again in my neighborhood 2022. With rising interest rates the BRRRR strategy isn't as affective as it once was.

Denver, CO + $20k doesn't compute. I'd focus on house/hacking opportunities and cutting HOUSING EXPENSES as much as possible. You won't live for free but you'll be in the game and collecting rent instead of paying rent to someone else. Appreciation is a bonus but never certain. Nobody predicted the wild ride of the last few years. Safe to assume nobody will predict the next few (accurately). 

When you say you are trying to cash out refi a SFH… you can't do that until you have bought it first. So first you have to buy it. THEN you can do the cash out refi. But also understand that there is something called a seasoning requirement. You cannot cash out refi a financed property unless you've held it for at least six months, typically. So be aware of that. Then there is the challenge of qualifying for your loan. The rental income typically isn't counted right off the bat as income to offset your expenses, so you can quickly get trapped by debt to income ratios, etc where the bank thinks you don't make enough to cover the new loan once you have added another house to your monthly expenses. So watch out for that as well.

I think either way you look at it, you are pretty short on funds at this point to be trying to accomplish what do you want to do. What someone makes a month isn’t really applicable to what their discretionary income is. Being self-employed is going to add to your complications… will need at least a couple of years of proof on income to qualify conventionally I imagine.

think if you listen to the overall wisdom of the people on this board they would say at least you are in an uphill battle… pretty much everything is against you: available funds, high interest rates, much less finding a home that will actually BRRRR. $20,000 and good intentions aren't going to be enough by themselves.

You are a beginner that wants to begin.  Totally understandable…. But what you don’t want to do is get in over your head and get screwed.  12% interest accruing when you are stuck with a half-finished rehab could get ugly real quick.  I really think you need more available financial resources.  You should consider partnering with another experienced investor on your first gig - given your precarious financial position (ie. Limited funds).  Even a family member that can just bring additional Resiurces to the table would help. 

Truly wish you all the best, but listen to people who have done this a lot - who have had $20,000 cost overruns on a flip.  If you aren’t ready for that occurrence, you probably aren’t ready to jump into what you are looking at doing.

Randy 

Yes it is.  20k is closer to a rehab cost.  Partner with a buyer and offer the 20k to rehab and take profits accordingly.

@Alyssa Patterson

Definitely not a good time to BRRRR. Especially with only 20k. I'd save another 20k before you even start thinking about it.

The BRRRR method involves buying 25% under market or at least close to that. So it's pretty low risk by definition. The challenge is finding such deals, particularly in this market.

I have been self employed for 10 years have proof of income and pay I’m up taxes.  I am trying to buy a house with a hard money loan I already got an offer with 15k down for single family property for going less than 30% market value. I have the offer for a loan to buy the house and for renovations, he said if I found the property he will wire me the money immediately. Should I do this? It was the first person I inquired about the loan. Should I wait for more options? 

@Alyssa Patterson just to try to simplify here...

It's not that the BRRRR method is RISKY, it's that it's DIFFICULT.  Why is it difficult?  Because: it only works if you can significantly boost the value of the property that you are buying.  If you can't do that, then it still might be a good deal.  It's just not a BRRRR.

I just finished a BRRRR myself - and it did not appraise for as much as I was hoping for at the end. It's still a good rental, it still cash flows, and I'm still happy with it. But, I did not get nearly as much out on the refi as I was hoping to.

So, just to be candid, I think it will be difficult to do with $20K.  You have indicated that you can get a loan, and that's great, but that just makes it even harder to BRRRR, because you have to factor the costs of the financing you'll be paying into the equation. Something that gets overlooked is that there are lots and lots of out of pocket costs to pay for when doing a BRRRR: the closing costs when you buy.  The appraisal.  The holding costs, which can include expensive utilities, expensive financing and expensive insurance.  And then closing costs again when you refi.  Lots and lots of costs.