Do you need rehabs for successful BRRRR ?

[Max Boeskin]

I was wondering would it ever make sense to do the BRRRR method without the rehab part? Not on every single deal...but when starting out have a property in the portfolio just rent for a couple years and cash out refinance with newfound equity form rent. If anyone else has had success with a similar strategy I would be very interested in that.

[Erin Church]

That's possible if you buy with enough equity in it, or in a significantly appreciating area. However, finding deals that are "definitely" going to appreciate a lot and/or that you're starting in with a large percentage of equity to be able to pull out all of your equity in a few years.  

Option 1, let's assume that you purchase at market value. On a purchase, you'll probably look at 20% down. So, for easy numbers, you buy $100k property and put down $20k. When you go to do a cashout refi, you'll likely get capped at 70-75% LTV. So, let's go with 75%. Your property will need to appraise at $133k to be able to pull out the original purchase price of $100k. Now, if you're truly wanting to get all of your money out, you'll need to be able to pull out two sets of closing costs, any additional money you've put into the place, etc. So, it would likely be safer to pull out an additional $10-$15k. If you're wanting to pull out $115k, you'll need $153k appraised value. So, you're looking at a 53% increase in value. This would take a while if the market isn't doing something crazy.

Option 2, you're buying something with equity so that you can refinance fairly quickly. To do this,  you'd need to purchase a turnkey at about $65k for every $100k. That would let you purchase, wait the 4-6 (or 12) months, and then pull out $75k. The problem comes in finding a turnkey at 64% of its current value.

You can obviously do a mixture of the two where you buy at a discount and don't have to wait as long on appreciation, but there's a reason most BRRRRs are rehabs - it's where a person can "force" equity.