BRRRR - Okay to use OPM or Wait?

Question

Hey all!  I have been doing a lot of reading on the site concerning the BRRRR method.  Considering where I am in my life (early 30's, wife, child and house), this is the strategy that I have chosen to follow in my adventures in REI.  That being said, is it a usable strategy if I were to start my first property using OPM or is it better to use my own money?  I have a significant amount of equity in my current home thanks to a hot market here in DFW, and I also have a little bit (less than $10k) in savings at the moment.  I really want to get my foot in the door before the DFW market starts cooling down, as well as meet my goal of two properties by 2018.  Thanks for all you guys do on this site and looking forward to any help available.

Stephen Lock · Answer

Interesting perspectives all around.  My biggest question about using OPM is the process for paying back the original lender:

For instance, if I use a PML to fully fund the acquisition and rehab, then the project finishes and I acquire a tenant.  Then I do the R/T refi, does the bank taking on the loan pay the PML directly or do they cut me a check to give to the PML?

Just trying to get the whole process in my head.

John Leavelle · Answer

Howdy @Stephen Lock

Use OPM as much as possible in the BRRRR strategy.  2 good reasons for that.  One the more OPM you use the less of your own cash you have to be concerned with getting out at the refinancing.  The 2nd thing is leveraging.  You get better ROI's when you use less of your own cash.

If you can get to the point where you don't have any or very little cash in the deal, then, you can use a Rate & Term Refinance loan versus a Cash-out refinance loan.  With the R/T Refi it is a shorter turnaround for the next BRRRR property.

You can look into getting a HELOC on your personal home to help with your REI deals.

John Leavelle · Answer

@Brian G.

On the contrary.  It really is the best, more advanced, method to use for the BRRRR strategy.

If you have little to no cash in the deal why would you need to do a Cash-out Refinance loan?  Obviously, if you have limited cash for investing and you have used it in the acquisition and Rehab phases you will need to get a Cash-out Refi to recover your resources.

However, once you establish your ability to complete these deals you may be able to obtain the purchase and Rehab funds (HML/PML) without using any of your own cash (or very little).  You may need to put a reserve in escrow for the duration of the project (which would be refunded when completed).  The R/T Refi does not have a seasoning period.  Therefore, you could apply as soon as the project is completed.

In other words if you don't put cash in you don't need to pull it out.  If you are planning to pullout more equity than the cash you put in then you need the Cash-out Refi.

Buy using HML/PML (and little to no cash of your own)

Rehab using HML/PML (must open loan same day as acquisition loan)

Rent out property

Refinance with R/T loan as soon as project is completed

Repeat in less than 6 months

The cash-out Refi would require seasoning of 6 to 12 months after Renting the property.  You conceivably could do 2 or 3 R/T Refi deals in the same time period.

I am at work and don't have any notes to refer to.  So if my assumptions are wrong then I hope someone experienced with these will chime in.

John Leavelle · Answer

@Brian G.

Disclaimer:  I have not used a Rate/Term Refinance yet.  However, I have discussed them with Lenders and researched it here on BP and elsewhere.  This is my understanding of the two terms.

Basically they are both designed to get you out of a higher interest rate or ARM into a mortgage with lower interest and terms.

The Rate/Term Refi is the easiest because you are trading loans of the same size but different interest rates and terms.  Closing and escrow prepayments can be included in the loan.  So you may have little cash expense.  And may even get some cash back from the old lender (prepaid tax and insurance in escrow) depending on the type of lender and timing of the Refi.  For the BRRRR strategy the benefit is no seasoning required and short turnaround.  Of course it also means you should not have much cash in the original deal.  Because you will not be able to pull it out.  Another benefit is you do not have to worry about having enough equity in the property to do the Refinancing.  Good for deals 90 - 100% financed with Hard Money/Private Money Lenders.

The Cash-out Refi requires more planning.  You are exchanging and existing loan for a larger loan, but, with better interest rates and terms.  It is larger because you are not only paying off your current loan(s), but, pulling out equity in the form of cash to repay your cash investment so you can reuse it for the next purchase.  For this option to work you must force enough equity appreciation (through the Rehab) to allow the Cash-out to occur.  A disadvantage is the seasoning required by most Lenders.  That pushes your turnaround timeline out further.

Other differences can be a higher LTV for the R/T Refi because it is considered less risk. You new loan payment will be lower with the R/T verses Cash-out Refi (smaller loan).  That makes it better for Cash Flow.

For now I have to use the Cash-out Refi.  But, hope to eventually use only R/T Refi's.

Ariel Salvaro · Answer

The main difference between OPM vs. own money is that OPM obviously helps you accelerate your investments - you can usually invest into & flip more properties in the same amount of time with OPM than with own money.

Brian Garrett · Answer

@Isiah Ferguson I'm personally using my own money for now but for those that don't have enough capital they can use OPM in the same fashion. Even if you have your own money it is smart to leverage it so that you can grow and scale a portfolio should that be what your goals are.

Isiah Ferguson · Answer

@Brian G.Why wouldn't the BRRRR with your own personal money ? rather than OPM

Brian Garrett · Answer

@John Leavelle Thank you for the further explanation. Like I thought this strategy only works for the small percent of people who are funding 100% of their BRRRR with OPM. Otherwise if you're using your own money or even some of your own money the strategy wouldn't work. Also just to clarify you don't HAVE to wait 6-12 months seasoning for a cash out refinance. I've talked to many lenders who are willing to cash out prior even if the property was not bought all cash to start.

Brian Garrett · Answer

@John Leavelle Thanks for sharing this information. It sounds like the Rate & Term Refi wouldn't work all that well with the BRRRR strategy because you don't get the cash back out to reinvest into the next property. Kinda defeats the purpose. Unless I'm missing something?

BRRRR - Okay to use OPM or Wait?

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