How about a little more clarity on the BRRRR Method???

29 Replies

Thanks for Reading and any feedback... I have the BRRRR Method understood up to this point.

So, let’s say I found a property... Locked it up, got a loan and did the rehab. Once I find a tenant to occupy the property, with those rents from that tenant, should I start paying on the loan until the property is eligible for refi???

I'm not sure I understand your question. But I find that examples help to clarify the process. So, let't say I have a house that I'm selling you for $100k. It needs a $30k rehab, and would then be worth $175k (ARV):

  • You buy the house from me with $100k (cash)
  • You renovate the house and spend $30k (cash) on the renovations. 
  • You rent the house for $1500/mo.
  • You do a cash out refinance on the house. Most lenders will do 75% LTV on a refi, so you're able to "pull out" $131,250 ($175k x 75%).
  • Your total investment in this house was $130k, and you just got $131,250 back in your cash-out refi. Now you have none of your own money tied up in the house, and you still own the house, and your tenants are paying your mortgage. 
  • Now you repeat the process. 

If you weren't using cash in step one (say you used $100k hard money instead), then your liens/mortgages would have been paid off at closing. In that scenario:

  • You used $100k hard money for the purchase
  • You used $30k cash for the rehab
  • You pulled out $132,250 in your cash out refi. 
  • The $100k loan was paid off at closing.
  • You get your $30k rehab money back. You still own the house, and tenants pay the new mortgage.

Whether you make payments on your hard money loan during the rehab (which I assume is what you were asking about when you said "should I start paying on the loan until the property is eligible for refi?") depends on the terms of your hard money loan. Some lenders expect interest only payments every month. Others get paid principal and inters at closing.

Note that you are typically buying with cash or hard money when using this method, because the property often needs to much work to qualify for conventional financing initially.

Obviously, all of the above numbers ignore closing costs and commissions.

@JeffCopeland 

Thank you for your response. You broke the Method down in its simplest form and step 2 was where I needed help. I see that there was more to the Method that I didn’t fully understand. 

 I would be using a Hard money Lender. I got snagged here... After the property is fully rehabbed and I have a tenant in the property paying rent, should I use the tenants rents to start paying back the Hard Money Loan while I’m waiting to refinance where I can pull that refi money out to pay the remaining amount of the loan.

I see that it depends on the terms of the loan. I have some more reading to do Jeff. Maybe I’m thinking too much into the scenario and that’s gonna stop me from making a move if I let it consume me. I’m gonna study what you wrote and do a little more reading. I’m sure I’ll have more questions though. I really appreciate your help. Thank you.

@Account Closed - A typical hard money loan is about 4 points up front and 12% interest only with monthly payments. 

In the scenario above, you'd pay $4k up front (or in some cases they roll this into the loan) and then $1,000/mo in interest ($100k times 12% divided by 12 months). These payments start right away, and you'd be making them during the rehab, and after finishing it and placing the tenants. 

You normally would not pre-pay any principal on a hard money loan - it would screw up the terms of your promissory note.  You just make the interest-only payments until you refinance. 

In the scenario above, your principal and interest on the $132,500 refinance (at 4% for 30 years) would be $633, add a couple hundreds dollars each for taxes and insurance, and your new payments still come in around $1000/mo...So you cash flow about the same with the hard money in place as you do with the 30-year fixed with a higher balance. But after refinancing, you're paying principal and interest on a note that is fully amortized over 30 years. 

Obviously, the key is to finish the rehab quickly so you can place tenants and start collecting rent. Paying $1k/mo in interest-only payments sucks. But when your tenants are paying it for you, it sucks a lot less and gives you plenty of time to refinance (hard money notes are often for one year some give an option for two years).

@Harjeet Bhatti - Seasoning periods vary from lender to lender, and from loan product to loan product. Not all lenders/loans require to you wait six months (or at all, some will refi the next day).  

When applicable, it's my understanding that the seasoning period is usually based on the date of the last title transfer. It doesn't necessarily matter whether you have hard money or other financing in place, or own the property free and clear with no financing. It only matters how long it has been since the last title transfer. 

When discussing the BRRRR method, six months is usually a pretty realistic timeline to rehab, market, and rent out the subject property. So seasoning is not usually a major issue. Best cast scenario, you finish the rehab in a couple of months, rent the property right away, then let your tenants pay your hard money payments for a couple of months while waiting for the property to season.

@Jeff Copeland   your hard money lender who wants to stay in business is going to coach you on the exit.. so this OP will get some feedback from the lender.. the lender will want to know he CAN refi

when I did a few thousand of these loans for investors as the HML I would not make them the hard money loan unless they had a Bullet proof pre qual and I did some underwriting of them as well.. to make sure my loan was going to get retired in 6 months.. were it all fell down was when refi's or BRRR got halted in 08 09 and everyone was stuck in their HML s properties normally are negative cash flow if your paying HML rates.. while waiting to refi.. But this model is coming back for sure.

I do a lot of it now.. but only for big rental owners with capacity.. I would never consider doing this for begineers again.. I leave that the new HML companies that sprung up in the last 10 years LOL>

@Jeff Copeland There are some guidelines which  are set by Fannie and Freddie which we all lenders follows no matter its bank, brokers or direct lenders. Under guidelines you have to follow for 6 month seasoning if the property is not paid by cash.  This scenario do not fit   guidelines for  conventional loan under delayed financing exception.  Off Couse you have other options open  in the markets as you said.    

@Jeff Copeland @Harjeet Bhatti @Jay Hinrichs

My apologies for the late response. I’ve been playing with numbers and using Jeff’s post as a spreadsheet. I revert to those examples in case I get hung up somewhere during the structuring of a deal.

Now I see what a deal should look like in terms of risk and profit using the BRRRR Method in its entirety. I really appreciate the feedback from the investor standpoint as well as from the hard money lenders view. Starting out, my interest rate on the HML is going to kill me even with numbers that make sense financially but, first I'm focused on thoroughly executing a deal and building solid relationships, so money doesn't matter right now. If at all possible, I'd like to come back and ask more questions...

It depends on what kind of private loan you have. Some will demand a monthly payment, in which case you will need to pay each month from the get go. Others will be a balloon after X months, in which case you'll have to pay it off along with the accrued interest. It just depends on what type of loan you get. But I would start looking for a bank to refinance very early in the process. 

Howdy @Account Closed

Mike let me provide a little more detail to the BRRRR process that might help clear things up a little more. When you are analyzing a BRRRR deal there are 4 distinct cost areas you want to recoup when you do the Cash-out Refinance.

1.  The acquisition costs (Your cash, Hard Money/Private Money loan).

2.  Rehab costs 

3.  Holding costs.   This includes (but not limited to) loan payments, utilities, insurance, taxes, lawn care during the Rehab period and until the property is fully rented.

4.  Closings costs (acquisition closing and Refinance closing)

You want to try and keep the total of these 4 areas to not exceed your refinance loan amount.  The Holding costs is where a lot of investors mess up and fail to include in their analysis.

@Andrew Syrios  If I’m looking for a no down payment loan, ideally I wouldn’t choose any private money where the payments start immediately. How does that work??? Would I have to find additional funding in order to make those monthly payments until the rehab is completed and the tenant is placed??? Additionally, while looking for a bank to refinance me, I have to be spot on with my numbers right??? There’s really no room for error at that point.

@John Leavelle what I gathered is within a six month period, all of my expenses should be factored in and I shouldn’t go a day beyond the six month mark to avoid any overspending. The holding costs and the rehab seem like the things I need to stay on top of the most. I also read that at closing, you never know how much the attorney or the title company will charge for their expenses and the lender has absolutely no control over that. Should that be something to watch out for as well???

Originally posted by @Account Closed :

@Andrew Syrios If I’m looking for a no down payment loan, ideally I wouldn’t choose any private money where the payments start immediately. How does that work??? Would I have to find additional funding in order to make those monthly payments until the rehab is completed and the tenant is placed??? Additionally, while looking for a bank to refinance me, I have to be spot on with my numbers right??? There’s really no room for error at that point.

@John Leavelle what I gathered is within a six month period, all of my expenses should be factored in and I shouldn’t go a day beyond the six month mark to avoid any overspending. The holding costs and the rehab seem like the things I need to stay on top of the most. I also read that at closing, you never know how much the attorney or the title company will charge for their expenses and the lender has absolutely no control over that. Should that be something to watch out for as well???

You would have to have money to pay the loan if the private lender requires monthly payments. But as you may be financing the rehab that would include the holding costs too. For BRRRR, I do think you need to have at least a little money for reserves in case things go over.

Originally posted by @Jeff Copeland :

@Harjeet Bhatti - Seasoning periods vary from lender to lender, and from loan product to loan product. Not all lenders/loans require to you wait six months (or at all, some will refi the next day).  

I have a local lender like this that will refi at any time. They will also loan for the initial purchase and repairs, as long as the total is less than 80% of the ARV they estimate.

I am wondering if I can BRRR without the rehab? Instead of leveraging the rehab for increased equity I would leverage my cash for a better price, competitive bidding and faster closing. Does this make sense at all? I understand I would still be tying up to 25% of my cash but it still gives me more of a head start on the next deal than if I put all my cash into the previous deal.

@Account Closed

I’m not sure where you are getting the don’t go past 6 month thing.  You need to be flexible.  Things do not always go according to plan.  Murphy is always lurking about.  If things can go wrong they will.  Rehab delays, contractor disappears, new permits or inspection may be required, it may take longer to get tenants in place, and your refinancing could be a nightmare.  Plan ahead for all possible contingencies and exit strategies. 

You are absolutely correct.  Rehab and Holding costs are what can make or break a good deal.  That’s why many investors include a 10% to 20% additional buffer in their estimate.  Just to cover those unexpected costs if they occur.  Like planning for a 3 month Rehab and 6 month seasoning/Holding period, but, budgeting for 8 to 12 month seasoning/Holding period.  Always have some reserve cash available to cover the unexpected.

You should be able to get a basic idea of expected closing costs from your realtor.  It never is exact.  So be prepared for last minute changes.  You can always ask Seller to cover as much of the Closing costs as possible.

Here’s my 2cents on the questions you asked Andrew.

If you can find a Private Lender willing to fund 100% of the entire process and wait to get any payment until the refinance, good for you.  However, I think that will be pretty difficult to find.  You will need to have some skin in the game in some form or fashion.  Be it cash, credit card, personal loan, Line of Credit, or a family member willing to cover the Holding costs.  It is not impossible... just hard to find.

You typically will pay monthly interest only payments along with the other Holding costs I mentioned earlier.  So yes, you need to come up with the means to pay for those expenses.

Regarding the Refinance Lender. I strongly recommend you get prequalified for the Refinance prior to purchasing the property. It provides proof of your plan to repay your Hard Money/Private Money Lenders. It also provides you with loan terms, rates, LTV, and seasoning requirements to properly analysis your deal. Not to mention peace of mind.

@Charlotte Bryan

If you are talking about initial purchase with cash, no Rehab, then Refinance to get 75% of your cash back then that is not a BRRRR strategy. That is a regular Buy and Hold strategy. You can use Delayed Financing or a Rate/Term Loan to get your cash back.

@John Leavelle

I had the 6 month seasoning period confused. I thought I would only have so much time to complete the rehab in order to pay the HML off or I wouldn't see a profit. I had that all wrong.

It all makes sense now. Man, I have a lot of work to do!!! When I say a lot, I mean A LOT!!! Thanks for the response. I’m about to go pro so that I can get this calculator and practice until I get it right John.

Originally posted by @Account Closed :

@John Leavelle

I had the 6 month seasoning period confused. I thought I would only have so much time to complete the rehab in order to pay the HML off or I wouldn't see a profit. I had that all wrong.

It all makes sense now. Man, I have a lot of work to do!!! When I say a lot, I mean A LOT!!! Thanks for the response. I’m about to go pro so that I can get this calculator and practice until I get it right John.

 Do your homework, but don't get stuck in analysis paralysis. 

Your HML should be providing a lot more information to you to help your analysis. Reach out to me if you want help with the anaylsis part.


Good luck!

@Kerry Boyle

Thanks for lending a helping hand. I’m definitely going to need it. I came too far to get stuck in analysis paralysis. With everybody that responded to my post, there’s absolutely no excuse for not being able to execute. 

I will be in contact with you shortly. 

Thanks for the good luck.

Sorry to barge in with a question, can the BRRR strategy be applied if the initial money comes from a HELOC on a primary residence. Do the BRR, Refi, Zero out the original HELOC and then hit it up again for the next property.

We currently live in our paid off house and like the security off a paid off house, it seems that if we do this we will always own a property outright.

@Ben Francis Yes! You can use a Heloc for BRRRR deals. Some people don’t feel comfortable doing it because they could loose their home if things go pear shaped on your deal.

I personally think it’s a genius way to use leverage to grow a real estate portfolio. I continue to use my own Heloc on my BRRRRs. Make sure you have financial back up plans and that you are protected against losing your home if things don’t go as planned with your deal. Be brutal in your analysis, conservative in your projections and have multiple exit strategies in place.