How about a little more clarity on the BRRRR Method???
Charlotte, NC · Member since 2014 · 16 posts · 3 votes
How about a little more clarity on the BRRRR Method???
Most Popular Reply
Jeff CopelandBusiness Member
Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votesI'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.
Copeland Morgan LLC4.770 Reviews
29 Replies
- Charlotte, NC · Member since 2014 · 16 posts · 3 votes8y
I was actually supposed to call a bank to see what the interest on refinancing would be to incorporate that in my analysis... Amongst other things.
I’m going to keep trying until I get this right.
- Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes8y
@Account Closed
Need more details on your numbers to see where you are having problems. Did you use BP Calculator? If so post the report or list out each item.
- Charlotte, NC · Member since 2014 · 16 posts · 3 votes8y
@John Leavelle I want to thank you for taking the time out to look these numbers over. I used the calculator in addition to clicking on the question marks for more help. I've revised these numbers from the ARV down to see why the numbers didn't make sense and at this point... This just looks like a bad deal altogether.
I don't know... I know I'm not going to give up. Thanks again John.
Purchase Price 75k
ARV 165k
Purchase Closing Cost 2500
Estimated Repair Cost 20k
Down payment on Purchase Price 20%
Loan Interest Rate 16%
Points Charged By Lender 4
Wrap loan fees/ Points into loan (Yes)
Amortized Over How Many Years? 1
Refinance After How Many Months 12
Estimated Rehab Times Months 4
Enter Loan Amount 11,500
Loan Interest Rate 6
(pay Loan fees/points out of pocket)
Amortized over how many years 30
Total Monthly income 1150
Total Monthly Mortgage (P&I) Expense $6169.70
Total Monthly Fixed Income $950
Electricity 150
Water & Sewer 100
PMI 100
Monthly Insurance 400
Property Taxes 150
Other Monthly Expenses 50
VARIABLE LANDLORD-PAID EXPENSES
Vacancy % 10 (115.00)
Repairs And Maintenance % 400 (4600.00)
FUTURE ASSUMPTIONS
Annual Income Growth 2
Annual PV Growth 3
Annual Expenses Growth 2
75k Purchase Price
Purchase Closing costs 9,550
Estimated Repairs 20k
Total Project Cost 114.5k
ARV 165k
Acquisition
Down Payment 17k
Loan Amount 70k
Loan Points/ Fees 2,720
Amortized Over 1 Year
Loan Interest Rate 16%
Monthly P&I 6,416.49
Total Cash Needed At purchase 46.5k
REFINANCE
Loan Amount 115k
Loan Fees 6
Amortized Over 30 years
Loan Interest Rate 6%
Monthly P&I 689.48
Total Cash invested 0
- Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes8y
@Account Closed
Sorry I’m just now getting back to you. Been busy.
I can see why you are confused. Your numbers are all over the place. Here are some line items needing an explanation:
Enter Loan amount $11,500. What is this? If you are using the HML and putting a 20% down payment the loan amount should be $60,000.
P&I $6,169.70 ??? If you are using a Hard Money loan of $60,000 and paying 16% APR you only make interest only payments ($60,000 x 16% = $9,600/12 months = $800 per month. This is your biggest error.
Fixed income $950. What is this?
Insurance $400. Did you get a quote?
PMI $100. Why do you have a PMI payment?
Repair/Maintenance 400% ($4,600). This is your next biggest error. It should be between 5% - 10% of your monthly income. It will depend on the current condition of the property and quality of tenants.
The Future Assumption Information makes this more confusing. Keep your analysis as simple as possible until you have a firm grasp on the process. Let me break it down then you can adjust what I may have missed.
Acquisition:
Purchase price $75,000
HML $60,000 (16%/12 months)
Interest only payments $800 per month
Down payment $15,000 (20%)
Points (4) $2,400
Closing costs $2,500
Total cash at closing $19,900
Rehab Estimate $20,000
ARV $165,000
4 months Rehab period
Holding costs $11,750
(Including 12 months of interest only loan payments, utilities, insurance, tax, and other total $19,800) Assuming only 4 month Rehab and one month to get tenant. That leaves 7 months of income collection total $8,050. $19,800 - $8,050 = $11,750 total Holding costs.
All-in Costs $111,650 (excluding any Refinance cost)
Refinance
$115,000 (70% LTV) 6%/30 years
P&I $689.48
Closing costs/Fee ?
Total cash in deal $51,650
I need better numbers to do the Cash Flow analysis.
Also I am assuming you are paying for the Rehab.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.