BRRRR Financing Tips
@José Rivera - The risk is in not knowing your numbers in two regards.
1) Not knowing construction costs
2) Not knowing your ARV
This basically applies to all of real estate investing though not just the BRRRR strategy. Specific to BRRRR you need to also know how you plan to refinance (commercial or residential). This will help you determine the amount of time to get your cash back.
Real world example:
I purchased a house for $35k and through it would need $20k worth of work. I thought it was a $95k ARV and I knew I'd be refinancing at 70% of that ( $66,500 for those like myself not wanting to do the math).
Turned out that the $35k I spent on the house actually needed $60k worth of work and when I got the appraisal back it also came in at $60k. Now the repair costs I wasn't necessarily wrong on...everything I budgeted for came in on budget, however...I didn't budget to have to rebuild the back side of the house from the foundation up, or rerun all of the electrical wiring throughout the house. But I did know my market well enough to know that the $60k appraisal I got on the refinance was totally bogus, so I went back to the bank with all my proof that the property was worth more than that including the comps that should be considered and lo and behold my appraisal was changed to $90k.
So...whether it is BRRRR or flip...make sure you know your numbers as best as you can and that you more more than the usual cushion to absorb them. My example above is an extreme one, so understand the odds of your first deal being like that are small...but if you don't "know enough to be dangerous" and ask the right questions of a seller and/or have a contractor you trust walk thr property with you, then it is possible that you'll walk into that.
Thank you Sir
Howdy @José Rivera
Totally agree with @James Masotti that Getting your ARV right and establishing good estimates for the Rehab are extremely important. I would also add two things. Get pre-approved for the Refinance loan prior to purchasing the property. Having your exit strategy in place will make for a smoother process. Second, try to keep your All-in costs (Purchase price, Rehab costs, Closing and Holding costs) as close to 70% of your projected ARV as possible.
Greatly Appreciated
John Leavelle How does one give approved for a refinance on something they don't yet own?
@Shawn Crawley - As far as I know you can't get approved per say, but if you talk to the banks and their loan officers then you will have a solid understanding of their lending criteria. This will then give you a basis for knowing exactly how to back into your offer price since you know the max you will be able to refinance for. Again with commercial lending under an LLC every bank will have vastly different criteria, so don't take the answer you get from the first one as the only option like is often the case with residential mortgages. You'll need to do a lot of asking around to find the option that works for you and your business model.
@Shawn Crawley, @James Masotti
Loan pre-approval is pretty standard now a days for home buyers. Many Sellers even expect it. You complete a mortgage application (with associated fees). The lender will determine the amount of loan you qualify for. You even can know the rate. It is not property specific. This allows you to shop around. Once a property is identified it will be attached to the loan. The lender will reconfirm there are no changes to your financial status prior to loan commitment. It makes the closing process quicker. The pre-approval does have a time limit. You will need to keep in contact with the lender.
I do not know if pre-approvals apply to commercial loans. Nor what effect an LLC has with the ability of getting a pre-approval. I agree with James it is best to ask around and ask lots of questions of lenders.