I understand the over-arching principles behind the BRRRR strategy, but I have some questions that i was hoping some experts could answer below.
I've purchased my first property in cash. I expect to be all-in at right around $55-$60k on the property and for the appraised value to be in the neighborhood of $85k-$90k.
Would the proper steps be:
1. Rent out the property. Get a tenant in there.
2. Once a tenant is in, go and get refinancing.
3. Have the house re-appraised (how do you do this, do you just order an appraisal?), and expect to get between 70-80% of the appraised value in cash out of the house.
4. Use that capital to find a new property
Am I missing anything here?
Hey Alex, the process is straightforward...but there are a couple of things to take caution over. The purchase and repair costs lead me to think this is a modest residential property. That said, the re-finance is dependent upon your personal credit and debt to income. If you bought with cash, there is a Freddie Mac provision that permits you to re-fi almost instantly. It depends on the lender, but some may be reluctant to offer to put debt in place until you can show the property is up and running (6 mos or so).
Basically, you want to find the right lender with good rates and the highest LTV offering (75% on a re-fi is good for cash-out) There are a lot of restrictions with certain lenders, such as not lending if the property is held in LLC (in some cases lenders won't lend unless it's been in your name of six months). All this just depends on the lender.
You may also run into minimum lending amounts as well...if the loan is too small, the bank won't waste time. I know everyone says BRRR is simple, but it's quite the contrary. Not only is it risky, you will run into DTI issues very quickly that will end this strategy for you...always keep a backup plan in place.
For now, get busy calling lenders and ask then what products they have to meet your needs. Once you find a good one, they'll assist you with title work, appraisal, etc. Good luck!
My initial plan was to try and get to 4-5 properties, and get them rented out, and then approach the Refi route. That seems like it probably is the best strategy still.
Your steps are right, but the appraisal is ordered by the bank after they approve you (you'll be paying for it, of course). At that point (if everything goes right), you will either get all of the money you put in back out to buy another house with, or pay off the private loan you had on the property so you can put it on a next.
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