BRRRR Strategy Questions

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BRRRR Strategy Questions

Caleb Dryden
Rental Property Investor · Bridgman, MI · Member since 2018 · 44 posts · 18 votes

I heard a podcast recently talking about the BRRRR strategy. It seems like a great option but I have some lingering questions and hoping some of you who've had experience with this approach can help.

Example: I buy a fix'n flip (with private funds) for $85,000, put $20,000 into repairs, and the final appraised value is $150,000. I would then go to the bank and get it refinanced. At 70% that would allow me to cash out $105,000. The next step is where I'm uncertain of what to do with the cash. If I pay back the investor, then I essentially take on a $105,000 debt through the bank from the refi. Which doesn't get me anywhere b/c I could've just taken out a conventional loan from the beginning. If I throw the proceeds into another property, then I'm not cash flowing anything from the original purchase since the investor is being paid out a monthly interest rate (which is all the rent money). I feel like there is something missing that I haven't heard or discovered yet. f

Does the same scenario change at all if the purchase was made in my name using a HELOC?

Any tips? Much appreciated...

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Timothy Maloney
Lender · Syracuse, NY · Member since 2016 · 165 posts · 92 votes
8y

@Caleb Dryden  First, you should be able to borrow 75% (or more) of the newly appraised value.    Be cautious as most banks will require seasoning and will not want to grant an unrestricted cash out.    However, the point of my reply is as follows:

You should be able to secure some aggressive Fix N Flip financing to do that flip with $21,000 (ish) out of pocket.    Assuming a 2 month flip given the low rehab budget the property *could be* stabilized at the start of month 3.    

Once you refinance at 75% of the 150,000 ARV you'd pay off the flip loan of $92,250 and net roughly 20k less closing costs. So, let's assume BOTH loans had combined closing costs of 10k (that'd be high) you are left with $10,000 of the original $21,000 you started with.

You would have essentially "purchased" a $150,000 property for $10,000 out of pocket or 6.6% down.  

The original $105,000 in your scenario above could conceivably get you into 1.5MM in properties.   It's risky, it's not cheap, but it is a strategy to get your portfolio huge rather quickly.   

Good Luck!! 

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  • Timothy Maloney
    Lender · Syracuse, NY · Member since 2016 · 165 posts · 92 votes
    8y

    @Caleb Dryden  First, you should be able to borrow 75% (or more) of the newly appraised value.    Be cautious as most banks will require seasoning and will not want to grant an unrestricted cash out.    However, the point of my reply is as follows:

    You should be able to secure some aggressive Fix N Flip financing to do that flip with $21,000 (ish) out of pocket.    Assuming a 2 month flip given the low rehab budget the property *could be* stabilized at the start of month 3.    

    Once you refinance at 75% of the 150,000 ARV you'd pay off the flip loan of $92,250 and net roughly 20k less closing costs. So, let's assume BOTH loans had combined closing costs of 10k (that'd be high) you are left with $10,000 of the original $21,000 you started with.

    You would have essentially "purchased" a $150,000 property for $10,000 out of pocket or 6.6% down.  

    The original $105,000 in your scenario above could conceivably get you into 1.5MM in properties.   It's risky, it's not cheap, but it is a strategy to get your portfolio huge rather quickly.   

    Good Luck!! 

    1Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    8y
    You're missing a few key parts here. First, you couldnt get a conventional loan that would cover the full purchase and rehab costs. Second, the refinance cash is used to pay the original loans. So you've borrowed $85k and put $20k of your own money in the rehab? In this scenario, you take the $105k, pay your lender their $85k, get your $25k back, and be able to do it all over again (hence, the last "r" for repeat). The idea is to have the refinance cover all the expenses youve paid to buy and renovate, so you own the property for nothing out of pocket.
    1Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    8y

    I think a point you're missing is that generally when you sell a property you have to repay the loan. You don't just get to keep all the cash and buy something else (unless it's a HELOC or similar).

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  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    Howdy @Caleb Dryden

    Regarding the HELOC question. No change in the process other than you are paying off the HELOC loan versus "Private funds".

    1Reply
  • Caleb Dryden
    OP
    Rental Property Investor · Bridgman, MI · Member since 2018 · 44 posts · 18 votes
    8y

    Thanks for the reply @Timothy Maloney, @Jason D., @Eric James, and @John Leavelle this was most helpful. So in essence, after refinancing I would pay back the lender and recoup my out of pocket money, and the final product equates to me owning a property without being out any money. And current tenants are paying off the mortgage. Does that sound accurate?

    Question related to how you structure the deal with an investor. I'm struggling with how to structure a deal like this so it's advantageous for the investor as well. If I use private investor money and do the rehab/refinance withing 6 months and pay him all his money back, is it really worth his time/money? How have you structured these deals in the past? If I give him half the rent for the first 6-12 months before refinancing then I'd be paying half the mortgage out of pocket. Unless of course the rents are at $1,000 and mortgage at $700. Is that the ultimate goal? Thanks again guys!

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  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    8y
    @Caleb Dryden yes, that is the idea of the BRRRR. A lender is usually going to get interest on the money loaned to you. You'd either make monthly payments while you are doing the rehab or you'd pay a lump sum interest payment when you paid off the loan.
    1Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    @Caleb Dryden

    I use Private Money and a HELOC for my deals. The Lender provides me a loan for specific maximum amounts for each deal. Say $100K at 10% for one year (I can extend it if needed). If the total project is less than the maximum I don't put anything in the deal. If it's over the maximum I use my HELOC to fund the overage.

    I only pay him interest only payments ($833.33) from month to month until I get the Refinance loan completed. So for 6 months that's $5,000 total interest paid. Same thing with the HELOC.

    If you don’t repay the lender (default on the loan) then they have first lien position and can take possession of the property.  So they basically win either way.

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