I recently took the first step and bought my first property in Seattle Wa. Have been listening to the BPP and continue to hear about the BRRRR method and velocity of money. I purchased it with 10% down, bought out PMI, renovated the inside for about 15K. Is it wise to BRRRR my primary residence or is that strategy best served for rentals?
@Ross Dolbec , it may make sense, but you have to ask yourself some questions and run the numbers.
- What did you pay?
- What's the current ARV?
- How much is the PMI?
- Will your overall payment be larger or smaller? If larger, can you afford it?
- If you refi, what's the pay back period to recover your closing costs?
- Will you be able to pull out any cash?
- If so, what will you do with it and what kind of a return can you reasonably expect?
The BRRRR strategy is best for rentals. The general idea is you buy it with cash, add value, rent it out, and then refinance to pull out your capital. This way, you are left with a cash-flowing, newly renovated rental property and have the funds to go do it again. The key point being you are obtaining financing at the end, rather than the beginning.
@Ross Dolbec , why not? If you can put the cash to use someplace else, and the refi payments would still fit the budget, I'd say fine.
However, if you put 10% down, then brought it up to 20% (to buy out PMI), plus rehab expense, will the property appraise at a number you can pull out most or all of your cash, and still be at a monthly you can live with? Only you would know.
@Jaysen Medhurst Great points. No PMI, was able to buy that off for around 3K. ARV is $415K purchase price of $355K. These are great points to figure out! Thank you!
@Kevin Jackson I think I didn't fully understand that, great way of framing it though, Thank you!
@Marc Winter True, most likely need to look outside of the Seattle area to afford an all cash purchase. Great insight, I have some number crunching to do. Thank you for the help!
@Ross Dolbec it may make more sense to get w HELOC and use the available funds for rehabs, down payments, or as part of your capital plan for reserves etc. then you are only paying when you have funds withdrawn. If it for your reserves, you may not actually have to use it but can operate knowing it is there.
In my market there are a few banks that go up to 100% equity on a heloc.
@Ross Dolbec buying a house a year with a "low down" loan, living in it, rehabbing, then refinancing, renting it, and moving to the next is a great strategy.
It's likely that you won't get your rehab costs out when you refi because you'll be around 90% LTV at 370k all in. At your PP you're closer to 85% LTV (provided $415k is the current value).
@Ross Dolbec It depends if you paid full market value for the house, or you bought it below market. Typically, if you pay retail for a house and try to rent it out for retail, you don't make anything after expenses. If the answer is that you purchased this as a distressed property that needed some work, then it would probably cash flow.