BRRRR Indepth Explanation

13 Replies

Hey Guys,  

Ok so I'm confused as to whether or not BRRRR strategy can be utilized by taking out a loan to buy the property and if so please explain how I can turn that into positive cash flow. And also if you buy the property cash do you then refinance a property that is already paid for in cash? How does that work?

Buy Property A (get purchase cash from whatever source:  pocket, refinancing another property, hard money, etc.)

Rehab Property A (get rehab repair cash from whatever source)

Rent Property A (your due diligence should show you if you can cash flow after purchase/repairs)

Refinance Property A (long term loan, pay cash received from loan to whatever source you received cash from)

Repeat

@Craig Gray

The source of funding, cash or loan does not affect the overall BRRRR strategy significantly.

The entire strategy is to buy something in such disrepair that you get it for a significant discount, perform a rehab that adds much more value than it costs, and then refi out some, all or more money than you put in. You ability to perform each step well is what will determine if you can cash flow.

In a situation where you bought cash, the refinance would be paid to you.

In a situation where you had a loan, the refinance would pay off the loan with the remainder going to you.

Cash flows are pretty to very thin on BRRRR strategy investments.

@Todd Rasmussen

If Cash flows are pretty to very think on BRRRR strategy investments.... is the point of it all to just acquire more properties to then sell all of them since they will not be making any significant cash flow thus not making any sense to hold on to long term?

If you buy for cash, then you refinance at its appraised value once it has been repaired and rented out. You can certainly do that if you buy the property for cash up front. The goal is to find a property that can cash flow even with long term debt on it. 

I don't know why @Todd Rasmussen says cash flow tends to be very thin on BRRRR deals. If you're buying in a market in which the ratio of rent to value is high, then you should cash flow well.

@Craig Gray you asked for an in-depth explanation... Some numbers should make it simple:

Start with $75k. Buy for $50k, rehab for $25k, new appraised value = $100k. Now you refinance at 75% LTV. So you get your $75k back, and you've got an investment with no cash of your own in it. Then use that same $75k for the next property, etc.

This example doesn't account for closing costs, etc... And don't necessarily expect to get all your capital back. But you get the idea.

Originally posted by @Gary Parilis :

I don't know why @Todd Rasmussen says cash flow tends to be very thin on BRRRR deals. If you're buying in a market in which the ratio of rent to value is high, then you should cash flow well.

@Craig Gray you asked for an in-depth explanation... Some numbers should make it simple:

Start with $75k. Buy for $50k, rehab for $25k, new appraised value = $100k. Now you refinance at 75% LTV. So you get your $75k back, and you've got an investment with no cash of your own in it. Then use that same $75k for the next property, etc.

This example doesn't account for closing costs, etc... And don't necessarily expect to get all your capital back. But you get the idea.

BRRRR as a strategy involves putting the least amount of money into a deal, therefore cash flow will be pretty to very thin if you compare it to non debt leveraging strategies for acquisition.

 

Originally posted by @Craig Gray :

@Todd Rasmussen

If Cash flows are pretty to very think on BRRRR strategy investments.... is the point of it all to just acquire more properties to then sell all of them since they will not be making any significant cash flow thus not making any sense to hold on to long term?

If you are playing the long game, BRRRR can be a great cash flowing vehicle. I'm talking initial cash flows. You are locking in your debt service costs up front. As your income grows with inflation, cash flow will increase over time. The amount you cash flow immediately will not be much to brag about, but the longer you hold it the larger your gross and subsequently net margins will get (on average).

The sum of the above responses do a good job of explaining the BRRRR in my opinion but left out a couple of items.

It is difficult to refinance based on a new value unless you have held the RE for a seasoning period. This seasoning (typically 6 months) in effect places a time limiter on how fast you can do the process which has the side effect of potentially limiting how many BRRRR you can do in any amount of time.

Refinance appraisals are notoriously conservative.  This implies that you are not likely to get a refi appraisal that is at top of market that is likely appropriate for a freshly rehabbed product.

The LTV on refinance is typically 75%. This is true even when house hacking.

The LTV combined with the conservative refinance appraisal places challenges on extracting all of your initial investment. You likely need to find a good/great deal at purchase to extract all of your investment.

BRRRR is a viable path, but you need to be aware of the hurdles that you need to overcome.

Good luck

To make BRRRR work, you have to get a worthwhile property at a discount, and rehab it efficiently and economically. That is the only way your 75% loan will pay back all the money you have invested. It's more likely that refinancing will allow you to pull out most but not all of your investment.

I've done a BRRRR where I swapped the 2nd and 3rd R's. I refinanced before I rented it out. This allowed me to get my money out sooner but I also held back some of the proceeds to use as reserves to absorb the vacancy costs. It gave me a solid financial backstop while still being able to buy more properties and fund the rehabs.

A seasoning period isn't always a requirement. That depends on the lender. I was able to refinance 1 month after having the property rented and 2 months after closing on the initial purchase of the home. Find a lender that is investor friendly or invests in real estate themselves with great reviews. They'll treat you right!