Ever Had a BRRRR ARV Come in Too High?

Question

Am curious if anyone has ever had the problem of an ARV coming in too high so that you got your money out and then some but then the property didn't cash flow/mortgage was higher than you anticipated?

Dan H. · Answer

I am in agreement with @Kevin Dougherty that you take the money.  Most refis are capped at 80% LTV and some at 75% LTV.  This is not an extremely high leverage.  If I have been paid up front for negative cash flow that is bonus and therefore there is no such thing as a BRRRR ARV being too high.  Seriously, considering turning down cash in your pocket today for cash flow that will accumulate over the next couple of years????  That is money that can be re-invested and should easily outperform a conventional RE financing.  This really is simple.  Take the cash up front.  Invest it in something that is projected to return significantly more than a conventional RE loan (which would be just about anything) and do not worry about any negative cash flow.  Also if this is CA, I expect rents in coastal metro areas to rise ~8% this year and ~8% next year.  The negative cash flow is unlikely to last long.  In the coming week I am sending some rent increases.  They will be ~8%.  That is the market rent rate increase in my market.

Take the money.  Use the money.  RE is great in large part due to the leverage opportunities.  To not use such an easy opportunity to use the leverage is being too conservative.

Good luck

Whitney Hutten · Answer

@Aaron Almquist yes... it can happen!  I'd err on as much cash out of the property that it still cashflowed on its own.  You will still be getting paid 4 other ways on the property (tenant paydown, appreciation, depreciation, inflation)... and your money is working very hard.  I'd then take that cash and ensure I had a solid reserve account set aside.  Then I'd do the happy dance and go find another cashflowing property!

Kevin Dougherty · Answer

Ok, so you have all this cash but no cash flow, take the cash which is more times cheaper than private money and HML and find another investment that you can put the cash to work in to. Hopefully the next one will cash flow enough for both of them. You have to move the money quickly because its the velocity of the capital that makes it work, meaning how fast can you deploy your capital and then have it come back to you. If you sit on the cash out money too long and you start to erode the principle by using it all to pay for the mortgage on the subject property, you will loose the money's ability to do its thing.

Good Luck

Kenneth Garrett · Answer

@Aaron Almquist

When taking the refinance on the BRRRR if the ARV comes higher then expected you need to cash out what makes sense.  Limit yourself so the property cash flows to whatever your goal is.  If I could cash out and put $20K in my pocket, but the cash flow is under$100 that’s not worth it.  Leave the 20K in as equity and let it cash flow $300 or better.

Dan H. · Answer

I fail to see your perspective.  Take additional cash out at the terms of a conventional refi loan and get that cash now.  Have more cash on hand to deal with anything.  So the negative cash flow can be covered with the cash in hand.  Versus taking out less money and therefore having less money on hand in exchange for some cash flow each month but not have the cash in hand.

I strive to have my RE at 70% to 80% LTV.  How do I do with this goal?  Not good.   With equity paydown and market appreciation, I typically am below 60% LTV.  Sometimes below 50% LTV.  It seems like I am always refinancing RE when it makes sense to for a particular RE.

I will use easy numbers to demonstrate why you should extract every dollar you can with a conventional refi.  Lets say there is the opportunity to extract $100K additional (used just for the ease of math) but that places the RE as cash flow negative.  $100K at 5% for 30 years is $537/month.  So for extracting this $100K that you have in hand you are negative cash flow $537/month.  If the cash flow stays the exact same in today's dollars (not even taking into account inflation impact on the rent and zero return on the $100K), it would take 15.5 years for the negative cash flow to consume the $100K.  Now add in a conservative rent increase of 2.5% (I am expecting 8% in my market for each of the next 2 years) and the negative cash flow would take even longer to consume the $100K (the RE will be cash flow positive prior to consuming the $100K).  Now add in a rate of return of 2.5% on the $100K (S&P historically is over 9%) and it would take still longer to consume the $100K.  In reality, the $100K is never going to be consumed because the RE will be positive cash flow, even using the conservative numbers I used for this exercise, prior to consuming the $100K.

Tell you what.  You take the money out via the conventional refi and loan it to me at 1% more than your conventional terms.  I have a credit score over 820 and enough assets to be zero risk.  I have every confidence that I will make more on that money than 1% over conventional terms (just to be clear to the moderators, this is not a solicitation as much as it is to show why it is silly for the OP to not extract out to the max LTV allowed by the refi - I expect there is zero chance for the OP to take me up on this offer :=)).

Convention loan terms are so low it is basically free money.  Obtaining better return than conventional loan is easy.  Having additional cash on hand reduces risk and does not increase the risk.

Good luck

Alvin Uy · Answer

Welcome to California!  LOL.   Higher valuation is always a good problem to have ... you just need to make some adjustments.

How much did you cashout?  Why dont you leave some money in to cashflow on the rent?

Alexander Felice · Answer

Yes I've had it happen. Deal specifics matter, you don't have to take out all the debt available to you.

but if you do take it, just make sure you have the deal flow to make it work for you. If you can't find deals then maybe slow down on leverage.

Michael Noto · Answer

@Aaron Almquist You don't have to cash out every last dime on the refinance although I probably would. Just take out enough to pay yourself back.

Aaron Almquist · Answer

Thanks everyone for the great feedback. I was unsure if this was a moot scenario for one reason or another, and haven't had it happen to me, was just imagining it as a possible occurrence before I jump in. I appreciate all the perspective offered. Personally I would absolutely err on the side of leaving enough in the deal to cash flow and just take what I'd planned. Especially as I am new to this and getting caught with slim or zero margins on something is a nightmare to me. I think if I was further down the line and more comfortable with an area/the process/my numbers game then I might average it out/compensate the cash flow over other deals and put the extra back in the process.

Ever Had a BRRRR ARV Come in Too High?

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