How the Heck Are You Doing 5-10 BRRRRs Per Year?!

How the Heck Are You Doing 5-10 BRRRRs Per Year?!

Tampa, FL · Member since 2014 · 169 posts · 164 votes

BRRRR works, no doubt. I've completed two but am now stuck waiting three months until I can cash-out refi on my third. So here's my question-- how the heck are all these investors doing it-- BRRRR-ing 5-10 properties per year?!

Since Fannie Mae's seasoning requirement is six-months for a cash-out refi, these investors would need a LOT of capital to continue to acquire properties while they wait for refi funds. For investors like me, who only have the capital to purchase + reno one property at a time, that limits me to two BRRRRs per year (if I do it perfectly). I'm currently looking for additional funding at local banks and credit unions, but with so much money tied up in the current BRRRR, my DTI ratio and credit score have taken a real hit.

SOOOO-- Brilliant investors out there in BP Land-- how are you doing it-- funding multiple BRRRRs simultaneously?! Are you relying on partnerships or, if you're a solo investor like me, how have you built-up your property acquisition fund? Are you using some combination of hard money / HELOCs / PLOCs / credit cards / family & friends / partnerships / flip profits?

Many thanks in advance!

Mark...

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Investor · St. Louis, MO · Member since 2016 · 41 posts · 24 votes
9y

@Mark J. I invest in SFR in St Louis. I have completed 3 BRRR method rentals in the last 6 months and am working on my 4th (just got it under contract).

The way I do this is through a HML and gap funding lender so that I am $0 out of pocket with a rehab budget as part of the HML. It then takes me about 6-8 weeks to rehab and refinance with a "terms refinance". This is different than a cash-out refinance as I am not getting cash out (though I can get 2% of the loan up to $2k in cash), rather I am refinancing the HML into a 30year fixed rate loan. I end up being about $5-$8k out of pocket after the refinance given a good ARV calculation (the goal is $0 out of pocket, but those are almost impossible to find).

The only caveat to this strategy is that I have to put all these loans and houses in my personal name. After 3 payments though, I quit-claim deed the house to my LLC, then only have the mortgage in my personal name (bank could technically call the loan, but 99.9999% of the time they don't - my bank even told me they wouldn't as long as I was current on payments).

I hope that helps you! Good Luck!

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  • Andrew SyriosPro Member
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    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    9y
    Originally posted by @Jon Q.:
    Originally posted by @Andrew Syrios:
    Originally posted by @Jon Q.:
    Originally posted by @Andrew Syrios:
    Originally posted by @Mark J.:

    @Andrew Syrios -- I've looked into that briefly, but as you noted, the amortization is shorter which would make the monthly payment higher and cut into my cash flow. 

    I've explored commercial loans a little last year, but what I found was that they required more the cash down (25% or more), which would quickly drain my reserves, and have higher interest rates-, which again would mean a higher monthly payment and cut into my cash flow? 

    If I use commercial loans for my next few properties, should I plan for lower cash flow and rely more on appreciation?

    Appreciate your thoughts on this...

    I would recommend to use Fannie when you can and use community banks the rest of your time. Yes, it will cut into your cash flow, but it will allow you to continue building and you will be paying down principal faster along the way. Regardless, once you hit 10 with Fannie, you won't have a choice.

    Yes, once you've got 10 Fannie loans, once option is going to portfolio lenders. Their products have much less attractive terms (ex. 7-8%, shorter amtzn period, etc.), but it's possible to still cash-flow... 

    What determines whether or not you to continually recycle all of your money has more to do with how much value your able to generate with each deal... example: if you're able to acquire at a below market price then in crease it's value by 25%, then there are products which should allow you to recycle your money indefinitely.  Unfortunately, with prices levels where they are in most cities nationally, that's becoming more difficult to do.

    The community banks we've been working with have been given us rates around 5 to 5.5%. If you're getting offered 7, I would keep looking. I'm pretty sure no matter where you are, you can beat that. 

    I'm not talking about a community bank. I'm talking about portfolio lenders.  Do these commmunity banks you speak of service their own loans and, if so, are they willing to provide more than ten loans?

    If yes, please provide the name of the bank here as I may be interested in working with them.

    Yes, they're just local banks and these would be the loans they keep in their own portfolios. I would ask around at your local REIA or on BP. Or just google for local banks in your area. These banks are pretty much our only long term financing source for SFR

  • Tampa, FL · Member since 2014 · 169 posts · 164 votes
    9y

    @Todd Dexheimer are you able to get commercial loans on residential rental properties?

  • Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Mark J. yes you can get commercial loans on 1-4 unit properties. 

  • Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Mark J. call your local banks and ask for one of the VPs of the commercial lending department. Tell him you are buying 1-4 unit rental properties and would like to talk to him about financing them. If he/she mentions transferring you to a residential lender, be sure to tell him that you want them financed quickly and cannot wait for the seasoning period. You may want to get several banks interested in lending to you depending on how big you plan on getting. Before I did a portfolio loan on a bunch of my properties I had 9 banks with loans on my smaller 1-4 family properties.

  • Tampa, FL · Member since 2014 · 169 posts · 164 votes
    9y

    @Todd Dexheimer - that sounds like a plan. The bank I've been building a relationship with for 2 1/2 years told me today they no longer offer commercial funding for residential properties-- but they were more than happy to try to talk me into a HELOC. Same thing with the other bank I use for my PLOC funds. You'd think being a disciplined steward of their money, paying them thousands in interest payments, and articulating a clear vision for a real estate business I'm trying to build would get them a little more interested in me. Not so much.

    Well, not to worry, tomorrow I'll be working on next week's call list, gathering together all the financial documentation I know they're going to want to see, and putting the final touches on my will-not-be-ignored funding proposal which I'm gonna slide across the table in as many meetings as I can get. 

    So there... ;)

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    I may be in the minority with this comment, but why the big rush? You've done 2, great ... take the lessons learned from those 2 and work on #3 if you like. When you are done with #3, work on #4, etc. Go at the pace your skills, knowledge, capital, and desire will take you, 1 at a time. You will naturally get better, faster, and more efficient the more you do and that will increase your rate and capacity, but exceeding those "speed limits" of skills, knowledge, and capital and your risk goes way up. After each one, be sure to take the time to reflect on lessons learned and to modify your business process and model as needed. If the only way your business model works is doing 5-10/yr, then that would be a red flag to me that your business model may need some tweaking.

  • Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes
    9y

    I completely concur with the pros that have responded previously.  Local banks are gold...you just have to call a lot :)

  • Lender · Nashville, TN · Member since 2017 · 61 posts · 26 votes
    9y

    We can do commercial loans on investment properties all across the usa. We can even cross collateralize them if the numbers work.  

  • Investor · North Stonington, CT · Member since 2014 · 393 posts · 228 votes
    9y

    @Billy Brown

    Could you explain more about the cross collateral process? If I have a house I bought for cash and there is no lien on it, can I use it as sort of a down payment on another property? Thanks. 

  • Lender · Nashville, TN · Member since 2017 · 61 posts · 26 votes
    9y

    To Collateralize  a property is putting it up as skin int he game for the bank, usually the bank get's first position if you default. Cross collateralize means they put several assets under one lien and pull out equity so you can go acquire more assets.  ie if you have 4 properties with 40% equity and 4 mortgages, the bank would refinance all 4 up to 75 or 80% of the value and put under one mortgage on a 20 or 25 yr amortization.  We do it all the time with our clients.

  • Investor · North Stonington, CT · Member since 2014 · 393 posts · 228 votes
    9y

    Are the closing costs similar to getting a mortgage or would it be quadrupled? 

  • Investor · Los Angeles, CA · Member since 2016 · 577 posts · 240 votes
    9y

    Mark.

    I think you need to find a lender who can do it before 6 months. There is a rule in Fannie Mae which says that if you are doing the BRRR strategy you are allowed to pull out a certain amount of cash before the 6 month market.

    I invest in cities across the USA and have teams there who handle everything on the ground. Ways that we have been able to do 10 BRRR projects this year is that we have sold some of our rental properties to other investors. Then with this profit we have been able to either do it again or do the traditional BRRR.

  • Tampa, FL · Member since 2014 · 169 posts · 164 votes
    9y

    @Antoine Martel - Yes, but Fannie Mae's "Delayed Financing Option" doesn't work for a BRRRR. The engine which makes the BRRRR go-go-go is the value and equity created through the rehab (AKA the 25% that doesn't get funded by the conventional 75% ARV cash-out refi). Sure the DFO allows me to get my initial investment + closing costs back, but that means every dollar I put into the rehab is not recoverable and becomes locked away as equity in the property. That puts the brakes on the BRRRR train and would drain my capital after just a few renos.

    Perhaps I'm totally missing the point, but if you're only getting back your initial purchase investment, then that's not a BRRRR (at least as I've come to understand it). Or perhaps you're just finding killer deals at 70% LTV that are rent ready.

  • San Antonio, TX · Member since 2017 · 81 posts · 31 votes
    9y

    I'm a newbie that's been studying BRRRR and wondering the same thing about DF: if the property needs rehab, how do you recoup those costs without freezing capital into the home equity. This whole thread has been of great interest for me to see how others move at a faster than six month pace to beat the seasoning window. Seems the key is to find deals at a high enough discount to eat the HML acquisition costs for six months and then finance out so you are cycling through the initial purchase and rehab with little to no out of pocket. But that makes the types of properties and sellers this strategy works with even smaller than if you have the capital to front some costs. Still trying to learn and understand, though.

  • Tampa, FL · Member since 2014 · 169 posts · 164 votes
    9y

    I'm with you @Neil Sinha. I've spent hours running through different scenarios and cannot for the life of me see how a BRRRR works with a hard money loan.

    Broad strokes here-- but you're gonna pay $8K-$10K in hard money costs for a $100K loan for three months (12%-14% interest + 3-4 points + closing costs). For a flip, sure, that's just the cost of doing business and it comes off the top. But for a buy-and-hold, there's no top,  other than your cash flow I guess. And if you're pre-spending your cash flow for the next two years to pay for the property's acquisition and rehab, then I just don't see how it makes sense.

  • Investor · Los Angeles, CA · Member since 2016 · 577 posts · 240 votes
    9y
    Originally posted by @Mark J.:

    @Antoine Martel - Yes, but Fannie Mae's "Delayed Financing Option" doesn't work for a BRRRR. The engine which makes the BRRRR go-go-go is the value and equity created through the rehab (AKA the 25% that doesn't get funded by the conventional 75% ARV cash-out refi). Sure the DFO allows me to get my initial investment + closing costs back, but that means every dollar I put into the rehab is not recoverable and becomes locked away as equity in the property. That puts the brakes on the BRRRR train and would drain my capital after just a few renos.

    Perhaps I'm totally missing the point, but if you're only getting back your initial purchase investment, then that's not a BRRRR (at least as I've come to understand it). Or perhaps you're just finding killer deals at 70% LTV that are rent ready.

     You're absolutely right. You know your stuff. Some of the rehabs that I do only have $5-10k rehab. So I can pull our 100% of my PP + Closing costs and then I leave about 5-10k in the deal. It only works for specific deals and for projects with major rehabs you're right it doesn't make sense. 

  • Investor · St. Louis, MO · Member since 2016 · 41 posts · 24 votes
    9y

    @Neil Sinha and @Mark J., 

    Neil is exactly right. You have to find a deal with a big enough discount to recoup HML costs in the equity capture.

    Here is a deal I did recently and seems pretty average for me:

    Purchase Price: $72,500

    Actuatual Rehab Costs: $12000

    HML costs/Holding Costs/Title Fees/Closing Costs for both purchase and refinance: $7837.00

    ARV: 113,000

    75% Mortgage: $84,750

    Now we add up all fees and costs: 72500 + 12000 + $7837 = $92,337

    Subtract the bank loan @ 75%ARV: 92,337 - $84,500 = $7587 out of pocket after refi

    Granted my closing to closing time was 6 weeks on this. So my holding costs were lower than average. But based on my cashflow, I will have 80% of my out of pocket costs repaid to me in my first year. That, to me, is a great cash on cash return.

    Also, since the ARV is $113,000 based upon the lower of the 2 appraisals done (other was $114,000), I have $20,663 gathered in equity.

    To me, this is the best way to scale your business up quickly. Yes, costs are high, but without large private investments there really is no other way to buy houses this quickly.

  • San Antonio, TX · Member since 2017 · 81 posts · 31 votes
    9y

    @Lane Forhetz

    What I've been trying to learn is how to get a lender to refinance at an LTV that pegs at ARV. Seems most conventional lenders would peg the property value at your acquisition price as the value to finance against unless there is 6-12 months seasoning. So to get the 84K as your 75% cash out in only six weeks of rehab, how do you find a lender that agrees that the appraisal has that much extra equity based on market conditions and the work you've put in since you took title. That's the mystery I am trying to solve and how to screen smaller lenders to identify those who will underwrite at those values instead of at Fannie/Freddie guidelines or with even more conservative overlays.

  • Investor · St. Louis, MO · Member since 2016 · 41 posts · 24 votes
    9y

    @Neil Sinha, any lender should take the loan as Fannie Mae supports the loans. As long as the bank follows the guidelines.

    The guidelines Fannie has put in place are:

    • You can get 75% ARV in a "Rate and Terms" Refinance - meaning you can't get "cash out" of the deal.
    • There are no seasoning requirements for this
    • You can take up to 2% or $2000 cash out of the deal, whichever is lower
    • The rates you get are competitive with normal primary home mortgages but are determined by your credit score and DTI (debt to income ratio)
    • Maximum of 10 loans (plus primary home, 11 total)

    I would try to find a local bank to work with. I simply did an interview-esque type of meeting and said this was what I was trying to accomplish and the loan office took my questions to their underwriter and addressed them a few days later. 

    As you develop a relationship with the local bank, they will see you as a good low risk customer and do more business with you as you max your 10 allotted Fannie loans.

  • Tampa, FL · Member since 2014 · 169 posts · 164 votes
    9y

    @Lane Forhetz

    Thanks everyone for contributing and keeping this discussion going. It's been very helpful talking (and thinking) this through. I had a professor once who said that until you can explain it in writing, you don't fully understand it. That's proven true for me many times.

    @Lane Forhetz - Two things you're executing very well on: #1 Find deals @ 65% ARV. #2 Somehow acquiring and closing on a hard money loan, buying & closing on a property, rehabbing it, and getting your cash back out through a refi in six weeks. That's impressive! Well done, sir! If I can build some solid relationships with HMLs, am able to cut another three-weeks off the renovation time, and spend about $5K off the rehab costs, I'll be able to get the process down as well as you. So, I'm close to making it work-- but not quite there yet.

    What kind of properties are you buying -- auctions? How are you able to close on the purchases so quickly? Are you using commercial loans for the cash-out refi? 

    As I've experienced it, there are two magic numbers that make a BRRRR successful. #1 Buying at 65% ARV (max!) and #2 Spending no more than 10% of the ARV on the rehab. That's the challenging part because you have to create value / equity equal to 35% of the ARV by only spending 10% of the ARV on the rehab. My experience has been more like I've spent 15% of the ARV on the rehab (and holding costs)-- so that 5% gets locked away as equity and comes out of my pocket (e.g. drains my acquisition capital).

    On the property I'm currently waiting to refi, I purchased at 65% ARV, closing costs pushed it 67% ARV, I completed the reno right on target at 10% of the ARV, and holding costs + refi closing costs will push my costs to about 14% of the ARV or resulting in about $4,400 out of pocket. Not a perfect BRRRR, but if I had not invested $3K in non-essential (but important upgrades), I'd only be $1,500 out of pocket-- so that's pretty darn close to a perfect BRRRR for me! ;)

    Again, I really appreciate everyone's thoughts and feedback here. 

  • Investor · St. Louis, MO · Member since 2016 · 41 posts · 24 votes
    9y

    @Neil Sinha, I realized I didn't answer the question about the appraisal.

    The refinance bank will order their own appraisal, once you have completed the rehab. So you have to pay for a second appraisal, which is a bummer, but as long as you get a decent appraiser, it's worth the extra $400-$500. 

    I've had good luck with my appraisals coming in within 5% of eachother and my own estimates for ARV. I've had a couple appraisals come in a lot higher than expected. The trick is to estimate on the low end and negotiate your purchase price from that lower estimate.

  • Tampa, FL · Member since 2014 · 169 posts · 164 votes
    9y

    @Lane Forhetz - I thought Fannie Mae only gave 70% ARV or 100% of the purchase + closing costs (whichever is LOWER) with no seasoning (however you must refi within 30 days of purchase). Although 75% still wouldn't make the deal workable for me.

  • San Antonio, TX · Member since 2017 · 81 posts · 31 votes
    9y

    @Lane Forhetz what I didn't know is that rate/term allows for a second appraisal value sooner than six months.  My understanding is that in order to get a lender to agree that there is a new market value (since a purchase tends to establish the property at whatever value the two parties agreed on) you needed the seasoning to show the market has "reset" the value to a new intrinsic worth relative to comparables.  Again, I'm just a new guy trying to read and research, but looking at Fannie/Freddie info I didn't see where it spelled out that rate/term shortened that close-to-close seasoning requirement.

  • Investor · St. Louis, MO · Member since 2016 · 41 posts · 24 votes
    9y

    @Mark J., Thank you!

    I think you have the process down just as well. I used to focus on staying $0 out of pocket and I never bought any properties. Ultimately, most deals will end up with some of your money out of pocket, at least in this hot market.

    I have found most of my deals on the MLS. It's been tough but it's been working pretty well. For me, as long as I am getting close to 100% cash on cash return the first year, I'm ok with being out of pocket a bit.

    In order to find a HML with decent fees, you may have to put up with high fees for a deal or two until they see you as a lower risk, having completed a couple.

  • Investor · St. Louis, MO · Member since 2016 · 41 posts · 24 votes
    9y

    @Neil Sinha, I understand. The main reason that the second appraisal is able to be done so quickly is that the first appraisal is a "subject to", meaning that it's subject-to the work to be done. I have to submit a scope of work that I will be doing to the house and the appraiser justifies the appraisal off that scope.

    @Mark J., all the deals I have done have been at 75%, but I've actually heard of some people getting 80% ARV. Apparently, Fannie will allow 80% based upon some mysterious set of guidelines they have. Banks have told me that it's possible but no one has ever provided the guidelines to achieve the 80%.

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