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Updated almost 8 years ago on . Most recent reply

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Will Foster
  • Colorado Springs, CO.
7
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Using the BRRRR Stratgey?

Will Foster
  • Colorado Springs, CO.
Posted

Hello BPers! 

My name is WIll, and I'm a newbie. I've been listening to the BP podcast for a few months now and have a legal pad full of notes. I'm excited to start investing and to build a Real Estate portfolio. 

I want to use the BRRRR strategy, and House Hacking method for a duplex. But I am a little confused about the Refinance portion and process, and was looking for insight.

I was thinking of using the Government Loan (203K)

First, I go to them, get an original loan, rehab the property, move in half, and rent out the other half. Then after a year, go back and refinance the loan into a new mortgage, pulling out the equity to buy the next property.

Is this correct? What am I missing?

I do not understand why a bank would refinance your loan after a year. Is it because it's a larger loan? 

How do you get the equity from the new mortgage? 

Can someone break this down to me in dummy talk?

Thank you in advance for your time

Will

Most Popular Reply

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John Leavelle
  • Investor
  • La Vernia, TX
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1,405
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John Leavelle
  • Investor
  • La Vernia, TX
Replied

Howdy @Will Foster

Both strategies are very good methods to invest.  However, it is difficult to combine the two.  Let me try to explain why.

To be successful using the BRRRR strategy you must purchase a distressed property at a significant discount. Since these properties are difficult to get conventional financing for you must purchase them with Cash or Short term financing (Hard Money/Private Money Lenders). Then you Rehab it and get it rented. You must have the property rented or available to rent for 6 to 12 months before you can do a Cash-out Refinance. The Refi Lender will provide you a loan amount that is 70 - 80% LTV based on a current appraisal. Typically it is 75%. This means 25% must remain in the property in the form of equity (in leu of a down payment). i.e. ARV/FMV or Appraised Value is $100,000. The new loan is $75,000 (75% of $100K) and you have $25,000 still in equity (this is where trying to combine both strategies has problems). You use the $75K to payoff the original acquisition loan and the remainder is your cash you put into the deal.

Using an FHA 203K loan (House Hack strategy) only requires a minimum of 3.5% for the down payment. You will be required to pay Private Mortgage Insurance (PMI) since you have less than 20% equity in the property. You are required to use a contractor to complete the repairs. Once you meet the one year live in requirement and you try to do a Cash out Refinance you will discover you can't. Because you cannot meet the 25% equity requirement I mentioned in the BRRRR process. The exception would be if you were able to force appreciation enough to produce the 25% equity.

Now ask me more questions if you need clarification.

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