Question About BRRRR

24 Replies

Hey guys - I'm in the process of finding my first deal & confused a bit by the numbers. 

Let's use this example....

I buy a house for 140k that needs about 10k worth of work. I spend 150k total. 

My monthly mortgage is $900. 

I fix up the house, get it rented for $1500/m and I'm starting to cash flow. 

Now I want to move onto the Refinance part to pull out some equity and move onto property #2. 

The house now appraises for 200k and they give me back 50k during the cash out refinance. 

Here's where I have some questions...

1) Does my mortgage payment now increase from the original $900 since it's now worth more?

2) Should I be calculating my numbers off the ARV value?

Thanks for the help!

@Matthew John if you were to find a bank that could lend 100% of the Value that would be pretty amazing! Most will lend about 75% of the ARV. There are differences to that number depending on the loan type, property type, etc.

  1. Does my mortgage payment increase - this will also depend on what type of loan you used to acquire the property.  Sometimes a seller needs to close very quickly.  And that might mean you need a loan type that can close quickly too.  Those loan types usually carry a higher rate (there's always an exception but 99% of the time this is the case).  So when you refinance, usually into a loan that takes longer to close, the rate is lower which makes your payment lower too.
  2. You should absolutely be calculating your numbers off the ARV rule. AND you should only be working with banks that do the same!

Here's some quick questions to ask your lender when the time comes:

  1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
  2. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
  3. What is my minimum down payment required? (not so important but if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
  4. Can I change title to my LLC?
  5. Do you sell your mortgages?
  6. Can you explain to me what your reserve requirements are?

Hope this helps!

@Matthew John , 1. If your new mortgage is $50k more than your previous one (with equivalent rate/terms), of course your repayments would go up! [Not because it's "worth more"]. 

And 2. Yes, sold ARV comps should already be $200k+ before offering $140k (if needing just an extra $10k to bring it to ARV). Preferably, offer no more than $130k [per the "70% Rule"]. My 2c.

@Andrew Postell I'm looking to put 20% down to avoid mortgage insurance. I'm just looking to get a conventional loan. 

So when I'm calculating my numbers for a BRRRR, I should be calculating my Mortgage expenses off the ARV price?

In this example I'd be buying at 140k and comps are 200k. So it fits the 70% rule well. It would rent for about $1500/m. 

Doing the calculations off the 140k I'm buying it for, everything looks great. Doing them off 200k, not so much. 

I honestly don't see how BRRRR works if you have to calculate it all off the ARV. Nothing seems profitable like this.

I think I'm looking at it wrong

@Brent Coombs In this case, the property is listed at 146k. It's a foreclosure. The banks listed it in Jan 2018 for 166k, then 154k, now 146k. Not sure if there's much negotiation with banks. 

So when doing analysis I shouldn't calculate mortgage off what I'm looking to buy the house for?

I should calculate off what it would refinance for? How do you know?

I'm getting super confused now

Matthew,

If you are using a conventional loan to purchase your property than that is what you will be using to calculate your cash-flow forecasts...its that simple. If your lender is willing to lend against a distressed asset (albeit in this case just needs $10k which is very low) than why don't you put your terms of the loan on here so others can better calculate.

Why would you be paying for $200k when you've only borrowed $150? Run your numbers off how much you are borrowing, over what rates and amortization etc.

@Joe Davis I'm trying to figure out how to run the numbers, from what I have been reading it's off the price you're buying it for. 

Now I'm questioning whether that is right and I should be calculating numbers from the ARV.

House is a foreclosure at 146k. Comps are around 200k - 210k. 

I'm looking for conventional loan, 20% down. It needs 10k in rehab. 

I would try to get it at 135k or 140k, so 150k would be my 'all in' with rehab + closing costs. If the ARV is 200k, that's a 50k difference.

It would rent for $1400-$1500 once it's rehabbed. 

Originally posted by @Matthew John :

@Brent Coombs In this case, the property is listed at 146k. It's a foreclosure. The banks listed it in Jan 2018 for 166k, then 154k, now 146k. Not sure if there's much negotiation with banks. 

So when doing analysis I shouldn't calculate mortgage off what I'm looking to buy the house for?

I should calculate off what it would refinance for? How do you know?

I'm getting super confused now

 Why the confusion? You calculate your mortgage on the amount you expect/need to borrow! 

[My confusion is: How are you buying it before refinancing it? 100% borrowed money? Or, cash?]

If you are using a conventional loan to purchase the property than re-finance wont be in the equation. you run the numbers off of whatever you're currently borrowing. So in your above scenario you are using $150k (minus 20%)? That's the number you will be running your calculations off.

The most typical way for the BRRRR strategy to work is you are using Hard Money at a much higher interest to facilitate the initial loan. When the work has been completed, you will than qualify for a traditional loan which will be at a much more favourable rate. You are eliminating the first high-interest loan with the new.

In your case it sounds like you are getting the long-term loan first...what are the figures on this? what % over how many years etc....you are only ever running your numbers on the money you are borring.....not what it could/would be worth etc. Run your numbers off $150k in your scenario - not $200k 

@Joe Davis Does BRRRR not work well using a conventional loan?

The terms aren't set because I haven't actually made an offer or purchased anything. Interest rates are bouncing around near 4.5% at 30 years.

BRRR is tougher when using a conventional loan, but I think it could be done. Especially if you're targeting bank owned properties.

However, you will most likely have to take the banks price. At least in my market, you can't really low-ball them with any success.

Yes it can work, but technically it's not BRRRR. You are missing out one of the R's :)

Bank owned and short-sales can be tricky to navigate. Mainly due to the fact that they can take a long time to close! However, if you can get a conventional loan on a distressed (or semi distressed) asset than their is no reason why the strategy won't work.

Remember to just calculate your cash flow forecasts on money that has actually been borrowed...nothing projected etc. Good luck and keep us all up to date on your first deal!

@Matthew John More than likely your mortgage will go up.  I don't know what your first mortgage amount was but let me break it down.

Usually 20% down payment

1st mortgage 150*.8 = 130k mortage

Refinance mortgage 200 * .75 = 150 k mortage

I don't know how much time has elasped but lets assume you paid 10k in mortgage over the course of getting ready to refinance

so you now have a 120k principle left meaning you can pull out 30k for your next property (150 - 120)

Your mortgage payment will be higher because its a higher amount you financed 150k vs 130k but also more than likely your interest rates have gone up and refinancing to pull out money allows a new interest rate to be locked in.

Hope this helps!

Originally posted by @Matthew John :

Hey guys - I'm in the process of finding my first deal & confused a bit by the numbers. 

Let's use this example....

I buy a house for 140k that needs about 10k worth of work. I spend 150k total. 

My monthly mortgage is $900. 

I fix up the house, get it rented for $1500/m and I'm starting to cash flow. 

Now I want to move onto the Refinance part to pull out some equity and move onto property #2. 

The house now appraises for 200k and they give me back 50k during the cash out refinance. 

Here's where I have some questions...

1) Does my mortgage payment now increase from the original $900 since it's now worth more?

2) Should I be calculating my numbers off the ARV value?

Thanks for the help!

Are you sure that $10K worth of rehab will add $50K to the property value? You should plan to buy a property worth $190K and pay only $140K for it. My point is you should make money on the purchase, because $10K rahab is unlikely to raise the value $50K. You will make most this $50K value increase on the purchase, not the rehab in the example you gave.

To answer your questions:

1. Yes your payment increases, not because it is is worth more but because you financed a larger dollar amount.

2. Yes. The BRRRR process reduces your equity in the property and therefore reduces cash flow. This has to be figured into your numbers.

@Matthew John I have a spreadsheet that I created personally to analyze potential BRRRR deals. I used it to explain the method to my partners and plan to use it to show numbers to future investors. I'd be willing to go through it with you. I think it will clear things up. I can use it to analyze your specific deal and send you the results. Inbox me and we can discuss more.

JR

@Allan Anderton

 Is see where you the confusion is, look back at this sentence:

"I don't know how much time has elasped but lets assume you paid 10k in mortgage over the course of getting ready to refinance."

Most buy and hold investors wait a year or 2 between purchases.  This means that if you have a traditional loan you are paying the principle down each month.  Because no time frame was introduced I look the liberty and said that 10k principle had been paid on the 130k principle of the loan leaving 120k principle left to be paid off.

Now if you are just jumping from purchase/rehab to the next one then (within months) you won't see really any reduction in the principle becuase you haven't made that many mortgage payments, not to mentioned that the bank probably won't count the coming income from the rental for at least the first if not first two years the rental is cashflowing cutting the buying power you as an individual has.

First of all, if it appraises for $200,000, they'll only loan $150,000, which would get all of your cash in the property out. As far as your two questions:

1) If you have a traditional loan on the property, yes your payment will go up in accordance with the new and higher loan amount upon refinance.

2) Yes, you should use the ARV to calculate your numbers (other than the holding costs of the loan before refinance)

Originally posted by @Matthew John :

Brent Coombs I'm looking to put a 20% down payment and finance the rest

So, if you're hoping to get that 20% deposit back at the Refi stage, why wouldn't your mortgage repayments go up? ie. You'd be borrowing 20+% more than when you first purchased it!...

Originally posted by @Jackson Pontsler :

@Allan Anderton

 Is see where you the confusion is, look back at this sentence:

"I don't know how much time has elasped but lets assume you paid 10k in mortgage over the course of getting ready to refinance."

Most buy and hold investors wait a year or 2 between purchases.  This means that if you have a traditional loan you are paying the principle down each month.  Because no time frame was introduced I look the liberty and said that 10k principle had been paid on the 130k principle of the loan leaving 120k principle left to be paid off.

Now if you are just jumping from purchase/rehab to the next one then (within months) you won't see really any reduction in the principle becuase you haven't made that many mortgage payments, not to mentioned that the bank probably won't count the coming income from the rental for at least the first if not first two years the rental is cashflowing cutting the buying power you as an individual has.

 I can see where Allen is confused. Your original math has an error:

"1st mortgage 150*.8 = 130k mortage"

80% LTV on a $150,000 = $120,000

Also, on a typical 30-year mortgage at around 5% interest the amount of principle paid down will be a fair amount less than $10K, assuming a typical BRRRR time frame. The principle would be paid down at around $2,000/year over the first few years of the loan.

Your points are still good, just wanted to clear up the math.

Thanks @Jeremy Z. let me fix that

More than likely your mortgage will go up. I don't know what your first mortgage amount was but let me break it down.

Usually 20% down payment

1st mortgage 150*.8 = 120k mortage

Refinance mortgage 200 * .75 = 150 k mortage

I don't know how much time has elasped but lets assume you paid 10k in mortgage over the course of getting ready to refinance

so you now have a 110k principle left meaning you can pull out 40k for your next property (150 - 110)

Your mortgage payment will be higher because its a higher amount you financed 150k vs 120k but also more than likely your interest rates have gone up and refinancing to pull out money allows a new interest rate to be locked in.

Hope this helps!

Thanks guys, I think my confusion was on what to calculate the numbers from. 

When analyzing deals, I will look at comps to guesstimate the ARV then run all the numbers from there (what I should be renting it for, how much repairs cost, then how much I should ultimately be offering to purchase it for).

Is the BRRRR strategy not great with a 20% down conventional loan?

Is it better to use a Hard Money Lender?

This is my first property that will be owner occupied for the minimum amount of time (6 months) before it can be refinanced. 

You all killed it with explaining BRRRR. I am a new investor and was also wondering if you should take into account ARV + Refi $$. Wish I had a follow up questions but looks like everyone in this thread really nailed it with the info...Thanks!!

Originally posted by @Matthew John :

Thanks guys, I think my confusion was on what to calculate the numbers from. 

When analyzing deals, I will look at comps to guesstimate the ARV then run all the numbers from there (what I should be renting it for, how much repairs cost, then how much I should ultimately be offering to purchase it for).

Is the BRRRR strategy not great with a 20% down conventional loan?

Is it better to use a Hard Money Lender?

This is my first property that will be owner occupied for the minimum amount of time (6 months) before it can be refinanced. 

1. ARV is not relevant to what you "should be renting it for". What's actual market rent?

2. It's never* better to use a HML, if you don't need to. (Why question conventional?)

3. * Except, you'd still need to live there for at least another 6 months as well. Cheers...

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