Realtor · Savannah, GA · Member since 2017 · 27 posts · 14 votes
I hear a lot of stories about investors buying properties and pulling back out their initial capital using the BRRRR method. Great idea! Is it possible to do the same thing but start out by putting 20% down with an FHA loan and then rehab, rent, refi with new ARV?
@Shawn McKee I used portfolio loans on those, so I ended up paying twice the closing costs for the loans (the initial loan, and the 30 year loan). I am doing it a little different on two more. I put a heloc on my primary residence and bought two rental properties with cash taken out of the heloc. I will wait six months and then apply for 30 year loans on the two properties that I bought. With the proceeds from the loans I will pay off the heloc and be able to repeat the process again.
@Shawn McKee, sure. Why do an FHA if you have 20% DP? You're only extending your timeline since you will have to live there for a year. Not sure exactly what your question is.
@Jaysen Medhurst I guess what I am asking is for a little insight on the process. I own my primary residence in Savannah. I purchased with VA. I have found some fixer uppers near Fort Stewart about 30 miles from Savannah. I can’t purchase a secondary investment property with the VA. From everything I have researched if your purchasing a home that you have no intention of living in then 20% down payment is required. Are there ways around this? I’m sure that there are, I just haven’t come across them yet. Any help would be greatly appreciated!
I think it is common to put the 20% down initially. Then you fix it up, hopefully you bought low enough that there is a lot of equity after the rehab. After the rehab, then you refinance based upon the new equity and maybe pull out the 20% down payment and what you spent on the rehab.
I have two houses I just did that with. Bought them with about 20% down, one a little over six months ago, the other one year ago. Fixed them both up and rented them. I refinanced both with 30 year loans and got 100% out of one and all but a couple thousand out of the other.
No you can't, if you use a loan you have to season it. The bank will take purchase price (+rehab sometimes) OR appraisal whichever is lower.
Then you have the fact that you A) pay closing costs 2x and B) still capped at 75-80% LTV .... plus rehab costs. and FHA is owner occupant..... so that won't work.
Now there's always exceptions, but I wouldn't count on this as a quick way to ramp up... seasoning and closing costs going to eat a lot of your time/equity.
@Matt K. If I have 20% plus $ for renovations would you suggest using some sort of private lending to initially obtain the property then refi once rehabbed and it’s rented out?
@Matt K. If I have 20% plus $ for renovations would you suggest using some sort of private lending to initially obtain the property then refi once rehabbed and it’s rented out?
I forget exactly, but I think hard money gets you out of the seasoning, but again you're going to have pretty big closing costs.
The problem is 20% is basically 0 equity in terms of loan. If you bought something at or near appraisal w/ 20-25% down, you're more or less at zero. For every dollar you put in, it needs to be worth 120% just to get it back out. So... say 5k worth of work, it needs to bump your appraisal by 6k just to get your money out.
BRRR works better if you take 100k, but a house for 80, put 20 into it, then get someone in it for 1200/mo and it appraises for like 120-130k. It doesn't work as well when you do 80k plus like 2k in closing, then 6-12 mo seasoning, then another 2k in closings, and then low appraisal of 110k....
@Shawn McKee I used portfolio loans on those, so I ended up paying twice the closing costs for the loans (the initial loan, and the 30 year loan). I am doing it a little different on two more. I put a heloc on my primary residence and bought two rental properties with cash taken out of the heloc. I will wait six months and then apply for 30 year loans on the two properties that I bought. With the proceeds from the loans I will pay off the heloc and be able to repeat the process again.
on that recent pod cast with @Alexander Felice, he talked about deferred closing. Can you use hard money to purchase and then rehab and then use deferred closing? Just thinking out loud.
@Todd Willhoite Thanks for the insight. I'm not opposed to paying the closing costs twice to get the process rolling in the right direction. As long as I get most of the initial money I put into the deal out then I'm okay with some out of pocket costs. I'll start checking with lenders about the portfolio loans.
@Shawn McKee I bought with a portfolio loan. No reason I chose portfolio loan to start, other than I have a good relationship with the banker and can call and get loan much easier and less paperwork than 30 year loans. Problem with portfolio loan is 20 year amortization and 5 year adjustable rate. Changed to 30 year to avoid interest rate risk. Could have refinanced with portfolio product if I didn't plan to hold for long term.
@Todd Willhoite
This is the same way I am doing it. Seems to work well other than 2 closing costs but really no way around that unless it's a cash sale
@Todd Willhoite , I see you ARE from OK . I live in NWA . I read you get 30 yrs fix loans and I have not been able to find that around here. Would you mind guiding me on lenders who will do the 30 yr fixed on investment properties ? I appreciate your time .
It is much easier to do a BRRRR with a small bank with portfolio/commercial loans. It depends on your goals, but if you want to scale up and make this a much easier process to borrow, go the commercial route, especially if the assets you are buying are smaller balance SFR's, where interest rate adjustments aren't going to affect your payments more than a few bucks a month. Or get some private money pipeline going. I may get some strong opinions otherwise, but I think dealing with the underwriting requirements on loan products that are resold on the secondary market is just not worth it. Tripping over pennies on the way to dollars.
The 2 main caveats would be, 1. You are only going to be doing a small handful of purchases and it's worth the hassle, or 2. The mortgage balance is high and your cashflow is thin enough that a reset in interest rates makes you cashflow negative (which you really shouldn't be buying these anyway).
I bought dozens of good, cashflowing, SFR's with portfolio loans right after the crisis, and I spend zero time worrying about about interest rates on the underlying loans because the cashflow is good enough to absorb the few extra dollars of interest after adjustments.
Just my opinion though, I am sure there are very good reasons to go the conventional route - I just don't like the process at all and the brain damage it causes me.
@Owen Dashner I really appreciate the solid information. I was leaning towards the small bank portfolio/commercial loans route. I'll just need to do so for the first few properties and then I can go cash. They will be small balance SFR.
There is a lot of truth to what Owen Dashner says, the paperwork in doing a conventional loan is a real pain compared to my portfolio lender. Conventional lender requires 6 months of seasoning to do refinance on ARV. Portfolio lender may not require you to wait that long.