BRRR Strategy Questions

5 Replies

I am looking at the BRRR Strategy. When analyzing properties, is there a certain percentage of ARV that you can determine if its a good deal without doing the calculator on every property EX: ARV 300K (must get house for 225,000 without repairs)- 75 percent- Is this right? When you refinance, you get all your money out?

Me and my husband have excellent credit ratings. He makes goods money and so do I but I am a broker and work contract roles so my stability is lacking right now. What are the best routes for us to finance a BRRR? Hard money is alot of money to factor in especially if we cant refinance for some reason. Would we put it under our LLC or ourselves? We have nothing in the LLC at all since I just opened it. Other avenues of finances we have is: a 401k that needs to be transferred since I no longer work with the company anymore, IRA's, 529 plans. Do you always have to have a 20 percent down payment because here near Seattle (ish) thats an easy $50K not including closing.

Sorry in advance for the million questions. I am looking to a very quick calculation on every property in my budget and then if i need to look deeper, go with the calculator. 

Thanks in advance for your replies!

@Kristen Chapin , 70-75% of ARV (minus repairs) is the right "shorthand," but you have to run the numbers on every deal to really know if it's worth doing. This is especially important on a BRRRR, because you need to know that the property will still be a good investment once it's rented out. In an expensive market like Seattle it's definitely possible to BRRRR a deal, get your 25% equity out, and the property lose money every month. HCOL areas don't often work for 1-4 unit rental properties since their value is driven by the residential market, not the income they produce.

Have you considered doing a BRRRR in a more advantageous market?

You have to look at the deals individually to make sure they work. That being said, if you narrow your search to a specific type of house in a particular area...you can get some general purchase price numbers.

For example, I am looking in a specific area that has tons of 1960's houses and the home values are all right around 220-240. 75% of $240k is $180,000, so if I can buy a property and be at or under $180,000 after acquisition, holding, rehab, financing costs, etc then I can pull all of my money out.  I just have to make sure my house is on the nicer side of average in the neighborhood.

As @Jaysen Medhurst pointed out, you really want to make sure your rent numbers work out too. It doesn't matter if you can pull all of your money out if there's not any cash flow...

@Kristen Chapin You've loaded a lot of topics into your question. I'm not an expert in any of these fields, but I have some personal experience with some of these issues and researched many of these topics. You should seek the appropriate professional counsel before making any decisions regarding these subjects.

1. Quick estimates for BRRRR and whether they will cash flow in the future should be based upon the future debt service you anticipate you will have on the property, because that will be a big factor for determining your cash flow. Roughly half of your rental property expenses will be from the debt service on the property. If you buy a property for $180k with an ARV of $300k and you ultimately want to refinance after rehabbing to pull cash out for another investment, you will likely only get 75% LTV, maybe 80% LTV, depending on the lender (unless you go with non-conventional lending), which leaves you with loan of $225k - $240k. You need to be able to cash flow with loan of up to $240k using prevailing interest rates in this scenario. Unless you get a HELOC, you won't likely be able to pull out more cash until your property appreciates. You may be able to get a HELOC that gets you up to 90% LTV, but your cash flow needs to account for the second mortgage payment.

Here's a blog article with some thoughts on general rules for quick calculations:

https://www.biggerpockets.com/blog/2015/09/02/real...

2. As an alternative to using traditional financing for BRRRR, you can find and use crowd-sourced lending or other non-conventional lenders that provide a variety of loan options as stated income non-recourse loans. This can help with acquisition and rehab of rentals while giving you time to refinance after 12 months into traditional lending products. These lenders tend to work with LLC's as opposed to individuals whereas conventional lenders tend to not loan to LLC's unless it's commercial lending. You have to do your research on non-traditional lenders, however, because there are scams out there.

3. If you are seeking conventional lending, you are self-employed and you have W-2 income in any fiscal year, and if you stop working for any agency or company where you earned W-2 income, you will have a more challenging time getting loans. Conventional lenders will only consider your 1099 income and will disregard your W-2 income because you are no longer working for the employer where you earned W-2 income. Additionally, you will be required to show two years of tax returns and have cash on hand in order to qualify. The income qualifications will be solely determined base upon your Schedule C income in your tax returns in this scenario. I know all this because this is what happened to me. It took me over two years to finally refinance my primary residence and rental properties. You will need to know that it's much more difficult to qualify for conventional lending as a self-employed individual with mixed W-2 and 1099 income. You are better off with all 1099 income and a higher Schedule C. I had high credit scores, which only helps with your interest rate, not qualification of the loan which is based upon debt/income ratio. Rental income is only considered at 75% of the monthly rent as well for income qualification on your Schedule E, if you have rentals already. So, you will need to factor that into your calculations when calculating your debt/income ratio and qualifying for loans. Finding a good broker is your best bet, in my opinion.

4. If you are able to roll over your employer 401k and IRA's into a solo401k and/or self-directed IRA, you can invest in real estate ventures with those accounts, but you cannot benefit or profit from those properties in the form of personal use or personal income. The money has to be re-invested back in the investment account for retirement and cannot be used for personal income. This is a great way to build your retirement nest egg, but you cannot benefit from any cash returns immediately from those investments. You should seek the appropriate advice from a tax strategist that understands these strategies in order to make the best financial planning decisions.

5. If you have already created an LLC, you should have a business bank account to manage separate books and start building credit for that LLC by opening lines of credit, credit cards, etc. in order to build the credit profile for the LLC. Any contributions you make to the LLC in the form of capital contributions should be recorded as owner transfers and transactions should be limited to business expenses and activity only in order to maintain the liability protections. I've also learned that it's a good idea to take out a general liability policy for the LLC in order to reinforce the validity of the entity and the liability protections it provides. Make sure to have all the necessary operating agreements and contractual paperwork in place for the business as well. Seek the appropriate legal counsel on the best way to set up and manage your LLC.

I hope this helps. There's much more I have to learn as well.

@Kristen Chapin when it comes time to refinance you will get up to 75% of the arv so you need to make sure that spread is there so you can get your money back out. That being said you really should annalyze each deal one at a time in complete detail. Best of luck!
Originally posted by @Greg Bishop :

@Kristen Chapin You've loaded a lot of topics into your question. I'm not an expert in any of these fields, but I have some personal experience with some of these issues and researched many of these topics. You should seek the appropriate professional counsel before making any decisions regarding these subjects.

1. Quick estimates for BRRRR and whether they will cash flow in the future should be based upon the future debt service you anticipate you will have on the property, because that will be a big factor for determining your cash flow. Roughly half of your rental property expenses will be from the debt service on the property. If you buy a property for $180k with an ARV of $300k and you ultimately want to refinance after rehabbing to pull cash out for another investment, you will likely only get 75% LTV, maybe 80% LTV, depending on the lender (unless you go with non-conventional lending), which leaves you with loan of $225k - $240k. You need to be able to cash flow with loan of up to $240k using prevailing interest rates in this scenario. Unless you get a HELOC, you won't likely be able to pull out more cash until your property appreciates. You may be able to get a HELOC that gets you up to 90% LTV, but your cash flow needs to account for the second mortgage payment.

Here's a blog article with some thoughts on general rules for quick calculations:

https://www.biggerpockets.com/blog/2015/09/02/real...

2. As an alternative to using traditional financing for BRRRR, you can find and use crowd-sourced lending or other non-conventional lenders that provide a variety of loan options as stated income non-recourse loans. This can help with acquisition and rehab of rentals while giving you time to refinance after 12 months into traditional lending products. These lenders tend to work with LLC's as opposed to individuals whereas conventional lenders tend to not loan to LLC's unless it's commercial lending. You have to do your research on non-traditional lenders, however, because there are scams out there.

3. If you are seeking conventional lending, you are self-employed and you have W-2 income in any fiscal year, and if you stop working for any agency or company where you earned W-2 income, you will have a more challenging time getting loans. Conventional lenders will only consider your 1099 income and will disregard your W-2 income because you are no longer working for the employer where you earned W-2 income. Additionally, you will be required to show two years of tax returns and have cash on hand in order to qualify. The income qualifications will be solely determined base upon your Schedule C income in your tax returns in this scenario. I know all this because this is what happened to me. It took me over two years to finally refinance my primary residence and rental properties. You will need to know that it's much more difficult to qualify for conventional lending as a self-employed individual with mixed W-2 and 1099 income. You are better off with all 1099 income and a higher Schedule C. I had high credit scores, which only helps with your interest rate, not qualification of the loan which is based upon debt/income ratio. Rental income is only considered at 75% of the monthly rent as well for income qualification on your Schedule E, if you have rentals already. So, you will need to factor that into your calculations when calculating your debt/income ratio and qualifying for loans. Finding a good broker is your best bet, in my opinion.

4. If you are able to roll over your employer 401k and IRA's into a solo401k and/or self-directed IRA, you can invest in real estate ventures with those accounts, but you cannot benefit or profit from those properties in the form of personal use or personal income. The money has to be re-invested back in the investment account for retirement and cannot be used for personal income. This is a great way to build your retirement nest egg, but you cannot benefit from any cash returns immediately from those investments. You should seek the appropriate advice from a tax strategist that understands these strategies in order to make the best financial planning decisions.

5. If you have already created an LLC, you should have a business bank account to manage separate books and start building credit for that LLC by opening lines of credit, credit cards, etc. in order to build the credit profile for the LLC. Any contributions you make to the LLC in the form of capital contributions should be recorded as owner transfers and transactions should be limited to business expenses and activity only in order to maintain the liability protections. I've also learned that it's a good idea to take out a general liability policy for the LLC in order to reinforce the validity of the entity and the liability protections it provides. Make sure to have all the necessary operating agreements and contractual paperwork in place for the business as well. Seek the appropriate legal counsel on the best way to set up and manage your LLC.

I hope this helps. There's much more I have to learn as well.

This is the first time I've heard of a HELOC for 90% on investment properties; I've only seen that high of an LTV in primary residences. Max I've seen is 80% LTV for investment properties.

Also, keep in mind that commercial loans (which you can often get on SFRs and 2-4 units too) are primarily dependent on the property's cashflow. The problem with our area is that nothing really cashflows here. That translates to lower loan amounts and LTVs (ie 60%).

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