BRRRR Question

11 Replies

Hello all,

I have a quick question about the BRRRR strategy. I am planning on buying my first owner occupied duplex in the near future with an FHA 203k loan, allowing me to roll rehab costs into the mortgage. After running numbers on a handful of properties, I'm seeing it's obviously very hard to break even on a duplex under FHA terms, much less cashflow, as there's only one unit producing income. So, I then plan on getting the property rented, reappraised and refinanced into a conventional loan.

My question comes in how that works. By refinancing into a conventional, are you essentially pulling the increased equity of the property, after refi, out to use as the down payment of the conventional loan? 

Thanks everyone!

You can get a conventional 203k loan.

It isn't called a 203K loan but many banks offer products very similar to the 203k loan. It sounds like you you just need a larger downpayment in order to make the deal work. If that is the case you can always put more money down. 

Good Luck

Lance,

Thanks for commenting. Yeah, with an OO duplex my realistic goal is simply to "live for free" - I understand even with a larger down payment it will be difficult to cashflow.

The reason I was going to utilize FHA is that I don't currently have that much upfront capital for a conventional down payment. FHA would allow me to get into the property and the rehab/refi would get me into a conventional mortgage. That's just how I'm leaning now; however, I may just try and save for the larger down payment. We shall see!

Originally posted by @Mikael Winkler :

Lance,

Thanks for commenting. Yeah, with an OO duplex my realistic goal is simply to "live for free" - I understand even with a larger down payment it will be difficult to cashflow.

The reason I was going to utilize FHA is that I don't currently have that much upfront capital for a conventional down payment. FHA would allow me to get into the property and the rehab/refi would get me into a conventional mortgage. That's just how I'm leaning now; however, I may just try and save for the larger down payment. We shall see!

I'm on the same boat! I'm sure it's much more easier to come across a deal in you're market. We have the highest property taxes here in NJ which kills cashflow. But the search for a deal continues, while saving for the larger down payment.

@Allen C, yeah property tax can definitely affect cashflow. That's pretty much what's killing my cashflow potential on a duplex. I've thought about a 3 or 4 plex for that reason. More units to offset the expenses. Anyway, good luck in finding a property!

@Mikael Winkler I love the idea of house hacking. Even if the deal doesn't allow you to live for free, I assume you have living costs now anyway? Are you able to get the deal, rent out the other half and lower your living expenses?? Even if you have to pay a little, it's temporary until the place is cleaned up and you can rent out both units.

The amount you're paying also goes into your own property at least!

Not a bad way to get started

@Joseph Chacko vellukunnel

@Eric Gomez

203k loans are specifically a FHA product. There is also a conventional renovation loan which is basically the same thing but doesn't include the FHA requirements and costs.

Yeah, I am going through one now, and getting everything lined up can be tricky.  As always, you need a good lender.  Its not rocket science, but even though you roll in the rehab costs, the property still has to appraise to cover everything.

@Joseph Chacko vellukunnelnot sure what your situation is, but you may not have a bunch of options.

I'd be happy to chat if anybody would like.

@Mikael Winkler to answer your question - yes, if there is any.  The property will be appraised without any reference to, or consideration for, your original loan.  So if the appraisal is not high enough, you will be "leaving money in the deal," as they say here on BP.  That's not necessarily good or bad, depending on how the property cash flows once both sides are rented.  You should run those numbers now.

And you'll pay closing costs on the refi, which can be non-trivial.

Originally posted by @Eric Gomez:

@Joseph Chacko vellukunnel Great question. This area trends with old properties in need of rehab, high taxes. Heard of 203k loan to roll in rehab in one loan but would also like to hear more about this. Where in Jersey city did you find a property?

Saw this question was from LONG time ago and that you probably already purchased and figured this out on your own but will answer just in case.

Ex. If the purchase price was $500K and the rehab was $100K (using 203K loan) your loan amount is $600K. (Say you put 3.5% down)

If you refinance and lets say the appraisal came in at $800K, they offer 75% LTV for multifamilies meaning they'll lend you $600K to pay off your old loan. ($800K * 75% = $600K)

You've built 25K equity, PMI will disappear and you forced 3.5% equity to 25% equity.

Hope this helps.