BRRRR Timeframe?

Question

I should be closing on a SFH in early December and having it rent ready about a month later after my planned renovations are complete. My plan is to use the BRRRR strategy for future buy and hold investments to start my portfolio. My question is how long should I wait or, will a bank make me wait to refinance the house. Will they want to see a steady rent income of a few months from the property or will they base the equity solely on the value of the house and the rent history won't come into play? I'd like to refinance as quickly as possible and I'm hoping that it can be done in a short amount of time.

Steven Anderson · Answer

@Allyssa Comptonhere in Texas your property taxes are not impacted by the refinance. We don't have a personal income tax.

When you refinance the house after the rehab your lender will require an appraisal. The appraiser will go to the property to determine its value because your lender will lend you a % of this value for the refinancing. The greater increase in value you create over and above your rehab costs maximizes the amount of previously invested cash you will be able to receive when the home is refinanced.

In my experience, it absolutely matters that you have the property rented. It also matters in the appraisers mind where your rent rate falls relative to comparable rental properties. A higher rent rate suggests (and computes to) a home with greater value in the appraisers models. An appraiser looks at the replacement cost, comparable home sales and your net income from rents as different methods of valuing your rental property.

Here's an example because you asked for numbers.

Buy home for $110k for cash (including closing costs) April 1. Spend two weeks and $9k on rehab. Total cash invested $119k. Six months later, through the refinancing process your property is valued at $145k. You decide to refi with an 80% LTV conventional loan meaning your lender will lend you 80% of $145k or $116k. At the closing of your refinancing, the lender will send you $116k and you effectively have $29k in equity in the property but only $3k of your own cash is still invested in the property ($119k of cash for purchase, closing and rehab) less $116k cash received at refi closing.

I hope this example helps.

Steven Anderson · Answer

@Allyssa Comptonif I'm not mistaken BP has a book by Brandon Turner called How to Invest in Real Estate with No (and Low) Money Down where he discusses this strategy

Allyssa Compton · Answer

@Steven Anderson thank you! That does help a lot. It's also good to know that rent factors into this because I hadn't been able to get that information previously.

I ask because I am considering a deal on a 2 family home that was converted to a SFH. All utilities are still separate and it is zoned as a 2 family, so it would be easy to put it back to a duplex; but I would need to put in a kitchen and close a wall. I could do a cheap kitchen but I was trying to determine, using the BRRRR strategy, if I would be able to pull my money back out through a refinance. I'm assuming that adding a second kitchen and turning it into a duplex wouldn't necessarily raise the appraised value by enough, but if they factor the fact that tenants would be in there by that point, perhaps it would make more sense.

Are there any books out there that have been helpful in navigating this strategy? All I can find are articles which don't give me enough of the numbers and logistics.

Thanks for all your help!

Brent Coombs · Answer

@Allyssa Compton, Lenders use their own trusted (read: conservative) Appraisers. I don't know whether some Appraisers work exclusively for certain Banks, but it wouldn't surprise me.

I don't know what taxes would be impacted. But certainly, take every expense into account...

Allyssa Compton · Answer

@Brent Coombs thanks for the response! That makes sense. Does the lender do a walk-through of the house in order to appraise it? Maybe that's a dumb question.

Also, when you refi I'm assuming that will have an impact on the taxes and might not make sense in all situations, especially high-tax areas like the counties around NYC.

Brent Coombs · Answer

@Allyssa Compton, not so much "a pretty major rehab", but more: "a very value-adding rehab" (ie. adding much more value than it cost you). It's your LENDER'S appraisal that matters at refi.

As well as that value-adding rehab, it works best if you BUY right (ie. instant extra equity)! Cheers...

Allyssa Compton · Answer

@Steven Anderson @Steve Volk Hi guys! I am trying to understand this strategy as best as possible but seem to be getting a little lost in the process. I'm on the same page when it comes to purchase the home, rehab it to bring up appraised value, and then getting a refi. But that's where I keep getting thrown a bit. Do you need to get someone to come out and appraise the home? Does rent factor in or are we past that stage? Wouldn't this need to be a pretty major rehab for this to work?

Can either of you throw some numbers and/or steps at me to help this make sense?

Bradford Myatt · Answer

@Steve Volk there is no one answer to your question.  If you are sure your home will appraise for the amount necessary to make your cash out refi work for you, by all means start the process and ask a bank.  Most LTV for a cash out refi are 75% and many banks will also take closing costs out of the loan value.  You could always wait a year or two to pay down the note and then be able to pul out more money.  Just a few thoughts.  Good luck!

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