I'm reading about the BRRRR strategy and I find it very interesting.
I'd love to hear your experience with this strategy. Can you address the following
- Detail the stages from buying to refinancing.
- Talk about the financials
- Advice for someone thinking of using this strategy.
Thanks for sharing!!!
I use this strategy all of the time and have been for years.
Regarding the stages, I start with analyzing the as completed property as a rental. Specifically, how much will the finished property bring in for rent and what expenses will I have. In addition to your direct expenses (taxes, insurance, utilities, etc.) most banks will also take 15% off the gross rent to cover vacancy, management and maintenance so I also include these estimated expense. From the income and expenses, I calculate the net income and use that to estimate what my bank will loan me on a refi.
I learned what my banks would loan me by asking them what criteria they use and how they evaluate rentals. Talk to your bank to find out how they will look at a rental deal since your numbers will vary depending on loan type/rate/terms.
For me, that means having a debt service coverage of 1.25 and a max LTV of 75%. The loan is based on the lower of those 2. Debt service of 1.25 means that the net income needs to cover 1.25 x the loan payment. For lower end properties, it normally hits the 75% LTV first and for middle to high end rentals, it tends to hit the limit with debt coverage first. Even if the property brings in 2 or 3x the loan payment, the bank will not loan me more than 75% of the appraised value.
Once you know how much the bank will (potentially) loan you on a refinance, you know the maximum amount that you can have into the property. Make sure you include: purchase price, closing costs to buy, holding costs, and closing costs to refi.
Closing costs are normally a % of the purchaes or refi price and talk to title companies and your bank to find out what to estimate for those. To figure out what you can pay for the property as-is, the only missing number is the repair budget.
Play around with the numbers to give yourself a feel for just how good of a deal it is. What happens if you get $50 less in rent or interest rates rise 1/4 point or you find a surprise during your rehab that costs you $5k more or the rehab takes months longer than you expected. For me personally, I've gone over my rehab budget most often so I always want some extra room.
Thanks Dan for sharing, you really detailed the strategy out well and cleared up a lot for me!