Shift to brrr strategy

12 Replies

So I got back into rei this past few months after sitting on the sideline about 6 months before that.  I'm a former builder who got rocked pretty good in 2008 then took a job out of state and just recently moved back to the gulf coast.  

Anyways, so I found bp, soaked up the podcasts, read the forums, started to apply some of the ttp's.  Found a couple realtors that had similar mindsets, networked with other investors, made offers on auctions, reo's, wholesalers, and continued to grind.   so now I got a property under contract for about 62pct of its arv.  I found the property by tracking a fsbo that was in reality an investor who picked the property up at auction.  Rehab should cost no more than 15k (realistically it might even cost less than 7k depending on what I decide to do with it and how much I'll do myself.

More importantly I am not using any of my own money.  I got this property with the use of a personal loan from Sofi.  They gave me 100k at 8.6 pct amortized over 7 years.  Making my payments about 1590 per month but only 600 of that is interest, the other 1000 is principle.  I got the loan about a month before this purchase for a trustee auction but the auction was cancelled so I gave myself 3 months to either use the funds or repay the loan and call it a 1600 loss.  The use of the personal loan was invaluable because I could realistically make all cash offers because the money was sitting in my bank account. Plus closing costs were a fraction of what I have paid in the past.  Quick closings etc.  we signed the contract this past thurs.  We close tuesday.  Sofi may or may not be an option for some, they only lend to people with high credit scores and high incomes apparently.  I do ok with my ft job so I took advantage.  

So the numbers (so far) are:

Purchase price: 62k

ARV: 105,000

Buying costs: 961.00

Rehab: 7-15k

Unsure of what the holding costs will be until its rented but I'm estimating 4 months.

Utilities: 650

Taxes: 300

Insurance: 500

Interest: 2400

So I'll be in it for about 70% ARV.

Projected rent: 12000

Costs: prop mgt: 1080

Maint: 600

Capex: 360

Utilities: 0 (tenant pays)

Vacancy: 1200

Tax: 800 (this will go up in october but maybe only 300)

Insurance:  still getting numbers but no more than 1200

NOI: 6760

Debt service will be accounted for after rehab and when I find a good refi option, but I figure I'll pay about 5.5pct and have lending costs (unsure of what those will be) associated with it.  Theyll require a survey, and I'll pay some origination.  

That should leave me with all my money back and a property that cashflows at $149.00.  I'll go do it again after.  

If I get held up with seasoning periods to refinance i could be looking at an additional 1200 in interest costs. 

We'll see how it goes 

I'd like to get some opinions from bp on the rehab.  The house currently has tile throughout, however, the br are different color tile than the hall, and the 1 bath has a different color tile than the br.  

Durable?  yes

Aesthetically pleasing? no

Cost for tear out and replacement of br tile and putting carpet down might be about 750-1000 for the 3 bedrooms.  It will not get me more in rents, but will probably get the house rented quicker imo.  

I'm thinking its not worth it but like to hear from others.  

@Jeremy England  i like your deal Jeremy, i would opt to make it uniform in baths and floors and you get two things, better refi value, and my own subjective opinion is a better tenant, if it bugs you it will bug people like you, and there's a bigger reason, you want this deal to be more liquid asap, so at any time a renter or outside buyer can buy it, it's an important exit option to have just in case 

@tj 

@Tj Jieff

I appreciate the feedback.  I'm at the top end of my rehab budget already.  Ran into some surprises like a drive way buried under where the new driveway was going which needed to be excavated ($400)

Roofing costs have nearly doubled since I was last in the construction business, I budgeted 3500, it costs me 5200.

I did not recgonize that there was significant drainage problems in both the front and back yards when I bought the place.  It was dry as a bone when I looked the house over.  Well, about 4 days after I bought it we had some helacious rain and now its a swamp. Im going to have to spend about 500-1000 to get some french drains and catch basins.  

I have the rehab costing about 17k now.  I'm not doing any of the work so far.   Hindsight, I probably just should have done all the interior finish work myself to save money.  

So that puts my all in at about 80k. About 76% of ARV. Still good for a cash out but I may end up leaving a little bit of money in the project

Well, I’m not positive. But I would think the personal loan is no different than any other debt to be consolidated using equity

We’ll find out soon because I was just referred to a local lender by a bp member yesterday that will do. 75% ltv w no seasoning.  

Im prepared for alternatives should the personal loan prevent me from refi due to credit limitation.  I have the funds in personal savings to pay off the loan.  I could also borrow 50k from my 401k for a short period

But I’m hoping I can just take care of it in one step with the refi

@Jeremy England yeah I see now you have some big costs, roof's a big one, drainage is another hidden one people often don't see coming, a bad pipe in yard's another. Given the deal size, if you leave some money in the deal, at least the numbers are small relatively speaking so it's better than being at $150-250K ARV.

@Jeremy England This is a very interesting financing strategy, thanks for posting. Do you mind explaining how difficult the process was obtaining the loan? I’m currently repairing my credit and studying up on different methods, so I don’t think this would be an option for me right now but I’d love to find out more to keep it as a potential option int he future.
Originally posted by @Kirk Simpson :
@Jeremy England This is a very interesting financing strategy, thanks for posting. Do you mind explaining how difficult the process was obtaining the loan? I’m currently repairing my credit and studying up on different methods, so I don’t think this would be an option for me right now but I’d love to find out more to keep it as a potential option int he future.

 Easiest loan I’ve ever applied for. It was simple . they check your credit, your bank statements , youre funded

If only mortgage loans for this easy

Speaking of loans thought I’d let everyone know that the bank that I had in mind for my cash out refi is no longer offering loans without seasoning periods to new customers. So I’m back to the drawing board with trying to find a bank to refinance with I’ll let everyone know when I figure out.

I may have to just pay off his personal loan with my own money and wait for the seasoning. It really throws a kink in the whole brrrr concept.  If I have to wait six months between every purchase and refinance the road passive wealth is a long one

for anyone who's been following this, so I found a lender who will cash out finance the property.  Its a commercial loan.  This will increase the monthly payment however which decreases the cashflow of the loan.  The terms are 5 year balloon amoritized at 20 years at 6pct with 1/2 pct origination.  That would put my payment at 537.  add in insurance and taxes and there would be about 250 left if I got 80pct out.  If I got 75pct out there would be about 300 left after piti.  

Question for anyone who can answer. They say I can finance this property in my LLC but witha personal guarantee. This sounds good, however I'm thinking of 3 or 5 years from now. If it's in my LLC's name, then a mortgage on the property is out of the question I think right? Like a traditional refinance into a 30 year at a lower rate?

I'd like to hear anyone's thoughts on it.  Thanks

Thought I'd update everyone here on this property.  So just signed a lease with a tenant today.  This was after a few verbal commitments that applied but never followed through, and one couple that applied, put a deposit, then decided not to rent the place.  

Anyway, new tenant has great references, great credit score, and good income. 

So some of the challenges I faced on this property

1. Going over budget on the rehab.  I've been over this.  But overall the project cost me about 81000 including the purchase, holding and rehab costs.  Appraisal came in at 100k (this was expected) .  Rent is 1000/mo.  So I didn't do great but ok.  

2.  Cash out refinance.  So it turns out the bank that told me they could refi me with no seasoning, really couldnt'.  They never told me i would be limitted to what I purchased the property for.  They would not even add the rehab costs to the delayed financing amount.  It was bank of the internet.  So beware.  I learned this after I paid the 575 dollars for an appraisal.  Yea I realize that is high but I accepted the high amount because I was getting a loan with the bank when no one else woould.  Turns out they wouldn't either.   I do have an option of cashout refi in a commercial portfolio loan witha local lender but the terms are not what I am looking for.  6pct, 5 year balloon, 20 yr amortiization and only 70pct ltv.    That would mean I only get a 70000 loan and leave 12000 in the property.  Plus I'd have to refnance out of it in 5 years.  Means even more costs.  

So I've decided to just pay the payments on the personal loan until the seasoning period is up in feb or march.  This equates to 7950 in payments on the loan, but about 4500 of that will be off the principal.  Plus I'm paying back 16000 in a lump sum today So in march the loan balance should be 77778, or there abouts.  If I do a cashout refi then I will get more favorable terms.   I should be able to use the appraisal I just paid for so that'll save money there.  I'll refinance and pay the personal loan completely off.  

This should mean my only cash that I paid of my own money will be the payments before the refi.  Collecting 1000/mo from the tenant which has no mortgage balance.  Taxes and insurance are already paid.  Ideally I won't have any maintenance costs during the first 6 months.  

I could get permanent financing and only have 2-3k of my own money in it after all is said.  

The question then is, how does one scale?  I don't see how that is done if no one will cashout refi before seasoning.  I guess unless you just pay a higher payment witha  portfolio loan and also have to get out of it before the balloon?  

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