FIRST BRRRR has me a bit confused someone please help ?! thanks !

17 Replies

so I'm trying to acquire my first brrrr deal and when I plug the numbers into the brrrr calculator it shows a negative cashflow on the refinance part and only a 6% ROI during the first loan.(hard money loan) im not sure if the deal is bad, the terms from my lender are bad, or im putting wrong information on the refinance part of the calculator, OR the deal and lending terms are both great but just don't work together. please help?

The property is In Atlanta and has an ARV of 210k, asking price is 60k, and repairs are 40k with rents at $1350.

the terms of my lender are: 100% financing for both purchase price and rehab, for 6 month term with all closing costs and fees wrapped into the loan, 3 points (or additional 3 months for 2 more points) with no monthly payments at an 8.29% interest rate. so essentially I am paying $0 out of pocket as of right now which I am fine with because I have little to no capital saved up. 

now when I put in the refinance info, I input a loan of 147k (70% of ARV) and 5% interest for 30 years. that way I can pay off the first lender and have enough to repeat the process with whatever is left over plus what I will be saving. but then it shows negative $350 cashflow. what really eats up the numbers are the taxes and estimated mortgage payments at like $850 a month. are taxes and insurance not included with a mortgage? is it not a good idea to completely cashout refi 70% of ARV 210k if it can't be covered by monthly rents?(assuming I put forth a good percentage for expenses, and my own cashflow as well)  is the brrrr calculator always accurate???

Thank you for taking the time to read and answer, any information would be greatly appreciated.

@Jose Garcia The numbers look accurate. To have any chance to cash flow monthly rents have to be 1% of purchase price. To get this to cash flow the max price would be $135000 dollars. You are refinancing $147000 so negative cash flow. you can turn it to a flip. Also you need to season the loan for 6 months after rehab with tenants in it before refi so don't go for 6 month term and make sure you can qualify for a loan.

Taxes and insurance are 99% of the time included in the mortgage. Doesn't sounds like the numbers work out and your rent should cover the mortgage. Most lenders lending on the property would probably not give you 70% if the rent isnt good enough to cover.

Originally posted by @Nicholas Covington :

Taxes and insurance are 99% of the time included in the mortgage. Doesn't sounds like the numbers work out and your rent should cover the mortgage. Most lenders lending on the property would probably not give you 70% if the rent isnt good enough to cover.

they would use 1.25 DC ??? on SFR just wondering what ratio they look at.. we know MF uses ratios was not sure on SFR

@Tim Herman thank you ! isn't the refinance used to get out more money than the first loan anyways, so how would you keep your cashflow with rents remaining the same during the refinance? also what would be the reason for seasoning the first loan 6 months after rehab? wouldn't the equity be acquired after the rehab saving you money if you aren't required to pay monthly payments? 

@Jose Garcia many posts on the brrr, People are always asking about lenders that will refinance without a seasoning period. The ones I have read are rarer than hen's teeth. I don't know why your loan would be any different. Easiest solution would be to talk to a lender, maybe you will find the one that doesn't need seasoning. Taxes and insurance are escrowed into your mortgage payment, they are separate bills, so the calculator is set up to include the separate bills. To verify this you can use any online calculator or download one to your phone and run the numbers. When you run the calculator pre refinance you have 2 months vacancy during rehab  and 6 months seasoning for a vacancy factor of 25% rehab period.

What Tim is saying is that most banks require you to own the property for 6 months or some other set time before you can refinance. This is called the seasoning period. 

Fidelity bank in atlanta has told me they have no seasoning period for refi. If you want a contact there shoot me a PM. 

Since you have no money in the deal why not refinance at $100-105k. With no money you just created over $100k of wealth and should have pretty good cash flow and an excellent return.

Your problem is you are trying to take more cash out. Most Brrr just get their original investment back. Your initial investment is zero. I would do this deal but not take any cash out since you didn’t put any in.

@Eric Telese and @Jose Garcia - There is a "seasoning" period for a full refinance based on the actual rehabbed value of a property, and it's usually at least 6 months after purchase (that's Fidelity's wait time). Fidelity (and other lenders) will finance before 6 months (often called "delayed financing" instead of "refinancing"), but the loan would be based on the purchase price of $60k, not on your anticipated $210k ARV. That's a huge difference!

@Jose Garcia

I agree with @Craig Jeppesen you are taking to much money out on the cash out refinance.  If you only borrow what you need to pay back the hard money lender then it looks like the property cash flows and you have built up nearly 50% equity.  I understand you are trying to build up some funds for the next one, but it doesn’t work on this one based on the numbers.  

Good Luck.

Originally posted by @Jose Garcia :

@Kenneth Garrett

@Craig Jeppesen

I Greatly appreciate your guys answer it makes sense, pay off the initial loan and don't try to force the extra funds if it'll eat up my cash flow and ROI I'm willing to accept. But then how would I repeat the process thereafter with no additional funds ?

Thanks again !

 This one worked for you with no cash. Do it again. Also save up your cash flow for a down pmt.

@Jose Garcia As mentioned before by the posters, the first rule on the BRRRR is to make sure you can get 1% rent based on the purchased price. (210,000 x 1%=2,100.00 monthly rent). Also, if you strategy is to BRRRR you need to certain the property you are buying is at least 30% off the market/ARV price. This will "guarantee" getting you first money investment/downpayment and a little bit more in the refinance process.

@Jose Garcia   You have little to no capital.  You want to buy more properties.  You need to get some capital.  Buy this deal and fix it up.  Sell it for $210k.  Pay the realtor their $12k.  Pay the lender his $110k and walk away with $80k+.  Now you have capital.  Do it again.  If you want to keep the next house as a rental, super.  

Let's assume you want to keep this house as a rental.  You don't have any cash.  I don't know if you have a job.  You will need W-2 income, some cash reserves, and decent credit to qualify for a 5% Fannie Mae loan.  Without those requirements, you will need to go with an asset based lender that will lend on the cash flow of the property.  Interest rate will be higher and loan amount is based on the cash flow of the property.  If you just want to pay off the lender with a new mortgage, there is no seasoning period.  If you want to cash out $1 or more, there will be a waiting period of up to 6 months from the date you purchased the property.  They are going to require you to have some cash reserves at closing too.

Rent $1,350 less PI $790 less insurance $100, less taxes $300 (estimate) = $160/mo.  This obviously doesn't account for vacancy, maintenance, or management fees.  I'm guessing BP model has added $500 of other expenses to get you to -$350/mo.  That $500/mo expense may or may not occur in any particular month.  If you don't have any cash in the bank, you won't be able to pay them.  Also, a $200,000 house should bring close to $2,000 in rent.  

Assuming you disclosed all of the lender terms above (I'm surprised he isn't requiring a % of the profit), use him to flip 2 or 3 houses.  Now you have pocket full of money and wiggle room do what you want.

Good luck.  Let me know if you have additional questions.  

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