BRRRR Method

54 Replies

Originally posted by @Brian Larson :
Originally posted by @Joe Villeneuve:

Add the cash flow from the 2nd use of the same funds (refi) to the first, and if you are ahead of where you were before you refi'd the first one, then you did it right.

Totally agree with Joe. To expand upon this a little,  we are talking about arbitrage.  This is when you borrow cash at one rate and invest it in order to make a higher rate. The 'extra'  equity and loan amount will hurt your cash flow for that property but what if that' extra' was $10k that you were able to use your buy a note that returns 13% annually. If the borrowed cash was 5% that 13% return is really yielding you 8% on that equity. Arbitrage.

With that stated, this gets dangerous if the investments are riskier and you are over leveraged on the property. This happened in a bad way in 2007/2008 when banks were handing out super cheap HELOCs with LTV up your 110% (stupid..) then people bought properties that were risky (no cash flow and hoping for appreciation)or worse boats/atvs/etc, and then their houses went down.

If this extra MO ey is coming at 75% of LTV and you invest it wisely (notes, more RE, use instead of HML) then arbitrage can be gr

Right...except you don't get refinancing for more than 75% of the ARV...so you can't get over leveraged.

Originally posted by @Joe Villeneuve :
Originally posted by @Brian Larson:
Originally posted by @Joe Villeneuve:

Add the cash flow from the 2nd use of the same funds (refi) to the first, and if you are ahead of where you were before you refi'd the first one, then you did it right.

Totally agree with Joe. To expand upon this a little,  we are talking about arbitrage.  This is when you borrow cash at one rate and invest it in order to make a higher rate. The 'extra'  equity and loan amount will hurt your cash flow for that property but what if that' extra' was $10k that you were able to use your buy a note that returns 13% annually. If the borrowed cash was 5% that 13% return is really yielding you 8% on that equity. Arbitrage.

With that stated, this gets dangerous if the investments are riskier and you are over leveraged on the property. This happened in a bad way in 2007/2008 when banks were handing out super cheap HELOCs with LTV up your 110% (stupid..) then people bought properties that were risky (no cash flow and hoping for appreciation)or worse boats/atvs/etc, and then their houses went down.

If this extra MO ey is coming at 75% of LTV and you invest it wisely (notes, more RE, use instead of HML) then arbitrage can be gr

Right...except you don't get refinancing for more than 75% of the ARV...so you can't get over leveraged.

 For now :)  Banks tend to repeat past mistakes to allow end users to do the same

Originally posted by @Brian Larson :
Originally posted by @Joe Villeneuve:
Originally posted by @Brian Larson:
Originally posted by @Joe Villeneuve:

Add the cash flow from the 2nd use of the same funds (refi) to the first, and if you are ahead of where you were before you refi'd the first one, then you did it right.

Totally agree with Joe. To expand upon this a little,  we are talking about arbitrage.  This is when you borrow cash at one rate and invest it in order to make a higher rate. The 'extra'  equity and loan amount will hurt your cash flow for that property but what if that' extra' was $10k that you were able to use your buy a note that returns 13% annually. If the borrowed cash was 5% that 13% return is really yielding you 8% on that equity. Arbitrage.

With that stated, this gets dangerous if the investments are riskier and you are over leveraged on the property. This happened in a bad way in 2007/2008 when banks were handing out super cheap HELOCs with LTV up your 110% (stupid..) then people bought properties that were risky (no cash flow and hoping for appreciation)or worse boats/atvs/etc, and then their houses went down.

If this extra MO ey is coming at 75% of LTV and you invest it wisely (notes, more RE, use instead of HML) then arbitrage can be gr

Right...except you don't get refinancing for more than 75% of the ARV...so you can't get over leveraged.

 For now :)  Banks tend to repeat past mistakes to allow end users to do the same

The bank's mistake was 125% ARV. If the REI doesn't do 125% ARV, and doesn't have to sell, then the REI doesn't get nailed by it. Even if the REI has to sell, with a 125% loan, they don't get nailed.

I am relatively new to this and want to implement the BRRRR strategy to buy rental properties and build a portfolio. I am meeting with a lawyer next week to get an LLC started and then from there, I need to get my financing figured out before I buy my first rental. I am hoping to be all set to purchase by early summer.

Can someone give me some advice on what I should try to do to get financing? HELOC? Refi? Here is my situation:

Own my primary residence

Own a second property that is being sold on a lease-to-own ( husband set this up before we were married on a 10 year term with renter/buyer, which we still have about 4 years left on and who knows if they will even purchase.) Break-even on this every month.

Equity in both, enough to have down payments for 2-3 rental properties or buy one outright.

Where would you start? Thank you!!

Jackie I wouldnt bother with an LLC so early in the game. You wont be able to use it if you go convential loan and the cost to maintain the LLC will probably be about the same as a good liability umbrella.

Well, My husband is worried about our IRA and 401k assets being at risk so that's why I am looking to do an LLC before buying anything else. We want our RE investment properties to be separated from our personal assets. Does this make sense or are we being paranoid? Thank you for the response!!

So, I could not get a conventional loan for a property being bought within an LLC?

Right, you'll want to work with a community bank or credit union. I get 5/1 ARM loans at roughly 5% for my LLC's. The was the biggest surprise when I purchased my first property in my nice shiny new LLC entity.

Originally posted by @Jackie Botham :

Well, My husband is worried about our IRA and 401k assets being at risk so that's why I am looking to do an LLC before buying anything else. We want our RE investment properties to be separated from our personal assets. Does this make sense or are we being paranoid? Thank you for the response!!

Hi Jackie. I am definitely not a lawyer and I am sure there is a valid counterpoint to what I am about to write, but in general, I agree with Byron's comment above. It might be a bit premature to get an LLC.

I totally understand wanting to protect your assets. I would be more worried about your cars, other property, etc well before your 401k/IRA. Those are protected by nature of being retirement accounts (or at least that is how it is has been explained by my lawyer to me).

I just hate to see people get so wrapped up in all of the side work to not actually go and do something. 

Note that you can always buy a property yourself then deed it to an LLC later. This allows you to finance it as yourself (use your credit, get a conventional refi) then put it in your LLC. You are still on the hook for making the payments and technically the bank could call a 'due on sale' clause but this is done all the time with LLC, Trusts, etc

To get to your original question....whatever way you can get enough cash for the purchase and rehab for as cheap as you can...thats the answers :) If you can get a HELOC on your primary home and use those teaser rates to pull out cash, buy/rehab/rent then refi into conventional loan then go for it.

Note that commercial/portfolio loans are definitely available but the terms are not as appealing as conventional and sometimes they want to see more of a track record with rentals. 

I like the idea of maxing out my 10 loans with Fannie before going to a portfolio lender. 

Here is what i do at each stage (what type of money i have out there)

BUY - Cash (either from savings or pulled against my HELOC)

REHAB - Cash (same) then immediately get it into a private money loan (1 yr term, interest only)

RENT - its usually in the private money loan at this time

REFI - do a rate and term refi out of my private money loan into either a conventional or portfolio loan (depends on amount, timing, rates, etc)

I try to have my cash back in my bank account within 30 days and the private loan refi'd within 90 days

I hope that helps

Brian, you may want to shop around. my lender has no seasoning period. I understand there are many like that available due to the competition for the loans. That would save you a lot of work. We are able apply for cash our refinance as soon as we are rehabbed, rented and ready to do so. No need for short term loan while waiting. 

Hi All!

@Shawn Coverdell , The lender that doesn't require seasoning, that's a commercial lender correct? Or conventional lender?

Thanks.

conventional. Apparently there are some out there. Others have had similar experiences in different areas. My Broker told me that after 10 loans, I will have to switch to a commercial lender. 

Where could I read or learn a bit more about BRRRR? Especially the refinancing part. If I buy a home cash and pay for the renos - would I just go to the bank and put a mortgage on it? Silly question but I am trying to learn.

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@Matt L. Check out Podcast 197, I've bought 54 rentals in the last 3 years using this strategy ;)

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Thank you!

I have been trying to do BRRRR but I have come stuck at the refi stage.

In my limited experience portfolio lenders don't like properties worth under $50k and some of them even don't like properties worth under $100k. Perhaps you will have more luck than me, but I would suggest that if you want to do BRRRR the properties over $100k would be better than the cheaper end.

Allow Cash Partners to Buy Into your properties.

ARV: $50,000 (or less
Cash in :  $37,500 (from Previous Refi's)
Splits:      $40,000 (5 each at $10k each)
75%:       $37,500 (refi...if you could get it, but you can't, so...)
NCF:       $     500/month (with NO Debt)
Cash:    - $37,500 (cash you put in)
NCF:       $     300/m (with Refi...again, if you could get it, but you can't, so...)
Cash: + $even  (Refi returns all cash in)
NCF:     $    100/m (with 4 new Cash Partners...and NO Loan, and...)
Cash: + $  2,500  (Overage paid to you from the Cash Partner BuyIns)

....that's over 1 full year of Cash Flow recovered (paid ahead) from sharing with Cash Partners, that can be used for immediate future properties.

Actually, I have found this method works better than the BRRRR method. There are many, many potential CashIn Buyers, there is no REFI process (approvals, applications, appraisals, etc...) and no seasoning period. Also, notice I went to 80% of the ARV, which isn't going to happen going the BRRRR method.

@Joe Villeneuve

I'm not quite following the steps that you laid out for using cash partners.  Could you explain with a few more details?

Thanks.

Originally posted by @Nicholas Duncan :

@Joe Villeneuve

I'm not quite following the steps that you laid out for using cash partners.  Could you explain with a few more details?

Thanks.

 Instead of refinancing, dding an expense of a loan each month, and subtracting fees, etc..., and then having to get approvals for loans, you just allow cash investors to become partners.

Dude, i do not know if this is also the case in your state but, here in the Philippines, banks are looking for a clear titled COLLATERAL on the application of refinancing. Then how could i implement the BRRRR Strategy if for every refinancing i'll do, banks will require a collateral? Please help me. Thanks a lot!

That's what we do and we're at about 350 right now. 

Hi All,

I am trying to BRRRR and I am getting stuck on the refi part. I used LendingHome, a hard money lender, to do the rehab. They make you initial close in an LLC. For the post rehab/rented out/taking cash out part, lenders want to close in my personal name. Not really a problem, but I am running into seasoning issues. Wells Fargo will apparently do HELOC's for investors, but will only use the post-rehab/new value after 12 months. TD Bank will perhaps do it, but I don't think they service Chicago. Huntington Bank is having a hard time going from LLC to personal (which they require) for less than 6 months seasoning.

Anybody have an out here? What am I missing?

I would be happy with either a cash-out refi or a HELOC.

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