I'm hoping to further my understanding using the brrrr strategy from a numbers perspective and explain my current situation.
Bringing all cash limits my buying power for the properties I'd like to get into which are multifamily units. I've read others have obtained a loan at 20-25% which may or may not include rehab costs factored into the loan. If the rehab costs are not included, the buyer funds it themselves.
Typically using all your own cash, at time of refinancing if your arv is 70-75% of your acquisition price plus rehab costs you would get all your initial investment back.
In this hypothetical all cash scenario my understanding is that your cash out refi would get your entire acquisition + rehab investment back:
Purchase Price: 170k
Rehab Costs: 17.5k
After cash out refi: 185,500 is retrieved to use on next property (75% LTV)
Now if I was to put 20% down on this same property instead of bringing the full purchase price to the table how does this affect my "After cash out refi" amount? (Let's assume that I am providing the rehab costs)
One question I have is regarding the "seasoning" period. What do the finances look like during this time vs after the cash out refi? Is cash flow affected and what is the typical cost involved in the refinance?
I have quite a bit of equity in my current home (140k) I could use to fund my first deal. I would assume I am to treat this money as "cash" which then is retrieved if a 75% LTV is achieved, is that correct? Until the cash out refi are you using the monthly cash flow to pay back the home equity loan? It makes me nervous taking a home equity loan since it affects my current residence and ultimately my family. It feels safer to use money I have saved specifically for investing but obviously using a home equity loan would give me much more leverage . I appreciate your help and insight!
Updated over 2 years ago
The after cash out refi amount should be 187,500 in the example not 185,500
@Russell Welbourn so lots of questions and a long post. I'll try and point you in the right direct. You have very specific questions. It would probably be a good idea to find a mortgage broker who specializes in investment properties. The answer will depend somewhat on your specific situation. I would offer this. Generally speaking, cash-out refi-s require more equity than when purchasing (some require 70% loan to value). Using you HELOC for your down payment can impact you debt to income ratio in a bad way. Be sure you are looking at the whole picture. $17.5k rehab costs seems low for a multi-unit property. Make sure you are realistic with your rehab costs.
It's true that using you HELOC puts your primary residence at risk. It is a risk. Don't take it unless you are 100% comfortable with the potential outcome. Usually risking your primary residence is not advised but a lot of folks have done it.
Hi @Russell Welbourn ,
You actually can't pull out more than the purchase price using the Delayed Financing Exception, no matter the ARV.
Waiting six months will allow you to use ARV as the basis for the cash out refinance.
It's hard to pin down exactly what you are asking. What is the exact scenario you are trying to pull off? Pick one scenario, and let's do that conversation. Trying to jumble five conversations into one is just going to confuse the conversation. :)
Thanks for your reply. After I wrote this post I realized it was pretty hard to digest; even after I reread it!
My numbers were hypothetical on that property and I realize most multi family properties, in order to get a great deal, will need rehab costs beyond that 17.5k estimate.
It makes total sense that taking on debt by using a HELOC would be compounded if you used that money as a downpayment on another property. For some reason that didn't click offhand.
I'm at the point now that I need to run the numbers on some properties to see concrete results instead of hypotheticals. It becomes overwhelming when trying to sort it all in your head!
Haha like I said I know that post was very confusing.
I'll tell you exactly what I'm trying to sort out. I'm looking to invest in multi family units. I have 35k cash that I have saved and am ready to invest with. I have partnered with a friend of mine so that we can bring a little more money to the table. He will have to take out a HELOC on his end but he has estimated he can take around 40k out.
That puts us at 75k. I can also take a HELOC that would give us about 80k additional money. That would bring our all in total to 155k.
In our market that might get us into a 2-3 unit multifamily at the bottom end minus rehab costs. This is our first deal and it makes us both a little nervous taking on a HELOC.
So now the the question.
1. Use 75k on a sfh, utilize brrrr and build a portfolio more quickly at the lower price point?
2. Go all in at 155k and try to find a crazy deal on a multifamily to use use brrrr on.
3. Figure out a way to finance a property (sounds like a bad idea/impossibility if using a HELOC), take the monthly cash flow and save up until we have enough to invest again.
I'd do #2.
Am I to assume that you would use your cash flow to pay back the HELOC? This is my biggest concern.... how to pay back the HELOC after refinancing (using brrrr), but needing it to tap into future investments.
Hi @Russell Welbourn ,
Yup, you want to pay those HELOC ARMs off as fast as possible.
@Russell Welbourn , you have the THEORY worked out fairly well (except where you wrote: "Typically using all your own cash, at time of refinancing if your arv is 70-75% of your acquisition price plus rehab costs you would get all your initial investment back", you meant to write: "Typically using all your own cash, at time of refinancing if your acquisition price plus rehab cost is 70-75% of its ARV, you would get all your initial investment back").
[I recommend: Try to have no more into it than 70% of its appraisal value].
The most important factor that bears repeating is that your investments still NEED to positively cash flow, even at such a high leverage! ie. Have you accounted for ALL possible expenses?
And the other concern is: if it DOESN'T appraise at sufficiently more than you have into it, you'll be leaving those missing extra dollars in the deal for probably many years to come. All the best...
After a lot of phone calls I have found 2 local community banks in my area who will finance at 80% of appraised or Tax assessed value without waiting for seasoning.
I don;t have a huge pipeline of properties but I do have some cash, borrowing from and earlier Podcast this has set me up to offer 25-30% under current value...if accepted, purchase for cash, perform any updates, make sure I have market rents, then in less than 2 weeks after all of those I can get my money back via re-fi. To be clear the local banks keep their paper, charge about 1/2% higher, and require a 20 year note.
Ask some local banks in your area.
For me if the Tax assessed value is in line with what I want I don;t even have to get an appraisal if I think it will appraise for significantly more (and the cash flow can support it with a 20 year note) that allows me to take more money out.
best of luck, b
Thanks for that fix on the ARV section there. Very true about calculating all possible expenses and of course needing that positive cash flow. Currently I'm sorting out how to account for the fixed costs specific to my area when analyzing a property. Jay Scott has put a great list in his flipping book as well as on here at BP that I've been digging into. My aim is to be very conservative in my approach on the numbers, especially going into my first deal when it comes.
That's great to hear that it IS possible to get both 80% and waive the seasoning period. Well done on finding that lender. I'm sure that will prove invaluable for your success and it definitely gives me the motivation to search for the right lender. Would you mind expanding on how you estimate the tax assessed value?
One question that just came up in my mind is how do you perform necessary rehab to increase property value if the property is currently occupied? Do you avoid properties that are currently occupied? Thanks in advance.
@Russell Welbourn The biggest risk you run in this scenario is not seeing the increase in the appraised value you're looking for. It is likely that with a smaller renovation budget you likely won't achieve the additional equity needed to meet a 75% or 80% ltv needed to take cash out on a rental.
I see these situations with borrowers all the time and it leaves them sitting and waiting much longer for a return on cash spent. In fact I just had one today :-(
@Mark Merdita I can definitely see this pitfall being a reality using this strategy. Something I have gathered in the short time I have been doing my research is the importance of making the numbers work for you and not you working for the numbers. I feel like it would be easy to stretch myself thin by making my acquisition price the most important factor so that I could get into a higher priced sfh or multi-unit, shorting myself on rehab costs.
In your experience what would you attribute most borrowers shorting themselves/leaving money in the property? Poor comps? Shorting on rehab costs/unforeseen rehab costs, or something else? I'm curious so that I may learn from those who have seen it personally.
@Russell Welbourn if properties need some rehab I will do this typically as they are vacant except for small items that my contractor can schedule directly with the tenant.
As for assessed value this comes from the town I don't estimate it. Most towns will have this online search for Tax Commitment Book on your towns Tax Assesor page
@Russell Welbourn I think a lot of the rehabbers do the right things but the appraisers have zero imagination. Appraisers for the most part are using a price per sq ft calculation of 3-5 comps so if you upgrade beyond neighborhood standard it won't do you any good.
The win is in the price you purchase it for so you don't have to rely on a big jump in ARV. Get the right deal up front with an understanding of what your ARV will look like based on local comps and you're in the green.
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