Investor · Chicago, IL · Member since 2014 · 22 posts · 6 votes
I have been doing some research on BRRRR (Buy, Rehab, Rent, ReFi, Repeat) and looking to speak with any experienced investors who use the BRRRR method in Chicago. I am mostly focused on the north side of the city. Also looking to connect with any hard money lenders/agents/wholesalers willing to work with a relatively new investor.
Sonny, from your example here is how I see the process working for you.
Purchase house $220K
20% down $44K
Rehab $90K
Payment on $176 for 30 yrs @ 5% = $945
(Add in your taxes and insurance, plus other holding costs like utilities or HOA fees)
For this example lets say your total holding costs are $1500/mth and your rehab and seasoning time is 6 months
6 x $1500 = $9000
Total investment = $90k + $44K + $9K = $143K
Refi and get a new loan at the new appraised value of $450K, ($450K x .75 = New loan $337,500) that pays off your old loan of $176K leaving you with $161,500.
So you get back all of your inital investment $161,500 - $143K = $18,500 profit.
Now you new loan payment would be about (30 yr at 5% on $337,500) $1812, plus taxes, insurance, etc.
Hopefully you can now rent the property for enough to cashflow ($2200/mth +) and you have a nice stabilized rental property that you have no money invested in (in fact you have already taken $18,500 in profit out of it). Essentially, you got paid to do all this and own a property with 25% equity (loan to value of 75%).
You can now take your original investment of $44K + your profit of $18,500 and go buy another property and do it all over again.
If you can pull this off it would a home run!!
If you add a hard money loan in for the rehab the cost would go up dramatically
$90K @10% interest only makes a payment of $700 + 3 points (3% x $176K) = $5280 (typical hard money terms)
So total hard money costs would be 700 x 6 + 5280 = $9480
This approach would eat up some of your profit but and add some risk but the numbers still work.
Sounds like a good deal to me. Just work hard to hit those numbers!
Jackson, NJ · Member since 2016 · 19 posts · 8 votes
10y
Would you want to use hard money as part of BRRR? If you're planning on using the property for rental income, doesn't high interest from hard money hurt?
I have been doing some research on BRRRR (Buy, Rehab, Rent, ReFi, Repeat) and looking to speak with any experienced investors who use the BRRRR method in Chicago. I am mostly focused on the north side of the city. Also looking to connect with any hard money lenders/agents/wholesalers willing to work with a relatively new investor.
Real Estate Broker · North Aurora, IL · Member since 2014 · 130 posts · 82 votes
10y
Typically in BRRRR if you do not have the cash upfront to purchase the property outright, you would use Hard Money for the acquisiton and the Cash Out Refi would be your exit strategy. That would put long term (affordable) financing into place that would effectively allow you to generate the cash flow once the property is rented.
If that does not make sense let me know. The beautiful thing about successfully implementing this stratey is that someone with a little bit of cash could use it over and over again to build a nice rental portfolio! That is exactly what I am doing!
Chicago, IL · Member since 2014 · 47 posts · 5 votes
9y
So how does a brrr strategy works in chicago ?
Let's say a property was purchased $220k and the rehab is $90k = 310k , rented out and it's worth right now $450k.
Cash out is 450x 70% =$315k?
So it means the bank will give me $315k for me to purchase the next property and the 1st property is paid off?
Please advise if I'm calculating this correctly or If something is missing in this calculation ?
Chicago, IL · Member since 2016 · 28 posts · 3 votes
9y
Sonny H. Hi Sonny, that's a great question, I've been thinking the same.
Given that banks normally give 70-90% for a cash out refinance, in your example I think that the answer to your question of, if the 1st property will be paid off, yes if you use Hard Money to purchase and rehabbing it...
Curious to see what others would say.
No the first house is not paid off !!! if you cash out $315K you have a $315K mortgage owing to the bank that cashed you out.
You got your capital back, (your $220K purchase and $90K rehab) which you pay back to your Hard Money Lender if you used one and you have $5k left over.
And that's a very simplified version. That $5K (and probably more) will most likely go to the Hard Money lender that gave you the initial purchase and rehab funds. They are not giving you that for free.
You do NOT have a paid off property. But you have a stabilized asset with conventional long term financing.
Chicago, IL · Member since 2016 · 28 posts · 3 votes
9y
Ronan M. Hi Ronan, is it wise to use hard money finance to purchase a non fix & flip?
I have an idea of using hard money to finance my next project and then do a cash out refinance to then buy the home under my name/LLC; but I've been reading some post out here about possibly having to wait 6 months to do a cash out refinance....any tips is appreciated!
Chicago, IL · Member since 2014 · 47 posts · 5 votes
9y
Let's say I do 25% down which is 55k and closing and etc $5k =60k
Rehab is 90k hard money .
What's the best way to use the brrr strategy ? Please advise , I recently discovered the brrr strategy and want to ensure that I'm on the right track .
Real Estate Broker · IL · Member since 2016 · 284 posts · 178 votes
9y
If you have 55K to put down you don't need a hard money lender. Contact your local banks and go from there. If you want to use hard money you can, but with 55K cash in the bank you're way ahead of a lot of people, and that's more than enough to get started based off my research.
Search brrr strategy on youtube under biggerpockets. Sign up for the webinars too. There's a live webinar next week (Oct 19th) discussing brrr strategy. The webinar is FREE.
Its not that's it is unwise to use HML for buy and holds its just "wiser" to explore all other from of conventional financing first.
Once you close with a HML the clock is ticking. Assuming you went the HML route because you were unable to get approved for conventional financing, will you have shifted the needle sufficiently with your finances in 6 months to then get approved for conventional financing ??
For example say you are not approved for $300K for a 3Flat by your bank due to poor DTI, or insufficient reserves or a poor credit score. So you buy the 3Flat with a Hard Money Lender with a 9 to 12month term. After 6 months you want to refi out of the Hard Money and their high interest rate and get regular bank financing. If you still have poor credit, poor DTI, tight reserves etc you might still not get approved for your refi. That's when it can become tricky as your have the balloon payment to the HM Lender fast approaching.
However...if you buy that vacant 3 Flat, rehab it, get all units rented and leased up then quite possibly you might be able to move forward with conventional financing based on your now stabilized income producing asset. But just remember, using Hard Money for this example is expensive. On my $300K example above it will most likely cost you about 10K to 12K.
If your deal is good enough and the extra $12K is still getting you a well priced property that will cash flow then this route might be better than no deal at all.
But I would hussle with as many brokers and bankers first to try and get a decent long term loan before going to HML which should be a last resort.
The biggest key to BRRRR strategy is to be able to buy a property with a deep discount to the FMV. Without getting a good discount AND adding value to the property to boost its value, this will not work.
Keep in mind some of the as-is houses do not qualify for conventional financing. That is where CASH or HML comes in for acquisition.
Like @Ronan M. has mentioned, if you do use HML to buy, you need to pay that off with regular financing as fast as you can. Typically most banks wants to see 6 months of seasoning to qualify for the best rates.
Typical HML rates are 9-15%, 4-8 points, and a misc of other fees. Plus they want to see some kind of experience in order to qualify for 1.
Rental Property Investor · Chicago, IL · Member since 2015 · 352 posts · 281 votes
9y
@Sonny H. you might...assuming that the house is now worth and appraises for the $450K which you stated in your earlier example.
But you still owe $90K to your Hard Money Lender for the rehab. And if he gave you $90K to rehab you probably owe him closer to $95K to close that loan.
Chicago, IL · Member since 2016 · 28 posts · 3 votes
9y
Ronan M. Chris T. Thanks guys for the advise.
Let me just say that I'm trying to get creative on funding my 5th loan and using these forums to ask for guidance.
I believe Chris T. Pretty much mentioned all my current obstacles.
Not that my credit score is horrible, I'm working to boost it up to 720.
I'm starting to learn more of the guide lines from Freddie/frannie Mac so I can buy more properties here in Illinois.
Chicago, IL · Member since 2014 · 47 posts · 5 votes
9y
I spoke to a lender and here what came up with :
Purchase : 220k
Rehab : 90k
ARV : 450k
20 % down : 44k
Owe bank : 176k
450k *70 =$315 k cash out
315-176=139 k cash out
So it's only $139k I will get cash out for the 1st property and that it wont be paid off.
Not only that interest will be raise higher for the cash out from the original loan.
Isn't The purpose of brrrr strategy is to get the first property paid off and repeat to the 2nd property?
Can I use the$139k to pay the first property or it has to be used on the second property?
Please advise how would I pay the 1st property off?
Investor · Reno, NV · Member since 2015 · 167 posts · 90 votes
9y
Sonny H.
No, the point of brrrr is not to end up with a paid off house.
The point is to get the cash you put into the deal back out to buy the next house.
There are a couple tricky parts I have found with brrrr
1. Refi appraisals are usually very conservative compared to a purchase appraisal. So don't assume that the property will appraise the same as if you were purchasing the property. There is lots of research you can do on BP about how to help an appraiser get to the number you want/need.
2. Cashflow after cashout. Once you do refi, you have a higher loan amount and therefore a bigger payment. Will your property still cashflow with the new bigger loan?
3. Knowing the ARV accurately. You need to be sure the work you put into the property is actually going to raise the value to the value you require to be able to cashout you initial investment. Many folks use this strategy and are only able to cashout some of their money not all.
Good luck, its a great strategy if you can make it work for you.
Investor · Reno, NV · Member since 2015 · 167 posts · 90 votes
9y
I always like to see it for myself so I have my agent send me comps with the criteria I ask for. I like to think I know best what the plan is for the property and I really know my market so I feel I can figure it out myself.
Lots of people have their agent figure it out. Of course the risk is that the comps may not be as good by the time your remodel and seasoning period are over.
Chicago, IL · Member since 2014 · 47 posts · 5 votes
9y
I was conservative side with the appraisal , actually it could be $500k,
Instead I used 450k.
2. Cash flow reduced $300 monthly with the new loan interest. Still great cash flow.
My concern is can I used the $139k cash out on the 1st property or it has to be the 2nd property ?
Sonny, from your example here is how I see the process working for you.
Purchase house $220K
20% down $44K
Rehab $90K
Payment on $176 for 30 yrs @ 5% = $945
(Add in your taxes and insurance, plus other holding costs like utilities or HOA fees)
For this example lets say your total holding costs are $1500/mth and your rehab and seasoning time is 6 months
6 x $1500 = $9000
Total investment = $90k + $44K + $9K = $143K
Refi and get a new loan at the new appraised value of $450K, ($450K x .75 = New loan $337,500) that pays off your old loan of $176K leaving you with $161,500.
So you get back all of your inital investment $161,500 - $143K = $18,500 profit.
Now you new loan payment would be about (30 yr at 5% on $337,500) $1812, plus taxes, insurance, etc.
Hopefully you can now rent the property for enough to cashflow ($2200/mth +) and you have a nice stabilized rental property that you have no money invested in (in fact you have already taken $18,500 in profit out of it). Essentially, you got paid to do all this and own a property with 25% equity (loan to value of 75%).
You can now take your original investment of $44K + your profit of $18,500 and go buy another property and do it all over again.
If you can pull this off it would a home run!!
If you add a hard money loan in for the rehab the cost would go up dramatically
$90K @10% interest only makes a payment of $700 + 3 points (3% x $176K) = $5280 (typical hard money terms)
So total hard money costs would be 700 x 6 + 5280 = $9480
This approach would eat up some of your profit but and add some risk but the numbers still work.
Sounds like a good deal to me. Just work hard to hit those numbers!
Buy and Hold Investor · Boiling Springs, SC · Member since 2015 · 36 posts · 5 votes
9y
Chris you said key to brrrrr was to buy at deep discount. I see the logic in that, but Brandon said in a podcast using brrrrr made it so we did not have to get as deep a discount as a flipper. How does that figure?
Chicago, IL · Member since 2014 · 47 posts · 5 votes
9y
Thanks everyone for the advice.
Any referral for local contractors, lenders , investors that are pretty good with brrr strategy ? Would love to network with them.