BRRR strategy upgrades with HELOC

8 Replies

Hey Bigger pockets community I have a question for you in hopes of clarifying a few things. I just recently got approved for a HELOC loan on my current residence and want to use this money to start buying SFRs utilizing the BRRR strategy. My question to you is, in your opinion what is the best way to upgrade the home, somewhat inexpensively so that I can get a cash out refi to then pay my HELOC loan back off so i can repeat this over and over again? Thanks

@Sean Harris
To answer your question, i'd probably say kitchen and bathrooms are quite  value-add upgrades (not always)

But a word of caution. With the BRRRR strategy, the saying "You make your money when you buy, not when you sell" could not be truer. If you pay too much, you could end being stuck in a situation when your local market doesn't support the resale price you would need to achieve in order to repeat the process.
In that scenario, improvements might not help. In fact, they could make matters worse by you throwing good money after bad money.

When implementing the BRRRR strategy, your purchase price in critically important. You need to buy well enough so that you can improvement works that will increase the value of the house to a level where you can refinance and pull out your initial capital.

And you also need a good grasp the repair costs in general. 

You fix the house to the specs that it needs to equal the ARV you determine at the time of purchase, then you account that cost when you make offers.

Assess ARV, asses proper rehab costs, ensure equity profit and rent spread are adequate, this will give you your purchase price maximum.

Don't purchase with the intent of doing it inexpensively, do what the project requires and adjust your offer from there. Also make sure after rehab, and profit, your appraised value comes with enough spread so you can cash out 100% of your funds (and maybe even some extra!)

To reiterate everyone's point here, you have to have solid numbers and know your maximum purchase price (and account for all the fees associated with it). Also, don't forget about the seasoning rule. Most banks require you to have a property for a minimum of 6 months before being able to refinance. This has an obvious impact on your holding costs (HELOC interest), so make sure you don't overlook anything.

OK awesome info guys, thank you. For sure some things to consider. I'm just trying to find the best route to go in order to buy SRFs as long term investments for steady cash flow, but I also want to pay the HELOC off asap so that I don't have that extra payment each month and also so my current house isn't tied up in it. I'm just going to use the HELOC as the 25% down then use conventional for the rest. I would love to go turn key for my first real deal just to get my feet wet for instance homes on roofstock.com, I just dont know how to get my money back to pay back the heloc other than waiting a few years for the rent money to catch up.

I'm looking to do the same thing but with small MFH.... I've passed on a few opportunities because rents after the repairs don't clear my goals.  This is my first investment property and it's been tough to be patient, but I think that's the smart play.

It looks like I'll be able to secure a HELOC and used some to refi my primary home as well.....with bothy mortgage and the credit line, I'll save just under $1000 and have down payment money available. Talk to a few banks and you'll find a creative loan.....my sixth call better the best deal.

Good luck!

Howdy @Sean Harris

Make sure the conventional lender is ok with you using the HELOC loan as a down payment. Most want you to have skin in the game. If you are wanting a more turn key deal then the BRRRR strategy is not the path you will use. The HELOC is a good method to help with the acquisition and rehab of a discounted (distressed) property in conjunction with alternative financing (Cash, Hard Money, Private Money, Seller financing).

Thanks again for the replies, this has been alot of help and a ton of great information. The situation that I am in exactly is I have a HELOC for 100k and other than that i have no cash or hard money to throw at anything. So in everyone's professional opinions what is my absolute best route to get started? I currently have a rental property on the same land as my primary residence.

@Sean Harris similar situation as yourself, let me walk you through my logic and see how we might "sharpen" each other:

I own in Seattle, WA where after less than a year appreciation has taken the value sky-high, plus we've made a TON of renovations. We don't want to move out or rent this home because we love the property and area...so, we're going forward with a HELOC to purchase either a SFR or MFR (sidenote, looking in SE Florida and Seattle area, though the latter has purchase prices that are challenging to justify in our position).

I am hoping for $125k of a HELOC meaning the top end of my SFR purchase is $600k (20% down) or MFR at $500k (25% down). This means my ARV should cap for SFR at $780k or MFR at $650k. However, that doesn't yet contemplate closing, renovation, refi, or hold costs which would all be reduced from the top purchase price for each niche.

What I'm looking for feedback on is how to pay off that HELOC, is it with the cash-out refi from the second purchase and hope there is some left over for another property's down payment? OR do I just draw from my HELOC again for that second purchase and repeat.

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