Brrr refinance question

18 Replies

To those that brrr, are you financing the home then paying the rehabs out of pocket? Or using rehab loans?

I often hear investors evaluate the property before the Reno and refinance, however not after. After the refi (and possibly the rehab loan) your mortgage increases therefore effects the cashflow.

Would appreciate any insight on this.

Currently buying a value-add project, that needs to be completely updated. Seeing if a brrr would be possible.

@Michael Bridgett

I think most that get into the BRRR loop get value ad properties with cash. Most of the best deals when you have the skills to complete come from deals that can't be financed (banks don't want them, too much risk)

We buy with cash and fund the rehab with cash.

We use a HELOC as needed tied to our primary residence.

I can't speak for everyone else, obviously.

@Jim Goebel

Since it’s a fairly small project (20k in repairs) I’m able to get a rehab loan.

This is probably why brrr isn’t working for me, not a big enough project. Makes sense Jim. Thanks!

@Jim Goebel

Is the HELOC on your house essentially a line of credit that you can draw from as needed?

@Ryan J. Shope

Yes, balance goes up and down based on what we do with it (draw or pay it off). Terms are some interest rate and we have to pay off 1% of balance per month. Pretty simple. We just use that to fund our buys and rehabs, then have commercial lending on back end to do the refi - then pay off the HELOC back to $0 balance.

@Jim Goebel

Got it, thanks. So, to help me clarify, you're using the BRRRR method, with the cash from the refinances used as your primary source of acquisition/rehab funds, then have the HELOC as a secondary source if you need extra capital?

I've just finished remodeling/renting my first property. Would it be wise to open a HELOC on it instead? I don't own my primary residence.

@Ryan J. Shope

Kind of, but not quite. Refi's are part of what people refer to as BRRR - so the refinance of the investment property is just to lock in the long term commercial financing on the rental AND to replenish (pay down) the balance of the HELOC. The HELOCs are tied to primary residences, typically. Once that HELOC balance is paid down, we're ready to go on another project. Our current situation is that the HELOC balance enables us to go on 2-3 properties simultaneously if we're getting properties at say $30-70k a piece.

To answer your question specifically - you won't do a HELOC on your investment property. To my knowledge, banks don't offer that.

Maybe think about buying a primary residence? You can't get much HELOC without having much equity so it takes a little time to get there.

@Jim Goebel

Thanks for the clarification. Yeah, I would like to get a primary residence. The problem is that I'm in such an expensive area (Seattle), so it's tough for me to find a deal. Ideally, I'd like to do a house hack deal here, but who knows. I appreciate the help!

@Ryan J. Shope

Yeah I understand.  How'd you go about getting the rental property by the way?  Do you mind sharing what you do for work?

@Jim Goebel  

I bought the rental property with a conventional loan through a VA foreclosure in Summerville, SC. I'm originally from that area, so I have some connections and understand the market fairly well. I recently moved to the Seattle area from San Diego to be a transaction manager at a Real Estate Consulting firm that specializes in helping Public Housing Authorities re-syndicate their portfolios and finance new developments.

There are a lot of ways to finance the rehab.  We typically just put in on the plastic.  We have the resources to pay off the cards for any rehab but even if we did not it would not matter much if you are doing a quick rehab.  We typically take less than 2 months to do a rehab and refinance.   That would imply 1 month without being able to pay the credit card off.  20% for a month is not a big deal.   This would not be the case if you expect the rehab/refinance to take many months.  If it will take more than 3 months, I would think you should not use the credit cards for the rehab expenses unless there is no other choice.

As for the increased loan reducing the cash flow, this has not been our experience. There are two primary reasons why it does not happen: 1) the refinance is typically at fairly low LTV (70% LTV is typically what we can get). Our equity share has increased even when the actual investment amount had decreased. 2) the best value on rehabs are on the most thrashed, outdated units. These units have gone from bottom of market rents in their thrashed state to top of market rent in their beautiful, freshly rehabbed state. So our experience is that our cash flow has increased after the rehab and refinance. I have not done calculations to determine if it has increased more or less than the percentage of equity increase; it is possible that our return on equity has gone down a bit. I do not really know and do not care because 1) it is still cash flow positive 2) my investment in the property has decreased 3) I pulled money out and have it to invest elsewhere.

Good luck

@Ryan J. Shope Like @Jim Goebel said, typically a HELOC can only be obtained on your primary. There are exceptions; but those lender options always feel like a hook. Your primary might also be the greatest valued property you will own, and if so, it might have the most equity to use.

A house hack makes sense, as you can buy it with as little as 3.5% down. Owning your own home is still investing. Especially, if you plan on using equity once its there. House Hacking is certainly the next level. 

@Joe White

Thanks, Joe. I've done a little reading on HELOC and what you're saying makes sense. This just adds another dimension on why House Hacking seems like a nearly essential step towards getting started in active REI.

Thanks @Dan Heuschele

With a cash dean, can you cash out 75% of the new ARV if the purchase price is still less than the 75% LTV?

60k sales price

25 rehab

120 ARV

Would you only be able to cash out at $60,000? 

Originally posted by @Michael Bridgett :

Thanks @Dan Heuschele

With a cash dean, can you cash out 75% of the new ARV if the purchase price is still less than the 75% LTV?

60k sales price

25 rehab

120 ARV

Would you only be able to cash out at $60,000? 

There is typically a seasoning owning period with most refinance loans that must be hit to take out more than the purchase price. 

Unfortunately, we typically do not get a large enough value add for that to effect us but all of our numbers are typically higher (way higher purchase and ARV, slightly higher rehab cost).

Good luck

@Ryan J. Shope It would be a great 1st step. One that would affect all future deals since one, jumps to the others. The 1st, often the hardest.

@Ryan J. Shope Hi Ryan, we were just able to secure a HELOC against our rental property in Ann Arbor MI with a local Midwestern bank. I'm not sure if they'd service you in Seattle, but feel free to PM me and I can share the name.

@Alex Bucklin just sent you an invite to connect. I'm in Ann Arbor as well. Looking to get a HELOC on a rental property. Would also just like to connect in general on REI. PM me.

@Michael Bridgett

Rehab loans with conventional are great, but you are limited to 4 properties and subject property.

The BRRR method can be used on up to 10 conventional loans including subject.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here