What happens when you blow your wad?

[April L.]

I only have 40k to get started on my first brrrr. So, if I put down 20% on a 230k property, that's it. I've blown my wad in a down payment. How do I move on to the next property with no more capital to invest?

[Andrew Garcia]

Hi @April L., since this is your first BRRRR, most lenders with fix and flip programs or HMLs will lend up to 85% of the purchase price + repairs. Therefore, you will already have the equity when you go to cash-out.

If you follow the 70% - repairs as the MAO, let me give you an example.

$230k ARV. $161k - $31k in repairs. MAO is $130k.

You would only need $24k in down payment. There will still be closing costs and fees but you would still have $10k left for a rainy day.

Then, once you refinance, you will pull out 75% of the value for a $172,000 value. After paying off the fix and flip loan and carrying costs, you put the $24k down payment back in your pocket to use on the next deal.

Hope this helps! Let me know if I can be of any assistance.

[April L.]

Quote from @Andrew Garcia:

Hi @April L., since this is your first BRRRR, most lenders with fix and flip programs or HMLs will lend up to 85% of the purchase price + repairs. Therefore, you will already have the equity when you go to cash-out.

If you follow the 70% - repairs as the MAO, let me give you an example.

$230k ARV. $161k - $31k in repairs. MAO is $130k.

You would only need $24k in down payment. There will still be closing costs and fees but you would still have $10k left for a rainy day.

Then, once you refinance, you will pull out 75% of the value for a $172,000 value. After paying off the fix and flip loan and carrying costs, you put the $24k down payment back in your pocket to use on the next deal.

Hope this helps! Let me know if I can be of any assistance.

 But I'm not interested in flipping. I'm interested in holding and renting. 

[Andrew Garcia]

@April L., correct. Flipping would mean selling the property. In the example, you are refinancing for 75% of the value.

.75 * 230k = $172k

$172k - $137k (loan amount) - carrying costs ($11k) = $24k which was your down payment. Meaning that you technically do not have a down payment.

Does that make sense?

[Theresa Harris]

Start saving for your next place.  also check your debt to income ratio to see how much you can borrow.  Assuming you had a down payment, how much can you borrow from the bank?  Even with $40K, you are topped out at a $200K property or a bit less because you need money for closing costs, there will be a few minor repairs and you want to have some reserves until you get it rented.

[Mike Dymski]

It's natural to want to blow your wad multiple times.  Invest in a fixer where you make your down payment, fix up the property, increase the property value, and refinance your down payment out of the property (Buy, Rehab, Rent, Refinance, Repeat).  Or, you have to just save up for the next one.

[Jon Martin]

You are allowed to carry a single 10% down 2nd home loan (which could also be your first home) on your credit report at any given time. That said, with closing costs you will have to spend wisely on your improvements.

[Matt M.]

Quote from @Mike Dymski:

It's natural to want to blow your wad multiple times.  Invest in a fixer where you make your down payment, fix up the property, increase the property value, and refinance your down payment out of the property (Buy, Rehab, Rent, Refinance, Repeat).  Or, you have to just save up for the next one.

 Lmao 

[Rodney Sums]

Quote from @April L.:

I only have 40k to get started on my first brrrr. So, if I put down 20% on a 230k property, that's it. I've blown my wad in a down payment. How do I move on to the next property with no more capital to invest?

 Buy a cheaper property.  When you get to the refinance stage you should get some to all of it back to start over again with.

[Mike Klarman]

Nothing wrong with starting out with just one to get the ball rolling.  With a 0 exp if your credit is less than 750 than you will get 80% of purchase plus 100% rehab. Your rate will be high 11s and you will pay two points.  That's kind of the barrier to entry for new investors.  Figure the deal will cost 20% down plus another 2% of total loan amount(points) + closing costs (1k min).  Then you will still need to show a certain number of payments of the loan in reserves.  HMLs want to know you have money to pay this bridge loan.

I'd target a property that is a 150k purchase.  You'll need 30k of your 40k right there.  Let's say the house needs 25k worth of work.  So your loan amount will be  120k + 25k = 145k.  You'll pay two points on that.  That's 2,900 more plus the 1200 let's say for legal fees, wiring fees, etc.  That's another 4,100 of the 10k you have left.  Now you need to show 6-9 loan payments in an account.  On a loan of 145K at 11.5%.  Your payment will be around 1,200/month.  So now you need to show 9 months lets say.  That's another 8,400 - not that you'll have to shell out but prove you have to make the bank feel comfortable if things should go a wry which they are known to do, especially early on in a flipping career.

I always tell newbies to partner with someone who can bring something valuable to the lending process: That's credit score, liquidity, or experience.  If someone in the deal can bring one of those it eases concerns a bit.