Does it make sense to do BRRRR for a primary residence?

Question

I'm thinking of buying a primary residential home for $600k, and rehab for $30k. The market value for the $600k home I am currently looking at is around $630k. Someone please walk me the process how refi would work. I am thinking of doing conventional loan with 5.5 percent downpayment to initially buy the property, then put down another $30k for rehab.

Andrew Postell · Answer

@Jake Song hmmm, so I'm going to tackle this from a different point of view if you don't mind.

Usually when someone purchases a primary home they have TONS of options.  Most of them a VERY low down payment options.  Even on the scenario you described above, there are renovation loans that will only need 5% down...meaning, 5% of your purchase price and rehab cost.  So if you wanted to buy a primary home, you have lots of different choices with very little out of pocket.

When we buy an invesment property - well, now I need 15% down...or even 25% down.  That's a HUGE difference.  And that's why the BRRRR method exists!  The BRRRR method allows us to buy a home and through the steps, get our money back and leave a smaller amount in the property than 15%-25%.

So you might be able to do what you are looking to accomplish even simpler than using the BRRRR method by just using a normal loan at your disposal.

I hope all of this makes sense how I am describing it.  Feel free to ask anything additional if you need. Thanks!

Andre Simmons · Answer

@Jake Song You might want to look into the 203K FHA loan or Homestyle loan. I believe this is what @Andrew Postell was referring to above. If you want to live in the property both offer similar low down payment options 203K (3.5%) and Homestyle (5%). You can save your cash and use OPM for the renovations. Both loans let you wrap your renovation cost into your mortgage.

Ron Brady · Answer

@Jake Song At 1st blush, what you're planning is not the best route.

The B in BRRRR works when you BUY with 100% cash.  You then RENOVATE and (typically) RENT out the property to a tenant. Thereafter you REFINANCE to pay yourself back the money you spent to buy the property.  This works best when the After repair value (which means exactly what it sounds like) is meaningfully higher than the Buy price + Renovation cost.  As an example, a home bought for $100k, renovated for $30K and with an after repair value of $160K is a good BRRRR.  Why? Because it means the mortgage proceeds pay for the purchase price of the house and the renovation and then you get the rent proceeds monthly.

Here you are not buying with cash, not renting the house out and its not clear what the after repair value would be. Thus, at first glance, a BRRRR does not seem like a good fit for this purchase.

Best wishes to you!

Does it make sense to do BRRRR for a primary residence?

Most Popular Reply