Live in BRRRR. Will this work?

[Amy Lee]

Hi everyone. Thank you in advance for all your advice. I love the people here.

I was initially looking to househack a duplex with FHA but the MLS market isn't very active for the area I'm looking at. At this rate, I may run into finding a property in the winter time (or 2024) and having difficulties finding a tenant as well as someone to take over my lease (im at month 4 of a 15 lease).

I wanted to consider a live in BRRRR strategy where I find a distressed property on MLS with a 5% down conventional. Im not sure if sellers on the off market/wholesale side would be inclined to take a conventional loan offer vs a cash offer, thus MLS is what I was looking at. I would use a credit card or home depot project loan to cover all the reno costs. Hoping the reno added equity and I have at least 20%, I would cash out refi to pay off the rehab costs and use the remaining funds for an investment property going into the brrrr cycle. The initial property, I would live in for about 2-3 years as a primary.

Does this make sense to you guys or am I patching up plans that are weird...

[Nicholas L.]

@Amy Lee

some good thinking here but as @Jaron Walling mentioned it is going to be very tough.

a few reminders on some things that get overlooked when Biggerpockets mentions the magic of BRRRR.

-you really have to increase the ARV of the property substantially for a BRRRR to work. not a 20% increase, not a 50% increase, usually closer to a 100%+ increase over purchase price.

-closing and carrying costs add up.  you have closing costs on the buy, carrying and holding costs, and then even the refinance costs can be 5-10K depending on the loan.

turns out it's expensive just to transact real estate.  =)

you mentioned you're on month 4 of a 15 month lease.  why not use the rest of the time to keep saving and searching rather than rushing into something?  there will be real estate available to buy in 2024, 2025, 2026...

hope this helps.

[Jaron Walling]

@Amy Lee The plan you described is full of holes and challenges but yes you're on track. At the most basic level your #1 goal should be buying distressed as low as possible, maximizing every dollar you have for the rehab, and getting a strong appraisal. "Hoping the reno added equity and I have at least 20%" - You can't hope anything... you need to know the market numbers (ARV, rehab budget, etc.). Without this information you can't refinance and make the strategy work in your favor. I wouldn't even waste your time. SFH, duplex, tri, it doesn't matter. Every property has a market value when it's shiny and "new". Know these numbers before you make offers.

When I started out I did something similar. 3% down, conventional loan, distressed, bought off the MLS. It was a live-in flip and I house-hacked with my brother. It was a win-win. Rehab budget was $20k. I blew $9k on the roof! We learned a lot, increased the property value, used some hammers, vetted and hired contractors, and after a 6 month seasoning period I refinanced the property. That was in my entry into homeownership.

If I can do if you can too. Follow the numbers not your emotions! Cheers. 

[Amy Lee]

Yes you're right. Numbers and market analysis. Thanks Jaron!

Quote from @Jaron Walling:

@Amy Lee The plan you described is full of holes and challenges but yes you're on track. At the most basic level your #1 goal should be buying distressed as low as possible, maximizing every dollar you have for the rehab, and getting a strong appraisal. "Hoping the reno added equity and I have at least 20%" - You can't hope anything... you need to know the market numbers (ARV, rehab budget, etc.). Without this information you can't refinance and make the strategy work in your favor. I wouldn't even waste your time. SFH, duplex, tri, it doesn't matter. Every property has a market value when it's shiny and "new". Know these numbers before you make offers.

When I started out I did something similar. 3% down, conventional loan, distressed, bought off the MLS. It was a live-in flip and I house-hacked with my brother. It was a win-win. Rehab budget was $20k. I blew $9k on the roof! We learned a lot, increased the property value, used some hammers, vetted and hired contractors, and after a 6 month seasoning period I refinanced the property. That was in my entry into homeownership.

If I can do if you can too. Follow the numbers not your emotions! Cheers. 

[Alecia Loveless]

@Amy Lee If you find a property I’d strongly suggest doing your best to get a contractor to walk through it with you at some point in the process even if you plan on doing the repairs yourself so the contractor can give you his best estimate on the cost of the materials needed to do the repairs that are necessary as well as any repairs that you will have to hire out.

To just throw out numbers like 5% and 20% is not realistic and will get you in over your head and suddenly you’ll realize your building you thought was going to cost $15,000 to renovate is going to cost $60,000 and the 3 month time line is now 1 year and all of a sudden you’ve got tax bills and water and sewer bills and electricity bills that you weren’t counting on. All because you building inspector was terrible and missed a bunch of stuff. This happened to me. Fortunately at the time I had the money but these things happen all the time.

[Nicholas L.]

@Amy Lee

some good thinking here but as @Jaron Walling mentioned it is going to be very tough.

a few reminders on some things that get overlooked when Biggerpockets mentions the magic of BRRRR.

-you really have to increase the ARV of the property substantially for a BRRRR to work. not a 20% increase, not a 50% increase, usually closer to a 100%+ increase over purchase price.

-closing and carrying costs add up.  you have closing costs on the buy, carrying and holding costs, and then even the refinance costs can be 5-10K depending on the loan.

turns out it's expensive just to transact real estate.  =)

you mentioned you're on month 4 of a 15 month lease.  why not use the rest of the time to keep saving and searching rather than rushing into something?  there will be real estate available to buy in 2024, 2025, 2026...

hope this helps.

[John Chong]

Depending on the condition of the distressed property it might be difficult to get a conventional loan. Good idea but I think you'll run into challenges.

[Travis Timmons]

I'll second @Nicholas L. and @Jaron Walling - this is easier said than done. It's not impossible, but the forgiving market that we have had for most of recent history (not including the last 12 months) is likely gone. You're also not in a market that appreciates at a great rate. If you overpay or get in over your head, the market and increasing prices will not bail you out. 

You're on the right track though. Finding a dump of a property in a desirable neighborhood, living in it, and fixing it up is a fantastic idea. Taking on excess consumer debt, not knowing your numbers inside and out, and a lack of an emergency fund while getting into your first rehab is a recipe for disaster. That has an element of "stepping in front of a freight train to pick up nickels" to it. 

Two things can be true - don't muddle them together and pretend it's all the same. Your idea is fantastic and worth pursuing. Don't confuse the what with the how. Make sure that how you do it is also wise and prudent. Timing also matters. It may be worth doing just not now.

[Amy Lee]

Hmm. I'm currently quite miserable where I live so I'm not against breaking the lease. Do you think the smarter thought at this point is to buy a home that needs no or minor cosmetic work (for the sake of saving on the home cost a little) just to purchase a primary residence. Then once I've mentally cleared of my home owning stress, I could focus on wholesale to accrue funds and go into investment properties then? I think I'm trying to get everything done in one transaction and dont even have the tools to do so, making it a major struggle.

Quote from @Nicholas L.:

@Amy Lee

some good thinking here but as @Jaron Walling mentioned it is going to be very tough.

a few reminders on some things that get overlooked when Biggerpockets mentions the magic of BRRRR.

-you really have to increase the ARV of the property substantially for a BRRRR to work. not a 20% increase, not a 50% increase, usually closer to a 100%+ increase over purchase price.

-closing and carrying costs add up.  you have closing costs on the buy, carrying and holding costs, and then even the refinance costs can be 5-10K depending on the loan.

turns out it's expensive just to transact real estate.  =)

you mentioned you're on month 4 of a 15 month lease.  why not use the rest of the time to keep saving and searching rather than rushing into something?  there will be real estate available to buy in 2024, 2025, 2026...

hope this helps.

[Amy Lee]

Quote from @John Chong:

Depending on the condition of the distressed property it might be difficult to get a conventional loan. Good idea but I think you'll run into challenges.

Thanks for the input John. It does seem difficult to find on market properties to make the brrrr work. 

[Nicholas L.]

@Amy Lee

i'll tackle one thing you just said - "focus on wholesale to accrue funds..." - unfortunately, this is another trope like the magic BRRRR that is easier said than done.

it actually takes a ton of time and at least some funds to wholesale.  competition for those leads is fierce and the best operations spend thousands of dollars a month on marketing.  the best source of funds for RE is... a good W2.

[Jaron Walling]

@Amy Lee 100% don't get into wholesaling without experience... be a homeowner first. Remodel a property or two. Get your feet wet owning RE before pivoting to another strategy. 

Doing anything new is challenging. I can't name many things I excelled at on first try. Probably tennis or riding motorcycles but that was beginners luck! Doing BRRRR deals take practice, relationships, contractor support, and $$$. You can gain two of those without buying RE. Becoming a homeowner, landlord, or both requires a strong mindset. Don't rush the process. Control what you can and take steps to achieve your first goal. There are numerous paths for success in this business. You can't walk every path at the same time when starting out.