Layton, UT · Member since 2019 · 85 posts · 49 votes
We know that a cash out refinance is preferable to a HELOC to pull capital back out of a BRRRR. But for conventional loans, the LTV is 75% and for portfolio loans it's typically 75% or 80%, unless you get lucky. Uncertainties in rehab cost and appraisal (or shortage of killer deals) can sometimes land you too high for all in costs or too low for ARV, such that you can't pull out all your capital.
I wonder if, after finding the right lender to do it, I could have as a backup plan to raise my total LTV to 90% or higher by taking out a smaller HELOC on top of the cash out refi. Since it's not a huge HELOC, and as long as the property cash flows enough, rental income could pay for both the mortgage and the HELOC, and the HELOC would get paid off in a relatively short amount of time.
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
6y
@David Ripplinger you have some good comments above but the crux here is 2 fold: appraisal calculations and rehab cost calculations.
So if you can calculate those with 2%, that's a reasonable tolerance. And yes, knowing both of those figures within 2% is entirely possible. So if you can calculate your ARV + Renovation Costs....and you can BUY + REHAB at 85% LTV...then you can get ALL of your money back each and every time, without seasoning, no HELOC, etc. That's how really good investors do it and work the BRRRR method.
And it's not so easy to understand. People spend HOURS of training on this subject and there are plenty of horror stories of people who purchased homes...and didn't do ANY math before they bought. So at least you are trying and you will get better at it.
So, how can you get better at estimating ARV? Treat this like college. It takes some people 4 years to get through college (and sometimes longer) so we aren't going to take just 1 class and call ourselves experts. We need to take multiple "classes" and become the SMARTEST person on this subject. Here's some ideas:
Lean on your Lender - a good lender can show you how to estimate ARV.
Lean on your Appraiser - ask your appraisers what they did. Maybe even ask them if there's any training they could suggest for you.
Lean on your Title Company - Title companies will often give free training, designed for real estate agents, on this subject. Ask if they have anything coming up...if they don't, ask them to host one!
Lean on your local Real Estate club - I don't know if you have any close to you but I lean HEAVILY on my REI clubs for this. They often will have sessions on this subject.
Bigger Pockets? - Do they have any tools? They have an entire forum on this subject. Maybe ask this same question in there?
YouTube? - It's got everything else, why not this?
And ASK - What's the impact of a pool? Windows? Bathrooms? Granite vs. Laminate? Where do I get the most bang for my buck?
How can you get good at estimating your renovation costs? - This one is going to be a little harder to do. I actually had a contractor provide me with his renovation calculator. I met this contractor at a REI club...because he was teaching a class on how to calculate renovations! Get with people who are smarter than you to make you smarter too.
Again, we need to get smarter than smart on this subject. This is money. YOUR money. Get out there and get better. You can do this and maybe one day you can even be teaching one of those classes. Who knows?