I am interested to learn more about some general rules of thumb for refinancing BRRRR properties depending on cash flow. What have been typical loan interest rates and refinance rates you have personally experience. How much did it affect your cash flow monthly? What rules of thumb did you use to know that it was a good choice to refinance and not just buy and hold as a rental.

I am looking to get started in the Midwest and was curious to hear other peoples stories and experiences as I continue to learn more every month. I would like to BRRRR my first property in the next year or so and would love to hear about some real world examples to compare to my calculations to make sure I am not missing anything. I have been researching lots of properties in Cincinnati, Cleveland, Columbus, Indy, & Chicago area suburbs.

+1 to this Thread, I'm in a similar place and am definitely interested to learn...

@Kevin Mahoney

Purchase + repairs < 0.7 * ARV

You do that, you should be sitting pretty good.

Originally posted by @Kevin Mahoney :

I am interested to learn more about some general rules of thumb for refinancing BRRRR properties depending on cash flow. What have been typical loan interest rates and refinance rates you have personally experience. How much did it affect your cash flow monthly? What rules of thumb did you use to know that it was a good choice to refinance and not just buy and hold as a rental.

I am looking to get started in the Midwest and was curious to hear other peoples stories and experiences as I continue to learn more every month. I would like to BRRRR my first property in the next year or so and would love to hear about some real world examples to compare to my calculations to make sure I am not missing anything. I have been researching lots of properties in Cincinnati, Cleveland, Columbus, Indy, & Chicago area suburbs.

 i've paid up to 8% interest in columbus and it didn't affect cash flow at all. i wouldn't look at interest rates of a driver of a purchase 

@Kevin Mahoney

The BRRRR strategy is a great method to build equity in a project. By rehabbing the investment you are forcing the equity. You have to run your numbers and calculate your interest rate into your numbers. I'm generally around 5%, but I use commercial lending versus residential. I don't have to worry about how many, DTI, credit score much, though they do run it.

My first BRRRR a few years ago.

Purchase $85,000. 
Rehab $15,000.  
Appraisal $125,000. 
Money stuck in $5000. 
Cash Flow $450. 
Less than one year all money out and CoC return infinite.

You must be able to project the value after repair (ARV). This is similar to flipping. I don't use the 70% or the 1% rule as these are guides only and they don't work every time. Use actual numbers and calculate whether the investment is a good one. I have completed about a dozen BRRRR's it works.

When it comes to BRRRR a key play is to find a value add. By that I mean add a bathroom enclose a car port. The idea is you are looking to increase the value of the property by 25-30% above the money you put in. Ideally, if you can fund the project in cash, your numbers will be much stronger. The hard money is going to cost you upwards of 10% of the money borrowed. I do some in cash and need to borrow if I want to scale. I regularly buy the property for cash and take out money to cover the cost of the building and reno money. This frees up money to buy the next property. There should probably be another letter in BRRRR to represent buy for cash then take hard money.

10-12% is common 

6 month project

1-2 pts funding 

1/2 - 1 point junk fees 

@Kevin Mahoney , @Samuel Pavlovcik , Loan interest rates ~10-12%, refinance rates ~5%. I've used commercial loans, which is why my rate is around 5%. You should be able to get a residential rate for low 4%. 

Obviously when you refinance your cash flow decreases by the amount of your mortgage payment. The rule of thumb to think about is, can you earn higher than ~5% (interest rate) on the money you are able to pull-out in the refinance? The idea is that you take the loan from the refinance (e.g. $80k) and buy another BRRRR ("Repeat").

If you don't "Repeat" the process, then you just have a BRRR... BRRRR > BRRR

Not necessarily a rule of thumb, but one note on the execution side of things, know who you are going to go for the refinance before you get involved in the deal. I know a lot of the banks in the CT area required a 1 year seasoning period before they would allow a refi to happen. Your holding costs will be pretty significant if you thought you were planning to hold for 4 months but then have to hold for 12. 

Not sure if that requirement has changed, but definitely something to look into. 

Originally posted by @Filipe Pereira :

Not necessarily a rule of thumb, but one note on the execution side of things, know who you are going to go for the refinance before you get involved in the deal. I know a lot of the banks in the CT area required a 1 year seasoning period before they would allow a refi to happen. Your holding costs will be pretty significant if you thought you were planning to hold for 4 months but then have to hold for 12. 

Not sure if that requirement has changed, but definitely something to look into. 

This is so true. My first BRRRR, I had no idea about seasoning. The lender required 6 months, but it ended up taking about that for the rehab so it was fine. However, that was because we had contractor issues that stretched it out. Rehab should've been more like 3 months, and if we would've finished in 3, it would've sucked to sit and wait (and pay for the borrowed money!) for another 3.

There are a lot of smaller institutions that don't require seasoning, but in my experience they charge higher interest rates. However, like @Robert Ellis said, interest rate shouldn't necessarily be a determining actor as long as the numbers still work. If you can get in and out of projects quicker, that's huge.

@Kevin Mahoney Here are my underwriting factors (I think that is what you are actually driving at, as interest rates are just one figure in the calculation for returns).  I aim to purchase C+/B properties that are $90-150K, and will rent for $900+ (ideally $1100+).  

1. I try to be all in at less than 80% ARV. Ideally, 70% ARV. However, I am willing to leave $5-10K in a deal if everything else is holding and my capital is well-preserved.

2. Cash on cash - 15%+ for BRRRR. Ideally 20%+.

3. Cashflow - $150/door.  Ideally, $200.

4. DSCR - 1.25 (this is a non-negotiable me)

5. Rehab - <$30K.  This is a rule of thumb that keeps me mostly in the cosmetic / mechanical realm and timelines under 4 weeks.

6. HOAs - None

7. Taxes - <$120/mth

8. Owner-occupied > 70%

9.  Schools - Rating of 5+ with parent rating of 4+ stars. 

I have other building parameters, but this is the gist of my underwriting parameters.

These parameters are pretty achievable in the markets you are looking at outside of Chigaco.  Chicago fundamentally has some financial issues and incredibly high taxes.  However, there is the Chicagoland area right across the border in Indiana... I'd look there.

@Kevin Mahoney

A lesson I learned from my first BRRRR is to understand your source(s) of funding and exactly how those sources translate to holding cost during a rehab. I took on a slightly larger rehab for my first project and, surprise, it ran over the projected rehab period!

Lucky for me I funded the deal with a combination of cash and a lower interest personal loan so it didn’t totally crush my numbers. Had I used a hard money loan I may have left more money in the deal after the refinance.

Always understand what worst case scenario might mean in terms of all cash obligations

@Kevin Mahoney

Know your lender ahead of time and what all of your numbers need to be. Make sure you have leases signed and first and deposit before starting the refi.

Remember leaving money in the deal is fine and shouldn’t hurt that bad. If all your numbers work and you moved forward with the deal, having $5-10k left in shouldn’t be a issue.

We have are appraisal tomorrow on are 3rd BRRRR and are excited but with everything going on a bit nervous. No matter what though, I know I have a great property that cash flows and I will be pulling enough out even with a lower appraisal to be able to get the next one.

Originally posted by @Kenneth Garrett :

@Kevin Mahoney

The BRRRR strategy is a great method to build equity in a project. By rehabbing the investment you are forcing the equity. You have to run your numbers and calculate your interest rate into your numbers. I'm generally around 5%, but I use commercial lending versus residential. I don't have to worry about how many, DTI, credit score much, though they do run it.

My first BRRRR a few years ago.

Purchase $85,000. 
Rehab $15,000.  
Appraisal $125,000. 
Money stuck in $5000. 
Cash Flow $450. 
Less than one year all money out and CoC return infinite.

You must be able to project the value after repair (ARV). This is similar to flipping. I don't use the 70% or the 1% rule as these are guides only and they don't work every time. Use actual numbers and calculate whether the investment is a good one. I have completed about a dozen BRRRR's it works.

Thanks Kenneth, Yeah I think my next steps will be refine assessing properties rehab cost and projected ARV based on newer modeled homes in the same area! I really appreciate the advice!

Originally posted by @Lesley Resnick :

When it comes to BRRRR a key play is to find a value add. By that I mean add a bathroom enclose a car port. The idea is you are looking to increase the value of the property by 25-30% above the money you put in. Ideally, if you can fund the project in cash, your numbers will be much stronger. The hard money is going to cost you upwards of 10% of the money borrowed. I do some in cash and need to borrow if I want to scale. I regularly buy the property for cash and take out money to cover the cost of the building and reno money. This frees up money to buy the next property. There should probably be another letter in BRRRR to represent buy for cash then take hard money.

10-12% is common 

6 month project

1-2 pts funding 

1/2 - 1 point junk fees 

 Hey Lesley, thanks for all the information! Can you clarify whats the difference between the points for funding and the points for junk fees? Or is that just a potential range pending the lender and the applicants credit?

Originally posted by @Jon Kelly :

@Kevin Mahoney, @Samuel Pavlovcik , Loan interest rates ~10-12%, refinance rates ~5%. I've used commercial loans, which is why my rate is around 5%. You should be able to get a residential rate for low 4%. 

Obviously when you refinance your cash flow decreases by the amount of your mortgage payment. The rule of thumb to think about is, can you earn higher than ~5% (interest rate) on the money you are able to pull-out in the refinance? The idea is that you take the loan from the refinance (e.g. $80k) and buy another BRRRR ("Repeat").

If you don't "Repeat" the process, then you just have a BRRR... BRRRR > BRRR

 Hey Jon,

Yes I definitely want to play the long game here and repeat on as many good deals as I can. Thank you for your insight on the loan percentages ! I'm adding all of this to my notes lol

Originally posted by @Filipe Pereira :

Not necessarily a rule of thumb, but one note on the execution side of things, know who you are going to go for the refinance before you get involved in the deal. I know a lot of the banks in the CT area required a 1 year seasoning period before they would allow a refi to happen. Your holding costs will be pretty significant if you thought you were planning to hold for 4 months but then have to hold for 12. 

Not sure if that requirement has changed, but definitely something to look into. 

 Hey Filipe, thanks for the heads up. Yeah I guess my next steps would be to contact a lender to see what kind of range I would fall in and what the seasoning period would be. Do I talk to a lender before I even find the deal though? Or find the deal and show the lender the specifics?

Originally posted by @Whitney Hutten :

@Kevin Mahoney Here are my underwriting factors (I think that is what you are actually driving at, as interest rates are just one figure in the calculation for returns).  I aim to purchase C+/B properties that are $90-150K, and will rent for $900+ (ideally $1100+).  

1. I try to be all in at less than 80% ARV. Ideally, 70% ARV. However, I am willing to leave $5-10K in a deal if everything else is holding and my capital is well-preserved.

2. Cash on cash - 15%+ for BRRRR. Ideally 20%+.

3. Cashflow - $150/door.  Ideally, $200.

4. DSCR - 1.25 (this is a non-negotiable me)

5. Rehab - <$30K.  This is a rule of thumb that keeps me mostly in the cosmetic / mechanical realm and timelines under 4 weeks.

6. HOAs - None

7. Taxes - <$120/mth

8. Owner-occupied > 70%

9.  Schools - Rating of 5+ with parent rating of 4+ stars. 

I have other building parameters, but this is the gist of my underwriting parameters.

These parameters are pretty achievable in the markets you are looking at outside of Chigaco.  Chicago fundamentally has some financial issues and incredibly high taxes.  However, there is the Chicagoland area right across the border in Indiana... I'd look there.

 Hey Whitney , This is an incredible and extremely helpful reponse. You hit the nail on the head for what I was asking haha. Yes breaking into the Chicago market is a long term plan,but I dont want to rush in there. I wold rather start out slowly in a less competitive market and build a solid base over the course of several years if not a decade. Thank you for your underwriting parameters. Seeing your benchmarks for sure helps me learn what to look for and be aware of when evaluating deals!

Originally posted by @Kevin Mahoney :

Originally posted by @Filipe Pereira:

 Hey Filipe, thanks for the heads up. Yeah I guess my next steps would be to contact a lender to see what kind of range I would fall in and what the seasoning period would be. Do I talk to a lender before I even find the deal though? Or find the deal and show the lender the specifics?

Hey Kevin, I would call around now to know what each specific banks' seasoning requirements are. It shouldn't really depend on the specific deal, so there's no harm in doing it now. They likely have their criteria, no matter how good (or bad) the deal is. Plus, if you find a bank that's easy to work with you've already saved yourself the hassel later on - when you may be knees deep in a rehab. Thanks for the upvote by the way!

Originally posted by @Joe Livsey :

@Kevin Mahoney

A lesson I learned from my first BRRRR is to understand your source(s) of funding and exactly how those sources translate to holding cost during a rehab. I took on a slightly larger rehab for my first project and, surprise, it ran over the projected rehab period!

Lucky for me I funded the deal with a combination of cash and a lower interest personal loan so it didn’t totally crush my numbers. Had I used a hard money loan I may have left more money in the deal after the refinance.

Always understand what worst case scenario might mean in terms of all cash obligations

 Hey Jon, Yes that is exactly what one of my first is for my potential first deal ahah that's why I am trying to gather as much information on what to look for prior so I have no real surprises down the road! That's awesome you were able to pull it off in the end!

Originally posted by @Kevin Mahoney :

Originally posted by @Lesley Resnick:

When it comes to BRRRR a key play is to find a value add. By that I mean add a bathroom enclose a car port. The idea is you are looking to increase the value of the property by 25-30% above the money you put in. Ideally, if you can fund the project in cash, your numbers will be much stronger. The hard money is going to cost you upwards of 10% of the money borrowed. I do some in cash and need to borrow if I want to scale. I regularly buy the property for cash and take out money to cover the cost of the building and reno money. This frees up money to buy the next property. There should probably be another letter in BRRRR to represent buy for cash then take hard money.

10-12% is common 

6 month project

1-2 pts funding 

1/2 - 1 point junk fees 

 Hey Lesley, thanks for all the information! Can you clarify whats the difference between the points for funding and the points for junk fees? Or is that just a potential range pending the lender and the applicants credit?

Both are costs  of the loan, they just call it different names.  Often the application or processing fee is just a number like 999.00 and it translates to percentage of the total loan.  The larger the loan the lower the percentage.  The real dollars remain constant.

@Kevin Mahoney im happy to share anything about the handful of brrrrs that ive completed; call or email?

@Kevin Mahoney you could always put together a sample deal, with all numbers broken out as if you were planning to pursue, and take that to lending institutions. Basically say, this is the kind of deal I'm looking at, what would lending look like on something like this?

@Kevin Mahoney Depending on the loan company, I’ve seen anywhere from 5% - 7%. If you do the math, you can see how this affects your cash flow.

I'm practically in the exact same spot as you, Kevin! Definitely going to go through the replies here later tonight.

I apologize if this has already been mentioned but if you haven't already, you might want to check out Tony J. Robinson's podcast Your First Real Estate Investment. Not all interviews are about BRRRR but still some useful first deal things you can pick up.

Good luck!

Some of these may be market specific:

• Make sure the property is a good hold property and should not be a flip. I find many SFR could be better flips than BRRRR as the rent to value is often not to our expectations.
• Finding a good BRRRR property is not easy in my market.
• Value extracted via a refi can compensate for a lot of cash flow.  For example, if I have netted $50K via the value add do I care if the initial cash flow is minimal?  I do not.
• Know the seasoning requirements.
• The older the home, the more hidden issues there will be and the most costly the rehab.
• In my market the refi appraisals are very conservative.  I plan for the refi appraisals being 10% below the actual value that would be set if there was an purchase offer.
• Refi LTV is limiting. Combined with the low appraisal this can result in more investment being trapped than desired.
• I have found the pre-rehab cash flow is similar to the post-rehab, post refi cash flow.   This implies that the value set by the conservative appraisal is about the same increase as increase in rent achieved by the rehab.  Do not think that the cash flow will improve if you have rehabbed the place but also refinanced it (increasing the loan amount).

Good luck