Seller Financing for BRRRR Strategy?

Question

Currently have an opportunity to obtain a property via owner financed. Debating on how the terms being structured will effect my BRRRR exit strategy.

PP: 76k

Down Payment: 6K

Interest: 8%

Term: 20 years

Monthly payments: ~550$

Now, my concern is with a little bit of cosmetic work and seasoning period. Could I later cash out refinance this property with a greater value without it affecting the terms of 20years at 8%?

Let’s say I want to wait a year or 2 to refinance, I would have already paid 13,032$ (2yrs). 3,451 on principal and 10,008 on interest. The remaining of the balance is $66,549 (principal). With my refinance would I have to pay those remaining 18 years of interest on it? Or just pay the full remaining balance?

Sorry for making this confusing. Thanks you all on advance.

Robert Verdi · Answer

If I’m following you correctly. It would depend on the terms of the owner financing. I’d have an attorney take a look at the financing terms closer. Make sure there is no prepayment penalty.

Some other thoughts, does it cash flow, how much for the cosmetic repairs and what is the arv?

Tim Matthews · Answer

Congrats @Jesus Sosa

Jesus Sosa · Answer

@Robert Verdi Good morning! I was able to negotiate the price even further down and our contract states there are no penalties for early payoff. So, as long as there are no early payoff penalties, I am allowed to pay the full purchase price of the property only, when I refinance. Interest is only being paid monthly with mortgage payment with seller.

Russell W. · Answer

Since I assume you are working directly with the seller on the terms of the agreement, your offer should be based on a seller financed deal with either a defined "balloon period" or language that simply allows for early payoff (undefined timeline). Typical balloon periods are 5 - 7 years. The seller may not be as interested in the deal if he knows he is only getting 2 years of interest. After two years the interest paid is approx. $11k (according to a amortization table I used). Compare that to interest earned after 5 years or 7 years at $26k and $35k respectively. The seller may decide to raise his price if he knows you plan to refinance after only 2 years.

Brent Coombs · Answer

@Jesus Sosa, what's its market value? (For BRRRR to work, it should already be worth close to $100k, if not more).

When you Refinance, you don't want to keep the 8% Interest Rate, even if you're allowed to.  ie. 8% is a terrible Rate for you!

When you do Refinance, the original loan is paid out by the new Lender, and hopefully your calculations about it being a suitable BRRRR deal prove correct. ie.  You want your new Lender to also lend you the amount you had in the deal of your own money, meaning the whole deal is OPM (Other People's Money) from then on.

And, you won't have to pay "those remaining 18 years of interest", but just the amount owed as at the date of Refinance (providing you don't allow an early payout penalty in the Contract, as mentioned by Robert above).

The other aspect of BRRRR being a sustainable model requires its rental income to cover all of the new, higher mortgage and other holding costs.  Good luck.  Cheers...

Robert Hartz · Answer

@Jesus Sosa

Congrats, I’m glad things worked out in your favor!  Keep us posted with progress along the way.

Robert Verdi · Answer

@Jesus Sosa just wanted to follow up to see how you made out.

Jesus Sosa · Answer

@Brent Coombs Yeah that makes total since. I wouldn’t want an 8% interest for 30 years at all. I took the 70% of the ARV and subtracted the rehab costs and it got me 75k which is the PP, but could negotiate it down even more since there is no HVAC unit (it got stolen).

Thank you very much for your assistance. Cheers

Jesus Sosa · Answer

@Robert Verdi Yeah I do have an attorney I have worked with previously. I will get her to take a closer look into the amortization and prepayment penalty’s (if any).

Property needs maximum of 10k of rehab. ARV based on comps are at $95-100/sq ft or 115k/120k.

Comp rents are 950-1100.

Cash flow should be well over 300$ accounting for vacancy, capex, maintenance, etc.

Seller Financing for BRRRR Strategy?

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