Struggling with BRRRR refinance...

8 Replies

So, last year I bought my first BRRRR property in Memphis, TN. I've learned a TON of lessons, and the lessons keep on coming! Here's the info on the deal.

I bought a 2/1 for $29000 from a wholesaler. Having done research, I felt that the property would be worth about $65k after the rehab was done. So for the BRRR to work most efficiently, I needed the rehab to come in at around $18000.

Ultimately, these costs crept up and I ultimately ended up paying about $21,000, slightly over what I wanted but I was okay leaving a bit of money in the deal.

We got it rented, and got over what I was hoping for. 

However, once the tenant was in, the water heater broke down, and needed replacing, and then it was revealed that the furnaces were no longer any good, and it was either buy new furnaces for $6000 or get a whole new HVAC system for closer to $7k. Despite having bought wall units, I went with the latter option, figuring I could use the wall units on another house. So anyway, all including various taxes and closing fees etc, I am $60,500 in. At this point it wads clear that the full BRRRR wasn't really going to work at the $65k estimate, but I was still happy to leave some money in and have the cash flow.

I began down the road with a lender, and had my appraisal done. It came in at $57,000. Ugh. So I'd put more money in than the property was worth right now. 

So I had a few options. 

1. Sell and take a loss. 

2. Refianance for less than I put in, leaving a bunch of money in the deal ($57,000 - 25% = $42,750). So I'd be leaving about $17,750 in the deal, and making a modest COC return of about 15%.

3. Keep it as is, leaving all the money in and making about a 13% COC return.

I decided to take as much out of it as I could, and have been trying to refinance. However, it is hard to find a lender who will write a loan for less than $50,000. I have found two who are willing to do it, however, my debt to income ratio hasn't helped, and I got another rejection from one of these lenders today. I own two very successful airbnbs which provide me and my family with about $4000 a month cash flow, but a lot of lenders won't consider these properties as they don't have year long leases...

I'm starting to pull my hair out with this. 

Soooo.... what would you do? 

I'd be patient and stick it out. It's not a bad deal based on the 15% CoC if you can get the financing. Out of curiosity - what lender(s) would lend on something lower than $50K? I wasn't able to find one in the area I was looking in a couple years back.

@Jake Thornton Good Afternoon all. Jake I commend you for taking the chance. The experience you gained is far more valuable than any "loss" you may have occurred. My honest and humble advice (and maybe you did this) but be sure to get an appraiser and general contractor's feedback and professional opinion prior to each deal. With the experience you already have, the process will be a lot more efficient and streamlined.

And I'm sure you did this as well, but be absolutely sure to vet your wholesalers as many of them are looking for the quick buck and will not be completely honest on their rehab estimates.

With that said, the PM lenders I broker for need an appraisal value of at least 75K in order to do any long term deal (cash out refinance). Otherwise, I can do any deal in the country, short or long term.

I hope this helps.


Thanks for sharing your story Jake, I am currently moving to Memphis & plan to BRRRR just about as aggressively as I can. We have $100,000 cash & a lot of time so we are pumped but are afraid of all those sneaky costs that always seem to come up!

How did you go about finding this deal? Also if you don't mind sharing how distressed was this property? 

@Jake Thornton If you could refi, that would help (the loan amount will be the trick). You could also do another deal and portfolio loan the two together at the end in the refi (that may help you get around the loan limits). 

If you can't get that done, you will need to make a call on holding or selling.  If this property rents well and is in a good area, I'd think about keeping it. 

Regardless, it sounds like you have learned a TON and have some work to do on that DTI. Even with these bumps, you got started, and are on the path my friend!

I would cash-out refi if you can. Yes you are leaving money on the table and lowering your cash flow but I think the nice thing is that you will now have cash that you can take and invest again this time with more knowledge and experience. You will also have someone paying the mortgage and hopefully the property appreciates which will help with cash flow in the future as well as help you if/when you decide to sell. 

You can always talk to another broker to see if there is anything they can do better but I would first recommend getting a copy of the appraisal to see if they used properties that are indeed similar of if there is a property or properties that they used that are not the ones that you think they should have. If you feel it is wrong you can try to see if you can challenge it (not impossible but not common) and if that fails at least you know how to move forward with a new lender. The thing to remember in this scenario is if you think it will be change at all because if not you would just be  throwing more money into the deal via the cost of another appraisal for it to come back the same. 

I hope this helps. Also congrats on the deal even though it ended up in the red. It's better to start and learn than to not start at all.