[Calc Review] 20% Down BRRRR Bad Idea?

Question

Hello BP Community,

1st post as a new investor. I've been following/studying BP for almost 5 years now and I am in a position to finally acquire my first property. I have attached a report with my estimation on numbers for a property. This is a property I am simply "looking at." The COC ROI is low initially but if I were to refinance later on it increases. I have been studying the BRRRR method but I was beginning to wonder.

Instead of purchasing with cash, why should I not finance with 20% down, rehab the property, rent it, and then refinance. In order to leverage my money a little more. Has anyone done this before? Why would this strategy be a bad idea?

I am also not understanding how the 1st year is $-7 total annual income.

Thanks in advance to any participation, just a new investor trying to learn.

View report

*This link comes directly from our calculators, based on information input by the member who posted.

Jacob Lemoine · Answer

@Nate Herndon Thanks for the feedback. You bring up valid points, I did not even consider financing the rehab. Seems I'll be having a conversation with my lender to lay out all my financing options. Hopefully I can post an update here soon with what I end up doing and acquiring my first property.

Thanks guys.

@Jaron Walling @Peter Woerner

Nate Herndon · Answer

It's all about how you like the numbers, I think. My wife and I are looking at investing in our first deals using lines of credit so it is "cash buy" of sorts, but we will be refinancing immediately into long term loans.

For your rehab budget, the programs that are available could also finance 100% of the rehab budget and hold that in escrow for you. That would allow you to spend $10k at a time, draw on the rehab budget to pay yourself back, and do that three times total to cover your $30k rehab. Or six times with $5k. Whatever suits you - there's typically draw fees of $150-$200 per draw, though.

I think financing is your ally if you prefer to hold onto more of your cash, or want to put 10-20% down on multiple deals vs 100% down on one deal. Cash is king like @Jaron Walling mentioned when reducing the total cost of financing is your #1 goal - again, it boils down to what makes you most comfortable.

Peter W. · Answer

I am not a pro. I am looking at buying my first investment house myself, but losing an extra 5000 on the front end is very clear reason why most people would shy away from double financing

It might make sense in your situation. There are exceptions to many rules.

Jacob Lemoine · Answer

@Nate Herndon

I appreciate the responses guys.

@Jaron Walling I understand I will get a better deal. But the houses in my area that I can afford with cash (looking around $40,000 purchase price) are in such bad shape, they would need $30k-$50k of work put into them. I'm not comfortable with spending close to $100k cash to fund a BRRRR.

@Peter Woerner If paying double closing costs allows me to invest in a better-quality property, would it be worth it if I have factored in that cost into my estimates? Would 4-6k be worth it to control an asset worth 10s of thousands more?

My thoughts with very simplistic numbers

$50,000 House

Cash purchase + 30k rehab = $80k out of pocket (refinance to recoup most of capital)

or

$100,000 House

Finance purchase @ 20% + 30k rehab = 50k out of pocket (factor the double closing costs)

As a new investor I like the sound of having to spend less out of pocket to acquire a property. But if this is a terrible idea, I will stick to BRRRR.

Peter W. · Answer

Because you pay closing costs twice.  For a 200k home in my area you end up paying 5-6k each time you close.  So doing it this way costs an extra 5-6k.

Jaron Walling · Answer

@Jacob Lemoine "why should I not finance with 20% down" - Because cash is king. You make your money when you buy. You'll get a better price. Create the value up front with a remodel then refinance out an amount that works for your numbers.

Nate Herndon · Answer

Hi @Jacob Lemoine, welcome! You are not off-base at all by thinking about financing your BRRRR project. Many investors, new ones included, will put down 10-20% down on a property, increase the value through a rehab (with rehab budget also funded by lender), and refinance into a 30-year fixed at the new after repair value. Depending on your cost basis and what your ARV looks like, you might be pulling cash out of the project via the refinance to carry into your next deal and do it all over again.

[Calc Review] 20% Down BRRRR Bad Idea?

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