BRRRR Strategy - I don't get it.. what am I missing?
Catonsville, MD · Member since 2014 · 89 posts · 21 votes
BRRRR Strategy - I don't get it.. what am I missing?
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Realtor · Charlotte, NC · Member since 2014 · 935 posts · 467 votes
10y@Matt Powell great Q and follow up by you and the community. I think this is one of the areas BP is good for when it is a legit Q from someone who is actually trying to learn (vs someone trying to vette some idea from a guru) You have asked the questions that hundreds of others didn't have the guts to ask but will benefit from reading. Several BPers are paying it forward for you (us) so that someday you (we) can do the same for the newest members. Persevere!
54 Replies
- Fairhope, AL · Member since 2015 · 21 posts · 0 votes10y
What I dont understand is, you still have a mortgage(s), so how do you make cash flow renting with all these mortgages done from multiple BRRR's? And isnt there a huge risk with having so many mortgages out there?
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes10y
@Charles Montgomery, the main point about the BRRRR strategy is: only buy properties that WILL cash flow, even with 80% borrowed money. If it works for your first wisely bought property, it will work for ALL your wisely bought ones!
The strategy also relies on your Lender's re-appraisal coming in at say, 40% more than you have into it, so again, the emphasis is on: wisely bought ie. the "huge risk" that you mentioned is ALREADY taken into account!
Remember also, you are only out of pocket your ORIGINAL 20% deposit.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes10y
Originally posted by @Charles Montgomery:
What I dont understand is, you still have a mortgage(s), so how do you make cash flow renting with all these mortgages done from multiple BRRR's? And isnt there a huge risk with having so many mortgages out there?
Yes, and understand, only 75% of rental income is counted to cover the debt service, if it doesn't the qualification comes out of your pocket. So, the kicker on these roll it over strategies is that it must rent to cover the debt service and cash flow for taxes, maintenance, insurance and your management. :)
- Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes10y
To give a simple explanation.
I'm going to shrink down the numbers to a final appraisal of $100.
Brandon finds a property for $60, after an appraisal confirming the value Bank A is willing to lend him $48 (80%) of the $60 to purchase the property, the other $12 (20%) comes out of Brandon's pocket. Brandon buys the property and then puts $10 of his own money into fixing it up. He then gets a renter for the property. Then he goes to Bank B and says what do you think the house is worth. Bank B has the house appraised and it is now worth $100, they are willing to lend him $80 (80%). The other 20% is paper equity. Brandon then takes the $80 pays off the Bank A $48 loan and keeps the other $32. This replenishes the $22 he spent on the house out of his own pocket and gives him $10 more to either invest in the next house or to replenish his starbucks card. :)
This strategy works as long as rent less expenses continues to cover the loan payments and as long as house values stay at or above a level where Brandon can refinance when the Bank B loan comes due, usually five years. In this example after five years Brandon probably owes something like $66.5 on the house. In order to not do a cash-in refi the house would have to be worth more than $84, because the bank will not lend above 80% of current value when the loan renews. $66.5 divided by 80% is $84.
- Investor · Overland Park, KS · Member since 2015 · 50 posts · 13 votes10y
Originally posted by @Dawn Anastasi:
Here's a real world example with rounded numbers for simplicity. I partnered with someone who had extra cash laying around. We bought a house for $63,000 cash, which my partner paid $62,000 and I paid $1,000.
I rehabbed the property for $25,000 which I paid $19,000 and he paid $6,000. Then I placed tenants. Then we got a refinance loan. The appraisal came in at $120,000. We got 70% LTV and cashed out $84,000.
We had $88,000 in and got out $84,000. So we only had $4,000 into a $120,000 house. You can't get a down payment that low on a purchase loan! If we had gotten a higher LTV loan we would have gotten more money out than we put in.
Dawn, dont those numbers only work if you and your partner hold the property together? If you have to give your partner say 10% return on their cash, you wouldn't get all your cash back.
- Real Estate Professional · Phoenix, AZ · Member since 2015 · 27 posts · 3 votes10y
@Becca Summers that's exactly what I needed I cant do the numbers and all that was very confusing to me but u simplified it. Thanks
- Fairhope, AL · Member since 2015 · 21 posts · 0 votes10y
Originally posted by @Cal C.:
To give a simple explanation.
This strategy works as long as rent less expenses continues to cover the loan payments and as long as house values stay at or above a level where Brandon can refinance when the Bank B loan comes due, usually five years. In this example after five years Brandon probably owes something like $66.5 on the house. In order to not do a cash-in refi the house would have to be worth more than $84, because the bank will not lend above 80% of current value when the loan renews. $66.5 divided by 80% is $84.
So the bank loan is due in full after 5 years and has to paid off?
- Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes10y
Let me add to that last answer. At the five year point, Brandon has now paid the loan down to $66.5. Bank B would normally not want to refi the loan just renew it. Here is why. If the house price stays the same $100, Brandon now has 33.5% equity, which improves the bank's position. (More equity to come after if Brandon defaults). If the house's value rises with inflation-2% ($110) then Brandon has 39.5% equity,
For the bank renewing Brandon's loan makes much more sense than issuing a new 80% loan to another customer.
Obviously, Brandon could at any point refi the loan if his equity increases enough.
AGAIN the flaw in this strategy is the reliance upon stable or rising rents and house prices. Lots of people doing this were wiped out in 2007-2008 when both rent and property values fell. Leverage works both ways and the more leverage equates to more risk.
- Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes10y
@Matt Powell It may be helpful to understand that the purpose down payments.
When you buy a property with a mortgage (financing from the start as opposed to refinancing after purchase) the bank requires a down payment. Let's call it a 20% down payment. For a $100k house this means you would have $20k in equity and a mortgage for $80k. The house acts as collateral against the mortgage loan. If you don't pay, the bank takes the house. Since the house is worth more than the amount of the mortgage, this makes the risk to the bank much lower. They can take your $100k house and sell it and get their $80k back, ideally, after paying a realtor, etc. Whereas they would have lost some money if the mortgage was for the full price of the house. So having collateral worth more than the loan is important.
When you refinance, they again want to make sure the collateral is worth more than the loan. There is no down payment, they just won't lend more than 80% of the value of the house. It doesn't matter what you paid for the house or if it was free to you. It is not about you having some of you own money invested. It is about the collateral, the house, being worth more than the loan amount, making it a very safe loan to the bank.
Hope this helps.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Matt Powell this model is VERY old news its how the turn key industry worked prior to the GFC in 07 and 08 when lenders STOPPED doing investor refis for all but the VERY RICH.
now as money is rolling again they are just bringing back basically the same products that existed prior to 08 nothing new mysterious or earth shattering here.
the trick though is getting more than 4 refis and you can get up to 10 if your VERY well off and qualified or you go portfolio which new players are entering the space B2R Colony etc.
@Michael Hayworth this is exactly how I ran my foreclosure buying business IN Portland . I had large LOC's and True unsecured LOC to buy at court house steps then would take asset and secure it with my secured line payoff my unsecured line and rinse repeat. I also had a great line at WAMU they did it with computer underwriting .. it was the bomb.
My entire HML business from 2001 to 2008 was based on this formula were I was lending to those buying turn key.. we put them into title with no money down the buyer would get a cash out refi.. the marketing buys in LA advertised buying 4 homes with nothing out of pocket just needed that W 2 income and credit... I made the 65% LTV HML we got 442 Lender refi ed me out in 60 t0 90 days... borrower would get 5 to 8k cash back X 4 they would get 20 to 32k tax deffered kish in their pocket Turn key guys made there 8 to 10k a house marketing guys made their 5 to 7k per house we made our 3 to 5k in HML and then the homes would cash flow 100 a month each... that was what built turn key prior to 08.
After 08 that program went into the toilet and most Turnkey guys went out of business or had to retool to sell to only SIDRA's but anyway BRRRR is OLD NEWS and its only because of this crop of newer investors that is seems new.
- Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes10y
@Michael
@Michael Hayworth this is pretty closely my approach on properties I sell. ( I keep some and sell some as I always have 8-10 places for cash flow) The only difference is I rehab right away, wait the 6 months seasoning for the appraisal and get all of my renovation costs and up front cash purchase costs back so I have essentially no money in after the renovation. I usually see approx. 25% appreciation over and above renovations but have to wait the 6 months to get the full loan amount at 70% LTV out.
- Catonsville, MD · Member since 2014 · 89 posts · 21 votes10y
@Larry Turowski You nailed it. I was caught up on how the bank would be able lend the 80% and not get the 20% for their own security on the refinance, but I get now that the house (collateral) is worth that other 20%, so that's their security. Thanks for breaking it down for me.
- Contractor · Fort Worth, TX · Member since 2015 · 379 posts · 740 votes10y
Originally posted by @Bruce Runn:
@Michael
@Michael Hayworth this is pretty closely my approach on properties I sell. ( I keep some and sell some as I always have 8-10 places for cash flow) The only difference is I rehab right away, wait the 6 months seasoning for the appraisal and get all of my renovation costs and up front cash purchase costs back so I have essentially no money in after the renovation. I usually see approx. 25% appreciation over and above renovations but have to wait the 6 months to get the full loan amount at 70% LTV out.
Bruce, there's no 6-month seasoning if you work with a good portfolio lender. I work with two different small local bank chains, and can start the refi the moment I have the trustee receipt in hand. I usually do refi them first, but not always.
The strategy definitely works if you have a good lender.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes10y
Originally posted by @Matt Powell:
Crystal clear, actually. Thanks very much. Appreciate your commitment to giving good answers.
So it sounds like liens need to be on the property to be factored into the official equity equation. Didn't know that.
Lots of good examples of refis in this thread. But maybe the definition of equity would be helpful? In very simple terms, equity is the value of the property minus the debt. If you buy a $80K property with cash and you use your own cash for a $20K rehab, you have 100% equity. Doesn't matter if the property is worth $75K or $100K or $125K when you are done. The equity position is the same...100%. Of course, if the property declines in value, that's a loss. But you still have 100% equity.
There's a lot of focus here on the 20% equity "required" for a refi. 20% equity is an industry norm but equity requirements are specific to a loan product/lender. There is no hard and fast rule about refis. Some lenders will let you get more out, some less.
- Brownstown, MI · Member since 2014 · 344 posts · 98 votes10y
Originally posted by @Michael Hayworth:
Originally posted by @Bruce Runn:
@Michael
@Michael Hayworth this is pretty closely my approach on properties I sell. ( I keep some and sell some as I always have 8-10 places for cash flow) The only difference is I rehab right away, wait the 6 months seasoning for the appraisal and get all of my renovation costs and up front cash purchase costs back so I have essentially no money in after the renovation. I usually see approx. 25% appreciation over and above renovations but have to wait the 6 months to get the full loan amount at 70% LTV out.
Bruce, there's no 6-month seasoning if you work with a good portfolio lender. I work with two different small local bank chains, and can start the refi the moment I have the trustee receipt in hand. I usually do refi them first, but not always.
The strategy definitely works if you have a good lender.
What amount will your lenders let you get? Are these 30 year fixed mortgages or some other commercial blanket loan or ARM you can get? Around here most that let you do the quick refi with no seasoning are typically a higher interest rate, or they will only do delayed refinance (70% of new LTV or what you purchased the house for, whatever's less, OR purchase price plus rehab as long as it's 70% ARV or less)?
Also around here on occasion calling around I've found some smaller banks that will do a no seasoning cash out refi with no out of pocket, but it's a 7 year ARM 15 year, and there are strict stipulations (like you can't have more than 3-4 mortgages already).
Always looking for a no seasoning cash out refi at 75% of new appraised value at 30 year fixed...they are out there, but are usually 1+% higher rate.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes10y
@Jay Hinrichs and @Bill Gulley how quickly everyone (well, 98%... not the 2%;) forgot the GFC. More confirmation that we are way beyond recovery and poised for a correction!
BTW, to everyone else, this did indeed work well with 'portfolio' lenders in the past. Even in the GFC for the right people running the right companies. It still works. The key obviously is buying and rehabbing to create the added value. Not that much different from other industries, actually. Create value in your product, keep margins good or great, and enjoy success!
- Contractor · Fort Worth, TX · Member since 2015 · 379 posts · 740 votes10y
Originally posted by @David Roberts:
Originally posted by @Michael Hayworth:
Originally posted by @Bruce Runn:
@Michael
@Michael Hayworth this is pretty closely my approach on properties I sell. ( I keep some and sell some as I always have 8-10 places for cash flow) The only difference is I rehab right away, wait the 6 months seasoning for the appraisal and get all of my renovation costs and up front cash purchase costs back so I have essentially no money in after the renovation. I usually see approx. 25% appreciation over and above renovations but have to wait the 6 months to get the full loan amount at 70% LTV out.
Bruce, there's no 6-month seasoning if you work with a good portfolio lender. I work with two different small local bank chains, and can start the refi the moment I have the trustee receipt in hand. I usually do refi them first, but not always.
The strategy definitely works if you have a good lender.
What amount will your lenders let you get? Are these 30 year fixed mortgages or some other commercial blanket loan or ARM you can get? Around here most that let you do the quick refi with no seasoning are typically a higher interest rate, or they will only do delayed refinance (70% of new LTV or what you purchased the house for, whatever's less, OR purchase price plus rehab as long as it's 70% ARV or less)?
Also around here on occasion calling around I've found some smaller banks that will do a no seasoning cash out refi with no out of pocket, but it's a 7 year ARM 15 year, and there are strict stipulations (like you can't have more than 3-4 mortgages already).
Always looking for a no seasoning cash out refi at 75% of new appraised value at 30 year fixed...they are out there, but are usually 1+% higher rate.
David, I do 3 year ARM 15 year note. I start at 5%. Last one that adjusted ended up at 6.25.
I didn't start out calling the lender asking for refi's. I started with 7% arm on regular investment property purchases, did several purchases with them and built a relationship, then slowly expanded my line of credit and reduced my rate. I've been at this 5 years now, with maybe 30 properties with my primary lender, and a handful with my secondary one. I try to keep 12-15 properties in my portfolio at any given time, sell another 10-12 a year.
- Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes10y
@Michael
@Michael Hayworth I do a cash out refinance for the fully renovated appraisal which is typically $75-100,000 more than my purchase and renovation costs. I have to wait 6 months for that new/updated appraisal basis but essentially that is how I get all my money back out and still have 30% LTV. Is that what you are saying you can do right after you take possession/renovate as I can do it right after but not for the new "increased" much higher amount. I can get out my purchase/renovation cost but not the increased equity beyond that right away. Thanks
- Brownstown, MI · Member since 2014 · 344 posts · 98 votes10y
Originally posted by @Michael Hayworth:
Originally posted by @David Roberts:
Originally posted by @Michael Hayworth:
Originally posted by @Bruce Runn:
@Michael
@Michael Hayworth this is pretty closely my approach on properties I sell. ( I keep some and sell some as I always have 8-10 places for cash flow) The only difference is I rehab right away, wait the 6 months seasoning for the appraisal and get all of my renovation costs and up front cash purchase costs back so I have essentially no money in after the renovation. I usually see approx. 25% appreciation over and above renovations but have to wait the 6 months to get the full loan amount at 70% LTV out.
Bruce, there's no 6-month seasoning if you work with a good portfolio lender. I work with two different small local bank chains, and can start the refi the moment I have the trustee receipt in hand. I usually do refi them first, but not always.
The strategy definitely works if you have a good lender.
What amount will your lenders let you get? Are these 30 year fixed mortgages or some other commercial blanket loan or ARM you can get? Around here most that let you do the quick refi with no seasoning are typically a higher interest rate, or they will only do delayed refinance (70% of new LTV or what you purchased the house for, whatever's less, OR purchase price plus rehab as long as it's 70% ARV or less)?
Also around here on occasion calling around I've found some smaller banks that will do a no seasoning cash out refi with no out of pocket, but it's a 7 year ARM 15 year, and there are strict stipulations (like you can't have more than 3-4 mortgages already).
Always looking for a no seasoning cash out refi at 75% of new appraised value at 30 year fixed...they are out there, but are usually 1+% higher rate.
David, I do 3 year ARM 15 year note. I start at 5%. Last one that adjusted ended up at 6.25.
I didn't start out calling the lender asking for refi's. I started with 7% arm on regular investment property purchases, did several purchases with them and built a relationship, then slowly expanded my line of credit and reduced my rate. I've been at this 5 years now, with maybe 30 properties with my primary lender, and a handful with my secondary one. I try to keep 12-15 properties in my portfolio at any given time, sell another 10-12 a year.
I think that's awesome and I tend to see it the same way...that rotation in and out of even hold properties is the way to go. Sometimes you just have to take the profit. However you decide when to pull the trigger might be different, whether it's watching your return on equity, ROI, or whatever. But that's great. Thanks for quantifying your statement. And if you're rotating in and out within 3-7 years the ARM definitely seems to make more sense.
- Brownstown, MI · Member since 2014 · 344 posts · 98 votes10y
Originally posted by @Bruce Runn:
@Michael
@Michael Hayworth I do a cash out refinance for the fully renovated appraisal which is typically $75-100,000 more than my purchase and renovation costs. I have to wait 6 months for that new/updated appraisal basis but essentially that is how I get all my money back out and still have 30% LTV. Is that what you are saying you can do right after you take possession/renovate as I can do it right after but not for the new "increased" much higher amount. I can get out my purchase/renovation cost but not the increased equity beyond that right away. Thanks
Sounds like your lender is allowing you to do 'delayed refinancing'...
- Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes10y
@david
@David Roberts It's the only way I can get full value back out as you have also found as well without paying a premium which I won't do. I refinance to 30 yr mortgages and sometimes convert to 15 yr depending on my end game. Mine are always fixed rate highly competitive numbers since I waited the 6 months. Since those are buy and hold properties, I want the lowest PITI so I maximize cash flow and can wait the 6 months since I'm really getting almost all my money out so this is what I consider the new "no money down", only it's after 6 months-LOL. I also have two different HELOC's that I use for the intermediate cash fro interest only so I'm not really using any of my own money. If someone has a better way, I'm all ears.
- Brownstown, MI · Member since 2014 · 344 posts · 98 votes10y
Originally posted by @Bruce Runn:
@david
@David Roberts It's the only way I can get full value back out as you have also found as well without paying a premium which I won't do. I refinance to 30 yr mortgages and sometimes convert to 15 yr depending on my end game. Mine are always fixed rate highly competitive numbers since I waited the 6 months. Since those are buy and hold properties, I want the lowest PITI so I maximize cash flow and can wait the 6 months since I'm really getting almost all my money out so this is what I consider the new "no money down", only it's after 6 months-LOL. I also have two different HELOC's that I use for the intermediate cash fro interest only so I'm not really using any of my own money. If someone has a better way, I'm all ears.
I also do the 6-mo refi and cash out almost everything, and yes this is a good no money down strategy after 6 months. Your cash on cash return becomes 100%. I think it is important to keep your money always moving around. I have been burned in the stock market too many times, turning over all control. Never aagain.
I have a 10-year interest only draw period HELOC on my home, but every time I risk it, I really don't feel comfortable. I'd rather risk someone else's money, but I don't like taking on equity partners, it's too expensive.
The bank told me HELOCs count as a mortgage against my 10-mortgage limit, which is why I don't want to open up any more.
I'm trying to learn quickly about understanding multifamily. Those deals are hard to come by, but in the meantime I want to learn to analyze and be ready to pounce. I plan to transition into holding multifamily, and holding some, but mainly flipping single family. That's the plan anyway. :)
- Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes10y
@david
@David Roberts commercial HELOC"s don't count against the 10 properties as I "hold" 8 properties and add/sell over that number when they fit into capital gains timing. Have multiple HELOC deals and have no problem refinancing properties.
- Brownstown, MI · Member since 2014 · 344 posts · 98 votes10y
oh i didnt know your helocs were commercial. Thats cool. I think commercial loans are unlimited. Sounds like you are killing it.
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