Help! BRRRR Question????

20 Replies

Hello, 

I was recently watching one of BP's videos on the BRRRR strategy and had a question about one specific aspect of this strategy.

How is it that a property produces income and cash flow during the acquisition face of the BRRRR project? 

If we have to come up with the money, make monthly payments to the lender, spend time and money rehabbing the property before we can get any tenants in there and wait "6 to 12 months" (depending on refinance details of the bank or lender); how can I make sense of income and cash flow during the acquisition face part of the results page of the BRRRR calculator?

Thank you,

   Oskar

Thank you BP for the amazing community you've brought together.

Hey @Oskar Beckmann ! I see a lot of questions about the BRRR Strategy, so I'll share how I've personally done BRRR's though I know there are a few different ways to structure them.

1. I never put money down, instead I have my HML cross collateralize the equity in another property I own (since I have many) OR I take the equivalent of the HML's down payment and put it in a separate account that they have access to in case of default. So I always do a 100% loan with the HML

The reason I want the 100% loan is so that I can do a rate and term refinance (no seasoning requirement) and all the HML has to do once they're paid off is release the lien on my property or release the bank account.

2. I also have the HML finance the renovation costs into their loan, which they take into account when they create the loan. Same point as above, this allows you to do the rate & term refinance so theres no need to get your cash back since its all in the HML loan.

No matter if you put money down and pay the renovation out of pocket or go for zero out of pocket (with the exception of the monthly interest payments, I've not seen a HML who was willing to do all 3) your cash flow is going to suck until you refinance.

I hope this helps!

Originally posted by @Jennifer Beadles :

Hey @Oskar Beckmann ! I see a lot of questions about the BRRR Strategy, so I'll share how I've personally done BRRR's though I know there are a few different ways to structure them.

1. I never put money down, instead I have my HML cross collateralize the equity in another property I own (since I have many) OR I take the equivalent of the HML's down payment and put it in a separate account that they have access to in case of default. So I always do a 100% loan with the HML

The reason I want the 100% loan is so that I can do a rate and term refinance (no seasoning requirement) and all the HML has to do once they're paid off is release the lien on my property or release the bank account.

2. I also have the HML finance the renovation costs into their loan, which they take into account when they create the loan. Same point as above, this allows you to do the rate & term refinance so theres no need to get your cash back since its all in the HML loan.

No matter if you put money down and pay the renovation out of pocket or go for zero out of pocket (with the exception of the monthly interest payments, I've not seen a HML who was willing to do all 3) your cash flow is going to suck until you refinance.

I hope this helps!

Can you explain a little further how you are structuring this deal with the HML?

Also how does the HML get paid back when using the rate and term refinance?

Could you give an example of a recent deal or a hypothetical one?  

"No matter if you put money down and pay the renovation out of pocket or go for zero out of pocket (with the exception of the monthly interest payments, I've not seen a HML who was willing to do all 3) your cash flow is going to suck until you refinance."

Yes, very true. A rehab or flip is essentially a vacancy expense and more so time really is money.  I had a bad experience with this years ago when the rehab went south. It's not just the lack of cash coming in but IO payments, utilities, lawn maintenance. It all adds up fast.  Bring those workers through the front door the day of closing.

Howdy @Oskar Beckmann

Good question. The answer is there is usually no income during acquisition and Rehab phases. If the property has tenants paying rent and considered livable, then, I would suggest it is not a true BRRRR candidate. The properties I look at are normally distressed with no tenants. They are not in livable condition and can not be purchased using conventional financing. Other than cash you must use Hard or Private Money loans. During the Rehab/Holding period you make interest only payments with a balloon payment due at a future date (6 to 12 months). These payments are part of your Holding costs. Along with insurance and utilities during the Rehab period. Once you have it rent ready and tenants in place that is when you have income.

Holding costs occur from the closing date until you have the property fully rented.  It could be one month or six months.  It depends on the extent of the Rehab, how long it takes to complete, and the time it takes to be fully occupied.  The quicker you are able to go from close to occupied the sooner the tenants will be paying for those costs instead of you.

With Hard/Private Money Financing you will have to have “skin in the game “.  It may be a down payment, All Rehab costs, Holding costs, and Closing costs.  When you are analyzing the deal you must consider what your expected total cash outlay will be.  When you do the Cash-out Refinance these are the costs you are attempting to recover along with paying off your acquisition loan.

Hello,

@Jennifer Beadles
@Richard Heine

@John Leavelle

Thank you for taking the time to post answers on this thread. I was confused after watching the BP BRRRR video and your answers make sense. I also learned that BRRRR might not be the correct method to use for the properties I'm analyzing.

Thanks again for your advise for an upcoming REI.

   Oskar Beckmann

@Jennifer Beadles

Another way to do what you're saying is bringing in a private lender to finance the down payment (or more) with a 2nd lien on the property. A lot of HML don't allow for 2nds, but I'd imagine the same lender who would allow you to do the cross-collateralization and collateralization of cash would allow you to.

Can I ask for the name of the HML you're using for all of this creative financing?

@Oskar Beckmann , you wrote "BRRRR might not be the correct method to use for the properties I'm analyzing"(?

Are you saying that all-in, they'd cost you more than about 70-75% of their appraised ARV?

And/or, you calculate that they'd not cash flow positively when you've re-borrowed 100% of your outlay?

In that case, I agree, they're not (pure) BRRRR candidates. You'd be leaving money in those deals, even after Refi. Good luck...

@Nghi Le You're right, you can definitely have another lender record a 2nd to do the rate & term. I've never had to do that, but it could be done.

Rain City Capital is my HML who does the cross collateralization.

@Oskar Beckmann you asked for an example, so here is an example of an actual BRRR deal that I did except I am rounding up.

Duplex purchase price: $130,000

Renovation budget: $12,000

= HML Amount of $142,000

Monthly HML Payments = $1,420 x 3 months (to rehab and refinance) = $4,260

Hard money points get tacked on to the HML and get handled at payoff, so the total HML payoff was $144,840

New appraised value came in at $230,000 which allows for a max LTV of 75% (since its a duplex) which means I could have a new loan amount of $172,500 without bringing any money in to close the refinance.

Since my total HML payoff was $144,840 + roughly $5000 in conventional refinance costs my new conventional loan amount was $149,840 (I rolled in the refinance costs).

Other details: normally HML's require 20% down, which in my case would have been $28,400 so the HML took a second lien out on another property I owned with a ton of equity for that amount. Once I refinanced and paid off the HML + HML points he released the lien on the other property.

So at the end of the day I was out $4,260 in HML payments and got a property that was worth $230,000 yet I only owed $149,840 and the monthly cash flow was $1043.

About 2 years later I went back and got a HELOC at 70 LTV (value is now $350,000+) which gave me access to $100k in stagnant equity which I use to acquire other properties.

Hope this all makes sense. Like others have mentioned there are multiple ways to structure BRRR deals though I prefer the cross collateralization so that a rate and term refinance can be done with no seasoning :)

@Jennifer Beadles How is the HML getting paid off doing a rate and term refinance if there's never a cash out? If the 75% LTV refinance is equal to $172,500 and the new loan amount after paying off the HML and rolling in the refinance costs is $149,840 what happens to that $22,660 equity spread? Also how come you didn't roll in the $4,260 of HML payments into the new loan the same way you did with the refinance costs so you would have had $0 into the deal? Lastly in your original message you mentioned putting the equivalent of the HML's down payment in an account they have access to. Could you elaborate on how you are structuring that type of deal with the HML and the benefits in doing so?

@Brian Garrett the HML is paid off just like a normal loan refinance. Cash out is needed only when you as the owner are wanting to get cash back out of the property.

I chose to allow that "excess" equity to stay in the property, I could have waited another 3 months to do a cash out refinance and paid myself the $22k but decided to just go forward with the rate & term instead of switching to a cash out.

The HML payments get paid monthly, so they can't be rolled into a new loan.

Benefits of putting the equivalent to the down payment in an account for the HML is to be able to do the rate & term (or call it regular) refinance instead of a cash out. This allows for 100% financing and you avoid the seasoning requirement (6-12 months) for the cash out refinance.

@Jennifer Beadles I think I follow you now. So the new lender that you do the rate and term refinance with is just paying off the HML directly the same way they would have paid off a bank if they had held the original loan. You're not technically taking "cash out" since that forced equity is still in the property. You're just refinancing out of the expensive hard money and into a better rate and term. Is that correct? If so, then the main benefit is that you save a few months (assuming your rehab takes less than 6 months) on the refinance time? For example if it took 2 months to rehab the property and get the new appraisal you don't have to wait 4 more months to refinance. Am I understanding now?

As far as the HML payments I know they get paid each month. I meant why didn't you just add that amount onto the loan to recoup the cost the same way you did with the refinance costs?

Lastly if I have the down payment cash to put into an account they have access to in the event I defaulted and I wanted a HML to finance 100% is that a typical deal or is that something you worked out due to your relationship with them?

@Brian Garrett you got it! 

There are a few benefits to doing a rate & term refinance over a cash out refinance, one being the seasoning requirement to use the new appraised value and another is the interest rate is usually slightly lower on the rate and term versus the cash out. 

If you did a HML and put 20% down & paid for the renovations out of pocket and you wanted to get all of your money back you would have to wait 6 months (or sometimes 12 depending on lender) to do a cash out refinance and to use the new appraised value.

With the rate and term refinance you can do the refinance right away with no seasoning and your only out of pocket costs would be the HML payments before the refinance.

I use to buy properties at the court house steps that needed very little work, so one property I bought on a Friday with 100% HML doing the cross collateralization, it needed literally no work so I started the refinance immediately (it takes a week to record the new deed) and closed on the refinance in less than 30 days with no money down.

@Jennifer Beadles Makes perfect sense. I'm not sure why that took a minute to click. It's an interesting twist to BRRRR that I hadn't thought of. As far as the HML payments, why couldn't you just add the $4,260 onto the rate and term refinance loan the same way that you did with the refinance costs to recoup the money that you laid out? Then you would ultimately have $0 in the deal. Or can they not do that because the amount would be greater than the original loan which would technically make it a cash out refinance at that point?

Originally posted by @Jennifer Beadles :

@Oskar Beckmann you asked for an example, so here is an example of an actual BRRR deal that I did except I am rounding up.

Duplex purchase price: $130,000

Renovation budget: $12,000

= HML Amount of $142,000

Monthly HML Payments = $1,420 x 3 months (to rehab and refinance) = $4,260

Hard money points get tacked on to the HML and get handled at payoff, so the total HML payoff was $144,840

New appraised value came in at $230,000 which allows for a max LTV of 75% (since its a duplex) which means I could have a new loan amount of $172,500 without bringing any money in to close the refinance.

Since my total HML payoff was $144,840 + roughly $5000 in conventional refinance costs my new conventional loan amount was $149,840 (I rolled in the refinance costs).

Other details: normally HML's require 20% down, which in my case would have been $28,400 so the HML took a second lien out on another property I owned with a ton of equity for that amount. Once I refinanced and paid off the HML + HML points he released the lien on the other property.

So at the end of the day I was out $4,260 in HML payments and got a property that was worth $230,000 yet I only owed $149,840 and the monthly cash flow was $1043.

About 2 years later I went back and got a HELOC at 70 LTV (value is now $350,000+) which gave me access to $100k in stagnant equity which I use to acquire other properties.

Hope this all makes sense. Like others have mentioned there are multiple ways to structure BRRR deals though I prefer the cross collateralization so that a rate and term refinance can be done with no seasoning :)

Jennifer, how did you manage to take a HELOC out on an investment property? I think the only places I've seen that do that are some credit unions, and the ones I've seen particularly required that either you or a family member were involved with the military.

Also, like others have asked about, very curious on utilizing another property in a cross-collateralizing approach for the downpayment.  Two questions with this - would they allow this on your primary residence?  And secondly, do they charge interest on this amount?  Thanks!

@Brian Garrett the HML payments were already made each month, so they couldn't be rolled into the new loan because they were not a refinance cost so I could have switched to a cash out refinance to get that $4200 back but it wouldn't have been worth it. I imagine these days there are HML's out there who would do 100% financing (collateralizing property equity or bank account) and add monthly payments to principal but I haven't seen it.

@Tae C. HELOC's on investment properties has been pretty easy for me, I have three HELOC's on three different investment properties. You have to work with a small, local bank who has a lot of capital. They will allow a 70% LTV on a HELOC.

So for example, lets say you have a duplex worth $350,000. Applying the 70% LTV rule that brings you to $245,000. Lets say you have a first mortgage of $140,000 so you subtract that from $245,000 and are left with $105,000 in available equity as a HELOC. Basically they want to see 30% equity left in the property and they will loan the difference between that and your first mortgage.

Yes, primary residence can be used for cross collateralization. You are technically paying interest on that amount since the HML is 100% of the purchase price instead of the normal 80%.

@Jennifer Beadles

I did a cash-out refi on my rental recently as I could not find a lender that would grant me a HELOC on a rental. I checked multiple local banks and credit unions. At the end of the day, you of course get the higher LTV on a refi at 75% vs. the 70% you mentioned (though with closing costs, maybe a lot closer to that 70% in reality - and without the higher mortgage payment). I do have a HELOC right now on my primary that is helping fund a couple flips currently - I just hadn't heard of many people finding a way to access a HELOC on their rentals.

Ok, makes sense on the 100% financing, therefore paying interest on the collateralized amount as well.  I looked up Rain City's website - I can't seem to find this info on there, do you know if they lend nationally or are they primarily just Washington/Pacific NW?

@Jennifer Beadles Gotcha so with this strategy the only downside I see is that you're always going to have your HML monthly payment money tied up in the deal since there's no way to recoup it with the refinance. So you don't technically get all of your cash back out like you do with a typical BRRRR cash out refinance structure when it's done right.

@Tae C. you are right, the cash out refinance will allow for a higher LTV, though I still prefer the flexibility of the HELOC because I'm not paying interest until I use it and the HELOC interest is simple interest as opposed to amortized in a mortgage which has a higher cost overall.

I'm really surprised that you couldn't find any local banks to do a HELOC on an investment property. I haven't had luck with credit unions either, they tend to be more in the box.

Rain City Capital serves WA, OR, ID and I think California for now. 

@Brian Garrett You're right, it's not 100% zero out of pocket, but when done right the cash flow on the new property should repay your initial investment in a few months so it's still a pretty great deal :) 

@Jennifer Beadles I agree and it's definitely an option that I'm going to keep in mind and consider now!

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