Help understanding the BRRRR method; sample analysis

23 Replies

I am a new investor looking for my first deal and came across this duplex that I thought might work great with the BRRRR method, but could use some input on my analysis. I also want to make sure I'm understanding the method correctly.

Property is a duplex with a 4 bed/2 bath unit & 3 bed/2 bath unit in a B- neighborhood in the Inland Empire

Proposed Purchase price: $315k

Rehab costs: 40K

Predicted ARV: 425k (currently a similar unit on the same street with fewer bedrooms selling for 430k)

I have analyzed the deal completely using the BRRRR calculator, but have some questions after doing that:

1) What are holding costs . . . the mortgage before I rent it, or is there more? 

2) How exactly do I get my money back out? Don't I still need a down payment if I go with the traditional financing for the refinance? 

3) With the scenario above, I was planning to borrow 125k (private money) for the down payment (initial purchase), closing costs, holding costs, and rehab costs. Then if I refinance in 12-18 months at 425k at 70% LTV that would be 297,500. Does this mean I can pull the difference between 425k and 297,500 out as cash? (That would be $127,500) I'm confused how to calculate the amount of cash I "get back" in the deal.

4) Lastly, if the amount I can pull out is 127,500 that's barely enough to pay back my private money investor with interest, but I would have an income producing property at roughly $250 per door. Is that worth it? 

Thank you in advance for you input. I appreciate it! 

Laura

$315,000 Purchase Price

$125,000 Financed (Private Money)...assuming you find someone to lend with 0 down on your end

$190,000 Financed (Bank or other lender)...assuming you find a bank/lender willing to finance given the above

Refinance:

425,000 * .70 = $297,5000

$297,500 - $190,000 (loan) = $107,500 cash left over

This cash would be used to payoff the private money but you do not have enough to fully pay

I think I have that right lol

If so...this is a very tricky deal

Holding costs in addition to the mortgages would be property tax, insurance, Utilities. Then, may not apply to this place but HOA fees and any yard maintenance. Insurance is more expensive than a homeowners policy because its for a vacant property under construction.

So just to recap. You are using private money for the down payment and holding/closing costs. Keep in mind thats going to be an issue when you try to get a loan to purchase. If you haven't had the money in your bank for more than 2 months, then they're going to ask you where it came from (lender will require 2 mos of bank statements). And they're going to tell you that you can't use borrowed money for the down payment.

Now if you stick it in your bank for over 2 months that would help solve that issue. But I believe they might ask you on the loan app or the loan docs whether any of the money used for the down payment is borrowed. If you answer no, you're lying and that would be a problem as well.

So thats going to be the biggest hurdle for you to overcome.

Lets say you find a local bank that will allow it though. Maybe they'll do 75% of the purchase price (236k loan). You would then need to use 79k for the rest of the purchase plus 40k for the rehab (119k) and the rest for holding.

So now you have 236k loan and a 125k private money loan for a total of 361k in loans on a property worth 425k.

Here is what you could then do: Do a cash out refi for 80% of the ARV (425k) which comes to 340k. That allows you to pay off the first mortgage of 236k but only allows you to pay off 104k of the private money loan which leaves you a balance of 21k still owed.

Now what you could do is turnaround and get a heloc on the property for another 10% (42,500) and pay off the remaining balance of the private mortgage and pocket the rest of the cash.

So now your two initial loans are paid off. You will have pocketed 21k. And you will now owe 340k on a first mortgage and 42,500 on a second.

The questions that scenario raise:
1) Does the property cash flow with those two loans?
2) Will your private money lender allow you to pay off a partial amount of the loan with the initial refi and then the rest after you get a heloc?

3) Can you find an initial lender that will let you use borrowed money for the down payment?

The plus side of that is that you would get a 425k property and end up pocketing 21k in cash to boot.

Those initial BRRR properties can really set you up for investing if you use them right. Max out the most amount of money you can while its owner occupied since owner occupied can get up to 90% LTV on heloc's with some banks (you have to shop around to find the banks that go that high but I recently got 100% LTV on my primary).

Originally posted by @Mike H. :

So just to recap. You are using private money for the down payment and holding/closing costs. Keep in mind thats going to be an issue when you try to get a loan to purchase. If you haven't had the money in your bank for more than 2 months, then they're going to ask you where it came from (lender will require 2 mos of bank statements). And they're going to tell you that you can't use borrowed money for the down payment.

Now if you stick it in your bank for over 2 months that would help solve that issue. But I believe they might ask you on the loan app or the loan docs whether any of the money used for the down payment is borrowed. If you answer no, you're lying and that would be a problem as well.

So thats going to be the biggest hurdle for you to overcome.

Lets say you find a local bank that will allow it though. Maybe they'll do 75% of the purchase price (236k loan). You would then need to use 79k for the rest of the purchase plus 40k for the rehab (119k) and the rest for holding.

So now you have 236k loan and a 125k private money loan for a total of 361k in loans on a property worth 425k.

Here is what you could then do: Do a cash out refi for 80% of the ARV (425k) which comes to 340k. That allows you to pay off the first mortgage of 236k but only allows you to pay off 104k of the private money loan which leaves you a balance of 21k still owed.

Now what you could do is turnaround and get a heloc on the property for another 10% (42,500) and pay off the remaining balance of the private mortgage and pocket the rest of the cash.

So now your two initial loans are paid off. You will have pocketed 21k. And you will now owe 340k on a first mortgage and 42,500 on a second.

The questions that scenario raise:
1) Does the property cash flow with those two loans?
2) Will your private money lender allow you to pay off a partial amount of the loan with the initial refi and then the rest after you get a heloc?

3) Can you find an initial lender that will let you use borrowed money for the down payment?

The plus side of that is that you would get a 425k property and end up pocketing 21k in cash to boot.

Those initial BRRR properties can really set you up for investing if you use them right. Max out the most amount of money you can while its owner occupied since owner occupied can get up to 90% LTV on heloc's with some banks (you have to shop around to find the banks that go that high but I recently got 100% LTV on my primary).

 Which bank gave you 90 or 100%? 

@James Canoy

Huntington national bank.  Their banks are ugliest lime green you've ever seen in your life. But their heloc's on primary residences are fantastic. 

I got that from a referral from @Scott W.

The first time I contacted his banker, I got crickets. Tried emails and vmails. Nothing. I thought she quit. Decided to try someone else and sure enough got routed back to his contact again. She was quite the talker. My closing took 3 hours - I kid you not. But for 100% of LTV, it was well worth it. Cheapest money I'm going to get.

I was actually told they could do another one on one of my investment properties. Actually I was told they could do 3 more on my investment properties but that they were limited to 80% because they were investment. I was all excited. 80% heloc's on investment? 

And of course, they couldn't. Too many restrictions because of the number of properties I owned. Wasn't the first time that happened where they thought they could and then figured out they had some guideline in there that they couldn't.

But I did close on the 100% heloc on my primary. :-)

So even though I wasted a lot more time talking with them on their other stuff, I was still pretty happy at the end of the day.

Keep in mind though, I once spent about 4 months pushing through an investment property loan with polish slavic credit union. They did 80% LTV cash out refi at 3.5% amortized over 30. I have never seen more paperwork needed in my life. Had to become a member of the credit union which required me to sign up for some other polish organization as well. But for that kind of loan, I'll hop on one foot for a week while trying to balance a plate of oranges on my head. :-)

@Mike H. yeah, they are great. I went 90% on the primary (of course, mike got 100%, go figure!) and got 80% on 1 of my rentals. I only have 3 rentals and they are all in my name. got $44k for the rental heloc at like 6.5%. I haven't tapped into it yet though.

get loans when you can't not when you can't. :) 

Howdy @Laura C.

Your numbers are a little confusing.

Is $315K the Purchase Price or List Price? I start "ALL" BRRRR deals with the projected ARV. Then work backwards.

ARV $425K * 70% = $297.5K All-in Cost Basis (Purchase price, Rehab cost, Holding and Closing costs)

$297.5K minus $40K Rehab costs = $257.5K - minus Holding costs - minus Closing costs (2 closings) = MAO (Maximum Allowable Offer) or Purchase Price

Here are my answers to your questions:

(1)  Holding costs include loan payments, insurance, utility costs (and any other expense) before the property is 100% occupied.  Once you start collecting rent will it cover the loan payments?  Most Private or Hard money loan payments are interest only with the balance due at a future date (6 to 12 months, maybe longer).

(2) To get all your money back out you need to keep all your costs within the 70% of ARV. However, it does not appear you have any cash in this deal. A refinance loan does not require a down payment. You are required to keep 20% - 30% equity in the property depending on what the LTV is In your example 70% requires 30% equity. This acts the same as a down payment.

(3) This is another confusing part.  If you borrow 125k (private money) for the down payment, then, where  is the remaining $190K coming from?  Or is that covering everything?  purchase, closing costs, holding costs, and rehab costs?  You are correct that If you refinance in 12-18 months at 425k at 70% LTV that would be $297,500. It does not mean you can pull the difference between 425k and 297,500 out as cash.  It means you get $297.5K to payoff any existing loans leaving you what ever (if any) is left as cash.  If the Purchase price is $315K, then, this will be a problem.

4) You need to clarify this deal and  the information on the private lender.  What are the private lender terms and interest rate?  What is the Purchase Price?   You have not provided any information to analyze the cash flow.  If it does produce $250 per door. It's definitely worth it.   However, I would need to see your numbers before saying it's a good deal.   Need a lot more information.

I agree with everything @John Leavelle mentioned above he's spot on and provided great information.

@Steve DellaPelle

Thank you for your input! That is what I am thinking too . . . a tricky deal. Plus, how do I calculate the money I can pull out after the refi to pay back my initial 125k (borrowed from a family member). 

@Derek Kirkwood  

Thank you for the response and input! How much do you usually figure for insurance during the rehab? 

@Mike H.

Thank you so much for your response and including these various scenarios; they are very helpful! 

When you discuss the cash out refi scenario am I understanding correctly that the refinance is first used to pay off the 1st mortgage and then the remaining amount, in this case the 104k (340k-236k=104k), is the cash I can pull out of the project? Is that the case with all BRRRR projects?

And for the questions you raised:

1) I am not so sure the property will cash flow with the 2 loans, which equal 382,500, if it does it will be significantly lower. 

2) I think the private money lender would be okay with 2 pay off payments as it is a family member.

3) Not sure about the lender either, I have some things to look into . . . thank you for bringing these to my attention. One more question, do you typically call around to lenders before offering on a house to find out if they will refi? How can they tell you before you purchase or know the property whether it will work or not, or is it mostly a policy issue? 

Thank again!

Laura

@John Leavelle and @Brian Garrett Thank you for your responses and helpful feedback! 

The 315k was what I was calculating as the purchase price, it's listed at 380k. Your equation is very helpful, but a bit discouraging too . . . in order to make this work according to the formula I would have to get the property at 1/2 of the list price, which seems unlikely, is this normal? 

I am still a little confused on point number 2 (and 3). If I keep all of my costs below the 70% of ARV, what money am I able to take out at time of refinancing? The 70% or the 30% of equity? Also, concerning point number 3, my intent was to purchase using a conventional loan as I do not have the cash to buy outright, by borrowing the money from a family member for the down payment, I thought I might still be able to deploy the BRRRR strategy. Is that incorrect? I guess regardless of how that portion works, if the money left after paying the first mortgage is less than what I owe the private lender, as you mentioned, it doesn't work.

I will attach the PDF of the analysis I did using the numbers discussed in my post. I used the BP BRRRR calculator. My gut feeling is that this may be a great deal if I had been using the BRRRR method for several "easier" and/or lower cost projects, but since it would be my first, it may be biting off more than I can chew. I look forward to hearing more once you see some more of the details (if you are willing, of course), and will continue analyzing deals in the meantime.

Again, many thanks for your time, expertise, and feedback. I appreciate it! 

Laura

@Laura C. , while Mike and James are having fun finding Lenders who'll lend out 80% LTV on Investments, and 90-100% on their Primaries, I hope they, and you, realise how much risk they're taking by borrowing to such high percentages. I recommend you stick with a maximum of 70% LTV as suggested by John, using his "work backwards" method.

I also suggest: after any Refinance, aim for having only one loan, per property! All the best...

[Edit: I hadn't seen your pie chart post before posting. Yes, it's hard to find Sellers who'll let their properties go for a price that'll then allow you to be all-in at no more than 70% ARV. But, who suggested it's supposed to be easy? And, as has been mentioned several times, conventional Lenders do not want your deposit to be also borrowed (using the same property as the deposit Lenders' security). Even placing their funds into your account for 2 months+, is acting weaselly].

@Brent Coombs Thanks for the insight! I'm naturally risk-adverse, so I don't think I'd be trying anything like that with my first deal or two, and I will keep that in mind as my business grows too. 

so 1st thing, @John Leavelle , is a pretty smart guy so listen to what he says. 

To help you understand BRRRR hopefully a little better, the "cash out" refi portion is only giving you cash to pay off existing debt (the purchasing debt in this case) and if there's any left over you're allowed to take it as cash. Sometimes people can get good enough numbers to do a Cash out refi for everything they put into the house+the original mortgage+a little extra, but not always, it's actually pretty difficult because every dollar you pull out is more that goes into the refi mortgage payments so it eats into the property cash flow.

The 2nd part is you will probably need to find a place with more upside potential than offering 380k when it's valued at 425k if it needs 40k in work. You need value add, that's why you'd need almost 1/2 price like you said. A deal I'm working on here for example is asking 125k, comps for ARV are ~210k, and it needs a good bit of work, probably 25-30k, so I'm offering 100k (210k*70%-30k=117k-5k closing-~3k holding=109k, then find a round # to start my offer at). This is why finding the right deal is probably the most important part of doing a BRRRR.

Finally, if you're going for bank financing on the front end (the purchase) and the back end (the refi) I would call around to banks, mortgage brokers, and credit unions and ask about their terms and policies. They probably can't quote you an exact % but they'll tell you if they work with investors, their LTV% on Cash outs, if they'll do a Cash out for the appraisal price or only off of the last purchase price (that's a deal breaker), seasoning required (6,12,18+ months) average APR currently for NOO loans, min credit scores etc...I was able to find a bank that is willing to do both parts, front and back end, for 20% down on the purchase, 75% LTV on the refi, 6 month seasoning period, and refi off the latest appraised value. basically everything I wanted except I can't do it in my LLC.

Good luck! And who knows, if he's desperate enough to sell the property maybe he'll go for 1/2 off. 

@Laura C.

1) Refi payoffs. here is where you're going to run into some issues. Is your private money lender going to record a lien on the property? Or are they just doing a private promissory note with you personally?

If they record a second mortgage, then when you go to refi, you are going to need to pay off both the first and second mortgage in full to do your refi - OR you will need to get the second lien holder to subrogate their mortgage so that your new lender can jump in front of them.

2) Ultimately, though, if the house won't cash flow with the two loans, then you have to decide if it makes sense to still do. At some point, you need to figure out where our comfort zone is in terms of how much money you need to put into the deal so that it cash flows enough for you to be comfortable.

3) In terms of refi, you probably want to check with a couple of banks to make sure they'll do the refi before you close. Otherwise, you'll be stuck.   They should be able to prequalify you based on your income, debt, and the mortgage payment for the new house.

I would, honestly, be hesitant to purchase a 300k+ property for a buy and hold deal. When you start to get up into that price range, it makes it really hard to cash flow. Every area is different. But in my area, the 130k to 180k price range seems to be the sweet spot. The stuff will still appreciate but it will also cash flow.

Originally posted by @Mike H. :

So just to recap. You are using private money for the down payment and holding/closing costs. Keep in mind thats going to be an issue when you try to get a loan to purchase. If you haven't had the money in your bank for more than 2 months, then they're going to ask you where it came from (lender will require 2 mos of bank statements). And they're going to tell you that you can't use borrowed money for the down payment.

Now if you stick it in your bank for over 2 months that would help solve that issue. But I believe they might ask you on the loan app or the loan docs whether any of the money used for the down payment is borrowed. If you answer no, you're lying and that would be a problem as well.

So thats going to be the biggest hurdle for you to overcome.

Lets say you find a local bank that will allow it though. Maybe they'll do 75% of the purchase price (236k loan). You would then need to use 79k for the rest of the purchase plus 40k for the rehab (119k) and the rest for holding.

So now you have 236k loan and a 125k private money loan for a total of 361k in loans on a property worth 425k.

Here is what you could then do: Do a cash out refi for 80% of the ARV (425k) which comes to 340k. That allows you to pay off the first mortgage of 236k but only allows you to pay off 104k of the private money loan which leaves you a balance of 21k still owed.

Now what you could do is turnaround and get a heloc on the property for another 10% (42,500) and pay off the remaining balance of the private mortgage and pocket the rest of the cash.

So now your two initial loans are paid off. You will have pocketed 21k. And you will now owe 340k on a first mortgage and 42,500 on a second.

The questions that scenario raise:
1) Does the property cash flow with those two loans?
2) Will your private money lender allow you to pay off a partial amount of the loan with the initial refi and then the rest after you get a heloc?

3) Can you find an initial lender that will let you use borrowed money for the down payment?

The plus side of that is that you would get a 425k property and end up pocketing 21k in cash to boot.

Those initial BRRR properties can really set you up for investing if you use them right. Max out the most amount of money you can while its owner occupied since owner occupied can get up to 90% LTV on heloc's with some banks (you have to shop around to find the banks that go that high but I recently got 100% LTV on my primary).

 Thank you for posting this. 

There are so many gems and nuggets in this post. Even if it does not work for what she is trying to do, it still gives insight on how someone can structure a deal. My biggest problem (fear) has been trying to structure a deal to where it makes sense for everyone to do the deal, and also get any borrowers money back to them. 

281-901-0954

@Laura C.

Please do not be discouraged.  Keep asking questions and analyzing properties until things become crystal clear.  You will get there.

The best properties to use the BRRRR strategy are almost always distressed in some form or fashion. Financing the acquisition of these type properties are typically by cash, Hard Money Lenders, or Private Money Lenders (or a combination). Conventional Lenders tend to stay away from these. So if the property you are looking at is in good livable condition that a conventional lender will finance it probably is not a good BRRRR deal. You ask is it normal to purchase these type properties at less than List price. For me the answer is yes because of the condition of the property. I do not pay attention to List price. I focus on the ARV or Market Value when it is in like new condition. I base my ARV on recently sold comps. Believe me ... I get a lot of rejected offers (as do most investors doing this).

Thank you for posting your Analysis. It helps to understand your numbers. Let me explain the 70% rule. BRRRR is very similar to doing a Flip. When working your numbers you want your costs to not exceed 70% of the eventual Selling Price or ARV. The difference between the two strategies is with the BRRRR you are Refinancing and holding the property as a rental. The Refinance Lender will provide a loan amount that is 70% - 80% LTV based on a current appraisal. Typically it will be 75% LTV for investment properties. Hopefully the bank appraisal and your ARV will be the same. So for a property that is appraised for $100,000 you will get $70K to $80K. assume $75K. This $75K is used to pay off the original acqusition loan. Anything remaining from the $75K will be provided to you as cash. I said I use 70% (to remain conservative) of ARV for my All-in Cost Basis. In this example that's $70K. Here's how my numbers might look:

ARV $100,000

All-in $70,000

Rehab $25,000

Holding $3,000

Closing $5,000

Purchase $37,000

As you can see the Purchase Price is probably 1/2 what the list price may have been. This is close to one I did where list was $63,000. I got a loan that was 75% LTV or $75,000. So my initial analysis allows a 5% buffer in case my Rehab goes over budget or the appraisal comes in less than expected. I could take out as the additional $5,000 as cash profit. But, you have to consider what effect it will have on the Cash Flow. I only took out the 70%. The remaining 30% of the appraised Value will stay in the property as equity. For your property it would be 30%.

If you have no cash to contribute to the deal it would be difficult to get a conventional or even a Hard Money Loan.  The Private Money Lender would need to pay 100% of the Acquisition/Rehab costs.  Just so you know.  I have yet to purchase a property for more than $75,000.  Most are in the $30K to $50K range.  I use a Private Lender to Purchase the properties and I pay for the Rehab, Holding, and Closing costs.  So need to rethink your financing strategy.

You completed the BP calculator correctly.  However, you should be more conservative with your expenses.  We can discuss that later.

@Donald S.

Thank you for your input! I appreciate your explanation of the process, and the tips and examples you shared are very helpful! I will call around to some banks before I get started and start looking for other deals that follow the formula you and John mentioned. Thanks!

@Mike H. 

Thank you again for your feedback, you've definitely given me some things to think about. The private money lender would have a promissory note, but not a lien on the property. I do see the complicatedness of this deal though if there are 2 loans or mortgages. I agree, part of this process is finding my comfort zone and analyzing deals like this and getting input have helped me understand that a lot better! 

300k is pretty average around here, and as you said makes cash flow challenging . . . which is unfortunate, right now. Most of the properties I've seen that are fixers, and under market almost all require an all cash offer. I will get there soon enough, just looking at all my options to get started so I can move that direction. Are the properties in your area for 130-180k multi-family or single-family? 

@John Leavelle

Thank you for the encouragement and further explaining the process! This makes a lot more sense, and as you mentioned, I need to rethink my financing strategy. I will do that as I continue to look at more deals! One thing I was thinking when I was calculating my expenses with the BP calculator was that since everything in the property would be new, my expenses might be a little lower and therefore, the first year or two I could go with a slightly lower expenses percentage, has that not been your experience? 

@Laura C.

My first question is where did you come up with the expenses you list?  Are they what the seller is providing?  I like being conservative in all my numbers.  That helps me stay out of financial trouble.  In the BP Calculator you see Cash Flow based on the 50% Rule.  I would stick with that until you get verifiable expense data.  I actually use 55% in my initial analysis.  Once I decide to move forward with the property I dig in to find more realistic numbers.

During the Due Diligence process I have the property inspected to verify my (and my GC) original Rehab needs. I want to know the current condition and life expectancy of all major components and appliances. This way I determine what needs repair/replacing now and what can be deferred. I develop a more accurate CapEx reserves requirement from that.

Expenses that will be affected after the Rehab may be Maintenance and possibly utilities (because of improved insulation and energy efficiency). CapEx items will have a longer timeline, so I drop it from 10% down to the actual number I derived.

Vacancy can be improved because of the new condition of the property.  However, there are other variables that can influence it as well.  Because of these other variables I keep my Vacancy reserve at 8.34% (one month).  If I have no vacancies then that is more money in my pocket.

Insurance should not be affected.

PM should remain at 10% no matter the condition of the property.

Taxes will probably go up after a new assessment is done.

The only amount I expect to go done is the CapEx reserves number. 8% for PM may be low. It depends on the service you have (or if you are self managing). Make sure you get the right tax information. Get a quote from an insurance agent.

Your Mortgage amount for the Refinance loan ($302,500) is too high considering what we previously discussed. With a loan of $297,500 the P&I payment will be $1,420. Using the 50% rule (assuming income id $1,600 per unit/$3,200 per month) your Cash Flow is @$180 per month ($90 per unit). This is very acceptable for a BRRRR deal. If you end up with closer to your numbers then that is great for you. However, I would plan with the more conservative Cash Flow.

@John Leavelle  

Great information and break down! Thank you again for taking the time to share your expertise and go into detail on how you calculate things. I based my calculations on a percentage rather than a dollar amount, and (I thought) I was using some numbers I'd seen in one of the BP analysis videos on YouTube. I could have been wrong with that though. I'll double check. 

Thanks again for the input!

Laura

Join the Largest Real Estate Investing Community

Basic membership is free, forever.