Refinancing Multifamily With BRRRR
How to Double Your Money in 3 Months
If you listen to the “Bigger Pockets” podcast and regularly seek strategies to make your cash go longer and faster, you would have come across the Buy Rehab Rent Refinance Repeat strategy, also known as BRRRR (I believe Brandon Turner from BP “coined” the name).
I recently purchased a small multifamily building, a Triplex, and applied the BRRRR strategy successfully. After refinancing the property and creating over 100k of new equity, it lead to an After Repair Value (ARV) equal to double the cost of the project.
The BRRRR strategy allows you to deploy capital and get back the exact same amount (or more) within 3-6 months.
By sharing my story of the Green Forest Town Homes complex and how it pays me $700 per month cash flow - after all expenses with no money in the deal – I hope to be able to raise your interest in using this strategy, so that you can benefit from it as much as I do.
Earlier this year, I set myself a goal that 2018 will be the year of growth in regards to my portfolio. In particular, a portfolio of multifamily apartment buildings that generate sufficient passive income.
I’m working with my own capital, so I “recycle” the money and repeat the process, which is the key for keeping the momentum of the velocity of money.
Buying the right property
With applying the BRRRR strategy it is important to buy the right property - a property at a discount and/or a property that has value added opportunity. Finding a deal that lets you combine these two factors would be the ideal situation.
Buying right can be achieved by finding a seller that is motivated and willing to give up equity upside, in exchange for favorable terms. These may be: fast closing, selling As-is, allowing the seller to provide seller financing, having a longer closing to allow the seller or their relatives longer time to move out.
How the BRRRR works
Lets say you have found the right seller and the right property. What comes next? How can you make the BRRRR strategy work?
In my case, what made this strategy successful was the fact I secured the property through a direct mail marketing campaign; my letter reached the seller exactly at the right time. The seller was a tired landlord that owned the property for nearly 30 years. He didn’t have any loan on the property and decided to vacate all units so he can renovate the units himself. A year and half had gone by, the units were still vacant and the seller just started pealing wallpapers.
Simply said, the renovations were not progressing.
We managed to purchase the property for $55,000; it required $35,000 worth of renovations and earnest money for the Cash closing.
The same principles could be applied whether you close in Cash, Home Equity Line Of Credit (HELOC) or use a local bank, private lender or hard money loans.
The scope of work included:
- -New roof
- -Front doors
- -Fencing throughout property boundary
- -Landscaping and street appeal
- -Rebranding with signs and mailboxes
- -Paint throughout the whole property
- -Vinyl floor planks
- -New carpet in the bedrooms
- -Light fittings and celling fans
- -Refinish cabinet and granite counter top
- -Back splash
- -New faucets (brushed nickel)
- -Door knobs (brushed nickel)
- -Bath hardware (brushed nickel)
- -Light switches, outlet cover, face plate
The grand total was $91,000($55k purchase price + $35k rehab + 1k closing).
How to recycle the money?
The answer is EQUITY!
If you are “BRRRRing” 2-4 units (or more) multifamily apartments buildings, you preferably want at least 30% “manufactured” equity on top of the project costs. For single-family houses 25% equity would be ideal.
The reason for this is becausewith doing a refinance, most lenders will lend up to 70% of the After Repaired Value (ARV) on small Multifamily buildings if you refinance within 6 month from time of purchase, or up to 80% if you refinance past the 6-month time-frame. This waiting time frame is called “seasoning”.
Note: There are a few posts on BP that claim to have a way around the seasoning using LLC’s. This is out of the scope of this article.
Refinancing with a conventional loan
I chose to refinance because conventional loans can offer 30 years amortization and 30 years fixed with low interest rates.
There is a loan product called “Delayed Refinance”, which allows the borrower to first close on the property with cash (or any other founding source mentioned above), renovate the property to add value, and refinance once the property increased in value.
Once the property is renovated and is “appraisal ready”, the refinancing lender will be using an appraisal to determine the After Repair Value, and would lend up to 70% of the ARV or the project total Cost, whichever is lower.
The refinance loan application can take up to 45 days to process, so it is advantageous to start the process as soon as possible.
Documenting all the costs in a settlement statement when you first purchase the property, and depositing the costs into the closing agent escrow account at the same time is the key for using the BRRRR strategy. The total rehab cost will be sitting in the escrow account while you progress with the project.
My settlement statement on the purchase looked like the following:
- -$55k Purchase price
- -$10k Roof
- -$2k Fencing
- -$23k To Rehab team
- -$1000 closing cost
- -$91,000 deposited to the escrow account to cover the cash closing
Manufacturing the equity
Once we closed on the property my team started the renovation. Each time a section of the work was completed, I asked the closing agent to write a check for a certain aspect of the property, e.g. the roof.
As soon as the work was finished we let the lender know that the property was ready for an appraisal. We received one at $199,000 a week later.
Great results! Over $108k manufactured equity in about 3 months and on top of that I was able to cover all the cost of $91k, because it was well below 70% loan to value. (Remember, whichever is lower!)
If I would have waited for Seasoning passed the 6 months time-frame, I could have increased the refinance to 75% of the $199k ARV and pull out $149,250, which is $58,250 extra Tax free cash. In this case, though, I decided to leave that equity untapped for now and only focus on maximizing the cash flow.
Long story short, this is how you can increase the velocity of money by utilizing the BRRRR strategy of Buy Rehab Rent Refinance Repeat and grow your portfolio.