The BRRRR strategy when you already start with a 30 year fixed?

Question

Quick question about the BRRRR strategy.  I understand the strategy when you have a higher interest hard money loan and you want to refi into a 30 year fixed lower rate but can someone explain how it can work when you have a 30 year fixed from the start?

Specifically I bought a property for 200k and got a 30 year fixed, I'll put about 60k into it, and next year I think it'll appraise for 300k.

Can someone walk me through the numbers of how can I use the BRRRR strategy for this?

thanks!

Brent Coombs · Answer

@Nicholas Lohr, in future, you NEED to ensure that each BRRRR deal has you gaining at least an extra 40% equity/appraisal on top of your cost (including borrowings). Simple.

13% extra, as in this case, just won't cut it as a sustainable strategy. Cheers...

Brent Coombs · Answer

@David Faulkner, it's a mistake to think you only need your investment to appraise at $125k for every $100k of you cost. Why? Because when you come to cash out 75% of that $125k, they'll only lend out a total of $93,750, so how can you proceed to buy ANOTHER $100k one? See?

Even worse, when your Lender only lends out 70% for investments! In that case, even a $140k appraisal for every $100k cost will leave you a couple of $k short! Cheers...

David Faulkner · Answer

Great point. I'd of said at least 25% (the equity needed on most investment property loans), but if you can pull off 40%, all the better ... Why is this important? If you can't get all your capital out with the second to last "R"(Refi), then the last "R" (Repeat) will be much harder because you'll constantly be needing more money to put into (and leave in) your deals. For the type of distressed properties that will support these numbers, you typically can NOT do the first "B" (Buy) with a 30 year fixed loan, which is why most start with cash or hard money.

Chris Mason · Answer

Hi @Nicholas Lohr,

If it's temporary financing that you plan to get out of, and not permanent financing, there's really no reason for it to have ever been 30 year fixed in the event that you could have gotten a lower rate in exchange for shared risk (what an ARM is).

If it was private money and that wasn't an option, so be it.

In the event that you do not have a time machine, view it as water under the bridge and move forward with what makes sense marginally. If you don't need access to the additional capital and are happy with your rate, great keep the financing you have in place. If you do, focus on that and not the face that you'd have been better off doing an ARM.

Also, FWIW, when you do an ARM that you're going to be out of relatively soon, don't go for the lowest rate. Go for the highest lender credit. Break even calculation almost always works out in your favor in such cases.

Nicholas Lohr · Answer

Chris Mason  It was a 30 year fixed to begin with.  My main goal is to get the 50k down payment out to use for something else.

Nicholas Lohr · Answer

@Jacob Asher Thanks for writing back. Yeah makes sense you'd need the rest of the numbers...

Current Interest rate is 4.875%

Current loan is 150,000

I put 50,000 down.

This just happened 2 months ago.

I paid 3000 in closing costs.

Vacancy rate is 3%.

I'm putting in new appliances with the 60000

Chris Mason · Answer

If it's something that may or may not happen and/or it will happen but not for another year, HELOC makes the most since so that you aren't paying interest on money you aren't putting to work right away. Nothing dumber than doing a cash out refinance and then watching that $50k sit in a savings account for eight months earning 0.02%, while you are paying >3% on it, ergo you do a HELOC if it may or may not happen and/or if it may be a year until you need it. I'll be perfectly honest, I'm not the best person to talk to about this because my firm's stand-alone HELOC products suck and I don't feel that my management even wants to be competitive in this arena.

If it's going to be a definite thing you need the money for relatively soon (ballpark less than 12 months), cash out refinance into a new fixed rate mortgage makes the most sense. We can discuss numbers if you wish. If you want to avoid being reset to year 1 of 30, there are 25, 20, and 15 year fixed mortgages that most people don't really think about.

Jacob Asher · Answer

I want to see if I got your numbers right.

Purchase for 200k 30 year fixed.

An ARV of 300k with 60k of repairs.

What I don't know is your interest rate or your equity(down payment). What other expenses did you have like closing costs titles. How does your PITI break down? How old are the appliances and how much should you put away to replace them in 1 3 5 or 10 years? What are comps going for last week/month/year?

So that's your B&R.

What are your expected acceptable Rent?

What's the vacancy Rate?

Refi after seasoned.

Repeat.

The BRRRR strategy when you already start with a 30 year fixed?

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