Risks of the BRRRR strategy

It’s all in vogue, and for good reason. I remember implementing my first BRRRR strategy in 2004. I bought a house in Arwada, Colorado with hard money that needed to be repaired and turned over. You will not believe; the flip turned out to be a failure and I got a problem. I was over budget and had to cut my rehab. How long ago. I was no longer sure about the selling price and decided to keep it for rent. It was a nice big house in an attractive area, and I instantly got the rent on the tenant’s property. Now to the problem. This damn hard money loan. Fortunately, this was even when you could still indicate your income, and since I had a good credit history, I was approved. I have kept this house for over 10 years!

I didn’t know much at the time, but I just fell into the BRRRR strategy. I bought a property, renovated it, rented it out, refinanced it, and then repeated the process. I bought this house with no money and received option money and positive cash flow. The term BRRRR hadn’t been coined yet, but I knew I had figured it out.

The entire Pine Financial team talks about this strategy for several reasons. Firstly, we can help with obtaining a loan, but this also works very well. This is one of the best strategies when buying real estate with little or no down payment. Want more information on this strategy? I wrote a FREE report here. (See below)

While this is one of my favorite buying strategies, it comes with risks. There are three risks when using the BRRRR strategy:

  • A different take on value: Apart from all the typical risks of owning a lease, all BRRRR risks boil down to your ability to refinance private money or a hard money loan. The easiest way to get confused is if your refinancing estimate turns out to be underestimated. In my world, we get an estimate on the front of a house with an appraiser’s opinion on how much a property is worth after renovation. Also known as ARV or cost after renovation. The key word here is opinion. It is possible that another evaluator will have a different opinion. This is even more likely if you are only doing minor repairs. It can be very difficult for an appraiser to understand a dramatic increase in value over a short period of time. Major repairs help with this. Although you are renovating property for rental purposes only, you still want to show that you have improved the property to justify its value.

The good news about refinancing appraisal is that you need to let the appraiser into your home. This means that you can meet him or her at the hotel. I highly recommend that you do this and bring along an estimate of your firm loan, lists of repairs performed, and any updated documentation of your value. We have seen fantastic results with these documents, but you must understand that this is always a risk. If the estimate turns out to be understated, you may have to cover the difference out of your pocket or, in the worst case, sell.

  • The original loan was not formalized correctly: I did not see it, but all of our preferred lenders told me it was business as usual. If you are dealing with someone who does not understand this strategy, they may ruin the original loan, making it difficult for you to refinance it. Here are some common mistakes:
    • What It’s Called – The best loan to refinance right now is the Fannie Mae loan. They have fantastic 30 year fixed rates and no title condiment. Title deeds simply means how long you must remain in the property or own the home before you can refinance it. Many banks or lenders have rules for seasoning their title. Fannie Mae – No. However, they have instructions not to lend to the enterprise. This means that they want you to personally own the home. It would be possible to waive the claim on a home from your organization in your own name, but the loan process will be much smoother if you buy a home in your own name. Once your loan has been obtained, it would be a good idea to relinquish ownership of your organization at this stage.
    • Giveaways – I’ve heard of some lenders not holding back money for construction. When the lender does this, you will receive the full loan amount at the close of the deal. If the lender loaned money for the repairs but did not specify it correctly at closing, it will appear that you received the money back and the refinancing lender will not provide the loan. These are interest-bearing and term refinancing loans, meaning they will only refinance the debts that were used to buy real estate. If they repay the loan that was used to put money in your pocket, it will be considered cash refinancing and you will not qualify.
    • Bond – it sounds simple, but the bail that a lender places on a property is a huge undertaking. The biggest problem is that they are actually mortgaging bail. This should appear in the title search and be disclosed in the final disclosure to make it clear that your refinancing loan is being used to pay off the purchase money debt. The collateral must also match the amount of the payment statement and it is best not to modify this loan or increase it in any way after you buy the home. Any of these can create a problem in separating the rate and term of refinancing from refinancing with cash payments.
  • Tight DTI: In 2004 I had a problem with DTI. Debt to income. I was making money, but most of that money was not reflected in my taxes. These could be non-refundable deposits that will be announced later, money from the army to pay for some of my college expenses, or asset depreciation. I also had several neighbors who helped me with my bills. If you looked at my tax returns and mortgage payments, I would not be eligible for a loan. I only qualified because reported income loans were allowed. Since we no longer have the loans we have claimed, we need to be especially careful.

For Pine Financial, we require our client to be pre-approved for refinancing before we loan them money IF they are planning to refinance. This is not a requirement for fins, but we want to help our clients succeed, so we pay attention to this little detail. Once you get your approval, it might be a good idea to do a stress test. What if the rent is $ 100 less per month than you plan? How about $ 200?

I hope I didn’t scare you. This is not the point, but about keeping you safe. If you are not familiar with the BRRRR strategy, it is difficult for you to understand what is behind it. If I gave advice, I would like to study this, but also understand the possible risks. As a hard money lender, we have been involved in several hundred of these specific transactions and will be happy to help you if you need a little hand-holding.

https://www.pinefinancialgroup.com/how-to-buy-cash-flowing-real-estate-with-no-down-payment-no-owner-financing/

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