real estate strategy risks
All the rage, and for good reason. I remember doing my first BRRRR strategy in 2004. I bought a house in Arvada, Colorado with hard money to fix and modify. You won't believe it. Flipping was a flop and I ended up in trouble. I went over budget and had to cut back on the rehabilitation period. Like way back. I no longer believed in the sale price and decided to keep it for rent. It was a nice big house in a desirable area and I had a renter in no time. Now to the problem. This is a fucking hard money loan. Fortunately, this was when I was still able to determine his income, and since I have good credit, I was approved. I kept this house for over 10 years!
I knew very little at the time, but fell in love with the BRRRR strategy. I bought property, returned it, rented it, refinanced it, and then repeated the process. I bought this house with no cash and received option money and positive cash flow. The term BRRRR had yet to be coined, but he knew he was about to do something.
The entire Pine Financial team talks about this strategy for a number of reasons. First, we can help with the loan to do this, but it also works very well. This is one of the best strategies when trying to buy a property with little or no down payment. Want more information about this strategy? I wrote a free report here. (see below)
Although this is one of my favorite buying strategies, it is not without risks. Here are three risks when using the BRRRR strategy:
A different view of value: Far from all the typical risks of owning a rental, BRRRR's risks are limited to your ability to refinance your own money or a hard money loan. The easiest way to stumble upon it is if your refinancing score is low. In my world we get a forward appraisal with the appraiser's opinion of the value of the property after repairs. Also known as ARV or postoperative value. The key word here is opinion. It is entirely possible that another appraiser will have a different opinion. This is more likely to happen if you are only doing simple repairs. It can be very difficult for an appraiser to understand a massive increase in value in a short period of time. Major fixes help with this. Although you are only rehab for rent,
The good news about appraisal when refinancing is that you must let the appraiser into the home. This means that you can meet him at the place of residence. I recommend doing this and bringing your hard financial loan assessment, lists of repairs that were made, and any recent companies that support their value with you. With this documentation we have seen great results, but you must understand that this is always a risk. If the rating is low, you may need to cover the difference out of pocket or, at worst, sell.
Incorrectly Executed Initial Loan: I haven't seen this, but all of our favorite lenders have told me this is common. If you are dealing with someone who does not understand this strategy, it may spoil the initial loan and make it difficult to refinance. Some of the common errors are:
So called: The best refinancing loan right now is the Fannie Mae loan. They have great fixed prices for 30 years and they don't have any private addresses. An increase in the value of the property just means how long you must remain on the title deed of the home or property before you can refinance it. Many banks or lenders have guidelines for property fumigation. Fannie Mae doesn't do that. However, what they do have is a guideline not to lend to an entity. This means that they want you to be the homeowner in person. It may be possible to cancel your entity title deed in your name, but the loan process is much easier if you buy in your own name. Once your loan becomes effective, it may be a good idea to cancel the claim to ownership of your entity at that time.
Retirement - I heard about some lenders who don't have construction money. When the lender does this, they will receive the full loan amount at closing. If the lender loaned money for repairs but didn't list it correctly at closing, it looks like you've received cash and the refinancing lender won't make the loan. These are interest rate loans and term refinancing loans, which means they will only refinance the debt that was used to purchase the property. If they cancel a loan that was used to put cash in your pocket, it will be considered a cash refinancing and you will not be eligible.
Lien - This sounds simple, but the lien that the lender places on the title is very problematic. The biggest problem is that they established the franchise. This should appear in the title search and be disclosed on the closing statement, showing that your refinancing loan is being used to pay off purchase financial debts. The mortgage should also match the amount on the settlement statement, and it's best not to modify or increase this loan in any way after the home is purchased. Either of these two things can create a problem separating the refinancing rate and term from cash refinancing.
DTI Narrow: In 2004 I had a problem with DTI. debt to income. I was making money, but a lot of that money wasn't showing up in my taxes. These could be non-refundable deposits to be reported later, money from the military to pay some of my expenses while I was in college, or amortization or depreciation of assets. I also had some roommates who helped me with my bills. If you look at my tax returns and mortgage payments, I will not qualify for the loan. I only qualified because the stated income loans are allowed. Since we no longer offer loans, we have to be very careful here.
For Pine Financial, we require our clients to obtain pre-approval for refinancing before lending them money if they plan to refinance. This is not a requirement for fins, but we want to help our customers succeed, which is why we pay attention to these little details. After approval, it would be a good idea to test this out. What if the rent is $100 less per month than you expect? How about 200 dollars?
I hope I'm not afraid of you. This is not the goal, it is to keep you safe. If you haven't tried the BRRRR strategy, it's hard to understand the power behind it. If I had to give advice, it would be to explore this, but also to understand the risks involved. As a solid money lender, we have been involved in several hundred of these specific transactions and are happy to help guide you if you need a little help.
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