Many investors have fast-tracked their real estate business with the BRRRR real estate strategy. BRRRR stands for buy, rehab, rent, refinance, repeat, and it is a great way for investors to earn passive income. It’s a method by which real estate investors buy distressed properties, but the difference is the intention to keep them as rental properties instead of selling them.

In BRRRR real estate investing, the property is treated like a fix-and-flip, using short-term financing such as private money, hard money, a home equity loan, or cash to acquire and rehab. Then, after the property has been finished, it is rented out to a tenant instead of sold. The owner then obtains a refinance on the property to pay off the short-term loan and turn the property into a stable, long-term, cash-flow-positive property that continues to build equity. And then, the investor does the whole process over again with a new property.

In a nutshell, this is how it works.

  1. The investor looks for and purchases a distressed property with potential.
  2. The investor fixes up the property, building its equity.
  3. The investor finds a tenant for the property.
  4. The investor secures a loan to cover the purchase price and rehab cost.
  5. The investor finds another property and builds wealth.

Of course, as with all investments, the math has to work for the strategy to work, and there are many BRRRR pros and cons to consider. When a person goes to refinance such a property, a bank will typically only refinance up to 75% of the new value. Therefore, for an investor to get enough to refinance the entire short-term loan and possibly recoup the rehab money, the property needs to be worth significantly more than what it was purchased for.

For example, let’s say a property sells for $100,000. The property needs a $25,000 rehab to be rent-ready, for a total cost of $125,000. An investor could use a short-term loan to buy the property (like hard money) and their own cash to rehab the place. Then, they would refinance the property with a new loan from a lender. If the new lender’s appraisal came in at $160,000, the bank might give 75% of that amount in a new loan, which is $120,000. This would pay back the investor’s entire short-term loan and most of the rehab cost. The big bonus is that the investor now has a stable, long-term rental property with $40,000 of equity at the start.

Of course, this example only works if the after repair value (ARV) comes out at the $160,000 level. It wouldn’t be as nice if the ARV were to come in at $100,000, and the bank would only loan for $75,000—not even enough to pay back the short-term loan. This is where the math has to work for the strategy to work.

Let’s summarize some of the BRRRR pros and cons.


More on the BRRRR method from BiggerPockets


Pros to the BRRRR method

Potentially no money down

The BRRRR method is one of my favorite strategies for investing without needing a lot of cash. If the numbers work out right, an investor could get into a deal for very little money out of pocket. Of course, the better the deal, the less money will ultimately need to be provided. And some investors have figured out a way to do this without using their own personal cash!

High return on investment (ROI)

Because of the low out-of-pocket cash needed for this strategy to work, the ROI should be astronomical. In other words, if the investor ends up having only $10,000 in the deal, but the cash flow is $2,500 per year, that’s a 25 percent cash-on-cash return, and that doesn’t account for all the equity built during the rehab stage. And as long as the investor owns the property, the ROI could be infinite!

Equity

BRRRR real estate investing allows investors to build some serious equity right off the bat. Rather than owning a rental property worth what was paid for it, wouldn’t it be better to own one with $40,000 of equity?

Renting a rehabbed property

After the full rehab has been done and the property is rented, the investor owns and leases a property in Class A condition.

A property can bring in more rent if rehabbed, even if it’s an older building. For example, in Lufkin, Texas, two properties are worth $93,000. Property A was built in 1949, but it has a higher rental rate; the tenants pay $1,000 monthly since it has been updated. Though built in 1956, Property B has a lower rate of $750 monthly since the property hasn’t been recently renovated.

Aside from a higher rental rate, a rehabbed property can be rented out faster and attract better tenants. It also reduces the maintenance budget on the property, making landlording even more hassle-free.

Fast-track scalability

After that first house, it’s easy to use the BRRRR method as an investment strategy. The investor already knows the drill and can easily go through the steps to build their portfolio of properties. Of course, investors need to do their part and find a great property, make a budget that covers everything, get through the project, and find the right financing. The BRRRR model is no walk in the park, but it can work very well under the right circumstances.


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Cons to the BRRRR method

Short-term loan

The short-term loan needed initially can be expensive with high interest rates, especially if it is a hard money loan. Also, the short term on these loans can make the carrying costs expensive, possibly resulting in negative cash flow during the time the investor is paying on the loan. For this reason, many people use a home equity loan or cash to fund the first phase of the project, then refinance to get their cash back so they can rinse and repeat.

Over budget

When making the budget, investors need to identify which parts of the property need to be fixed. The first thing to consider is what is needed to make the house livable and functional before upgrades that add value to the property. But the project could easily go over budget with unexpected expenses and necessary repairs that can lead to a longer rehab time. Many factors can cause setbacks, so investors need to anticipate as much as possible at the beginning when they are putting together the budget.

Low appraisal

If the home doesn’t get a high enough appraisal after the rehab, it will be a big headache for the investor. A bad appraisal is a worst-case scenario for a BRRRR property. This is why coming up with the correct math and budget going into the deal is imperative.

Seasoning

The refinancing bank will likely require the investor to wait six months or maybe even 12 months after the original purchase before they will refinance the property. This period of time is known as “seasoning,” and most conventional and portfolio lenders require it. If the end-lender requires a 12-month waiting period, and the short-term loan is only good for nine months, that will be a problem.

Therefore, when I use this hybrid real estate investing strategy, I try to make sure my short-term loan is for no less than 18 months. This gives me the time I need to refinance, and if something goes wrong after month 12 and the refinance won’t work, I still have six months to sell the property or hunt for a new refinance.

Two potential closing costs

The BRRRR method usually involves two loans—one at the beginning when the property is purchased and another when the property is refinanced. Of course, each transaction comes with its own set of fees and financing costs. There are lenders out there who will finance the whole project with higher fees at purchasing and lower fees for the refinancing stage. Investors need to do their due diligence when finding the right lenders for the project and shop around.

Problems at the rental stage

The clock is ticking, and investors are often in a rush to get a property rented out. Aside from the investor’s need to start earning money on the rental property, having tenants is usually a requirement for refinancing. Lenders like to see that the property has tenants and will be a safe bet for the loan.

But rushing through finding a tenant and acting hastily may prove to be unwise for investors. Investors need to thoroughly vet the tenant first—get their credit report, do a background check, even ask for references. After all, they will have to deal with the tenant and rely on them for their income for a number of years.

Dealing with a rehab

Finally, the biggest part of the BRRRR strategy is dealing with the complications of a large rehab project. Rehabbing a property is not easy. It’s no fun dealing with contractors, unknown problems, mold, asbestos, theft, and the rest of the headaches that come with a rehab.

BRRRR real estate investing can be a powerful way to build wealth through real estate and is one of my all-time favorite strategies. Capitalizing on the forced appreciation the way a house flipper would while acquiring a great rental property that will provide years of cash flow and passive income is truly getting the best of both worlds. However, the strategy is not a simple undertaking, and there are numerous BRRRR pros and cons to consider. It requires exquisite math, planning, and the ability to find a great deal. But for those willing to take on the challenge, BRRRR real estate investing can supercharge a business and set investors on a path to great success.


BRRRR guide 1

Systemize your investing with BRRRR

Through the BRRRR method, you’ll buy homes quickly, add value through rehab, build cash flow by renting, refinance into a better financial position—and then do the whole thing again. Over time, you’ll build a real estate portfolio that’s the envy of your fellow investors.



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It’s no secret that housing is in short supply. According to Realtor.com, the country is a whopping 5.24 million homes short. And total active listings? Those are down 24% over the year.

To make matters worse, some of that inventory is extremely dated. The typical house is now 39 years old — a far cry from the modern, move-in ready property that most homebuyers are looking for.

For these reasons, the fix-and-flip sector is poised for growth. As investors recognize the potential these older properties hold and the inventory and profits they could open up in such a red-hot housing market, demand for older, more distressed properties should increase.

The only problem? Capitalizing on this trend, at least for brokers and lenders, will be difficult.  Traditional lending approaches are time-consuming when it comes to fix-and-flip properties. They come with lots of hassle and overhead costs, and the process just isn’t efficient — for the buyer or for the lender.

Acra Lending is looking to solve these challenges and make fix-and-flip lending simpler and more efficient for borrowers, lenders and brokers. The company has created a new vertical of loans and an entirely new LOS designed just for borrowers looking to purchase a home and renovate it to put back on the market. Through this program, Acra aims to remove many of the financing hurdles typically faced by those in the fix-and-flip sector.

Here are just a few of the challenges Acra’s fix-and-flip program will help overcome:

An expensive and inefficient process

Acra understands the struggles fix-and-flip investors face when seeking financing. In fact, the company even built a team of over two dozen experienced flippers to consult on the matter. 

“We have taken the industry knowledge of 25 people who have been doing fix & flips for a long time, and we ripped all the pain points out and discussed them,” said Keith Lind, executive chairman & president at Acra Lending. “We just put our brains together and said, ‘OK, what are the top 20 pain points and how do we eliminate them?’”

The company then built its LOS based on these conversations, removing those hurdles and creating a process that’s easier, more efficient and more affordable on the whole.

“On the lender-broker side, it means cheaper costs to originate, because we’re more efficient,” Lind said. “There are fewer people in operations and less overhead.”

Confusion and a lack of transparency with borrowers

One thing Acra’s team of experienced flippers noted was the lack of transparency in traditional financing — the phone tag and back-and-forth emails that loans typically entailed.

The new fix-and-flip program aims to address this by giving borrowers full visibility into their loan applications, including where their loan is at in the process, what documentation is still outstanding and what’s left on their to-do list.

“They can go on the site, put in their loan number and see exactly where they are in the process,” Lind said. “They’ll see what they need and what has to be done to get the loan processed. It will also show when we’ve sent out communications, just to hold everyone accountable.”

Time-consuming underwriting

Traditional financing is time-consuming when it comes to fix-and-flip purchases. The biggest problem is that the process focuses on the buyer’s financials — not the property or the investor’s experience.

Acra’s fix-and-flip program puts more emphasis on the business side of things, focusing instead on the property’s value before and after renovation, the number of flips the investor has managed and how long they’ve been in business as a fix-and-flipper.

Because of this, there isn’t endless documentation to analyze — no W2s, bank statements or tax returns. “It makes for a much faster underwrite,” Lind said.

Waning agency business

For lenders and brokers, Acra’s new program can also open a new stream of business entirely. It can even help boost profitability as demand for traditional agency loans wanes.

“The agency market is clearly slowing down,” Lind said. “The number of people able to refinance are tapped out, and we’re seeing that in earning numbers.”

If the Federal Reserve begins tapering MBS purchases later on in the year, as it has indicated it might, this could cause interest rates to rise, shrinking agency demand even more.

As Lind explained it, “This is a great new product for brokers to focus on as that more traditional business decreases.”

For more information on Acra Lending’s fix-and-flip loan program, visit acralending.com.

The post How one lender is solving problems in the fix-and-flip space appeared first on HousingWire.



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Appraisal management company Clear Capital is looking to beef up tech tools for its network of appraisers, and it is doing so through an acquisition. 

The Reno, Nevada-based company just closed on the acquisition of Finnish proptech startup CubiCasa this week. The two are well acquainted – Clear Capital already utilized CubiCasa’s digital gross living area technology.

The partnership will allow CubiCasa’s automated floor plan sketching technology to integrate with Clear Capital’s ClearInsight Platform, a mobile property data collection application. 

CubiCasa’s mobile capture technology collects data through a walk-through of the home, which it then uses to create a floor plan sketch and calculate the GLA. Accuracy in these calculations is imperative as square footage is the second-highest driver of a home’s value — location is the first, Clear Capital said. The calculations reached by CubiCasa technology are aligned with American National Standards Institute standards and the technology can be used without prior training by anyone with a smartphone. 

According to Clear Capital, companies can easily embed CubiCasa’s technology into their existing applications through APIs and mobile SDKs.

“What they’ve already built can serve as an industry utility to help modernize the valuation industry, and we’re excited by the additional innovations our investment can bring to the product,” said Jeff Allen, executive vice president of innovation labs at Clear Capital, who has stepped up to become president at CubiCasa. “We think there’s major change coming to our industry in years ahead, and we want to help lead it, not just react to it.”

In the past year alone, Clear Capital has rolled out several new products including ClearCollateral Review, a review system that automates collateral underwriting in compliance with internal credit policies and GSE guidelines, and ClearLabs, an in-house innovation lab.

The appraisal-valuation space has seen quite a bit of mergers and acquisitions and disruptions in the last year. 

Earlier this month, appraisal management company Class Valuation, a subsidiary of investment firm Gridiron Capital, acquired Kansas City, Missouri-based Pendo Management for an undisclosed sum. Class Valuation also has digital floor plan capabilities. 

And United Wholesale Mortgage, America’s largest wholesale lender and the second-largest mortgage lender overall, announced on Sept. 9 that it will no longer require its brokers to use appraisal management companies to complete appraisals. The lender will instead coordinate appraisals in-house, contracting with appraisers directly, offering appraisers and brokers a way to bypass AMCs altogether, which UWM CEO Mat Ishbia characterizes as “middlemen.”

The AMC sector is not without controversy, as HousingWire examined in an investigation in. Appraisers have said that AMCs — which became ubiquitous as a result of Dodd-Frank — introduce inefficiency into the appraisal process, degrade their working conditions and cut into their pay.

The post Clear Capital acquires Finnish digital floor plan firm appeared first on HousingWire.



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The average borrower has drastically changed throughout the years. Today, more borrowers are self-employed, work remotely and have multiple streams of income. For brokers, working with these borrowers can be complicated because they require unique processes. HousingWire recently spoke with Bill Dallas, President of Finance of America Mortgage, to discuss how brokers can leverage technology to accommodate today’s average homebuyer.

HousingWire: How has the average borrower changed over the last few years? 

Bill Dallas: Today’s borrowers generate income in various ways and have different household compositions than previous generations. With the rise of the gig economy and remote work arrangements, more Americans than ever have multiple sources of income or are self-employed. As of August 2021, more than 10.2 million Americans were self-employed, according to data from the U.S. Bureau of Labor Statistics. That represents about a 7.5% increase over the year prior and is a trend that will likely persist.

In addition to self-employed workers, the “gig” economy — or independent contractors and freelancers who do short-term work for multiple clients — continues to grow. In 2019, the share of gig workers in companies jumped 15% compared to 2010, according to data from the ADP Research Institute.

Altogether, these are dramatic changes compared to when traditional guidelines were put in place. As a result, today’s borrowers need mortgage products that are better aligned with their current needs while still considering their ability to repay.

HW: What are some common pain points brokers face when working with borrowers in unique situations? 

BD: First and foremost, the biggest pain point for brokers is finding lenders that offer mortgage solutions outside of the conventional lending box. Some lenders might offer just a handful of products that don’t provide the innate flexibility needed to accommodate self-employed borrowers in multigenerational households who are financing a home with multiple streams of income, for example. These situations require more creativity and innovation, and brokers might be hard-pressed to find lenders who are willing to work with borrowers in those situations.

Another barrier brokers face is unclear or inconsistent communication from lenders during the underwriting process. This is especially true in unconventional lending scenarios where more documentation may be required or borrowers have to jump through more hoops to show their income or employment history or verify their self-employed business earnings. That’s why it is important to have a partner that understands the challenges facing brokers and can offer unparalleled support.

In today’s fast and furious market, brokers need assurance that their borrower can get to the closing table quickly and efficiently. Turn times are a huge pain point, especially when borrowers in unique situations may be pressed to close more quickly in a competitive seller’s market. A seller may grow impatient if a loan approval is delayed and they have back-up offers with less complicated financing attached to them.

HW: What type of innovative loan options and technology do brokers need to enhance communication with borrowers? 

BD: Brokers need access to strong non-QM loan programs that provide self-employed borrowers with more options. And with home-price growth climbing in many parts of the country, access to flexible jumbo loan options for borrowers in high-cost areas that exceed conforming loan limits is necessary to help well-qualified jumbo borrowers who cannot qualify for a conforming loan. It’s also important to have products that are tested and proven, so you know they will remain available to borrowers. 

As far as technology goes, a loan origination system that offers updates at each step in the pipeline and can deliver on promised turn times is critical. Technology that allows brokers to remain top of mind and meet their customers on their terms via a multichannel approach is also becoming more important for today’s borrowers. More than that, though, brokers need confidence in lenders’ loan pipelines in order to continuously meet (and, ideally, exceed) their customers’ expectations.

HW: How does FAM TPO help brokers meet borrowers wherever they are in their financial journey? 

BD: FAM TPO stands apart because we have a wide range of products available and are continually assessing and innovating our offerings to ensure we can meet the evolving needs of more borrowers.

FAM is a nimble company capable of creating tailored products, which you’d be hard pressed to find elsewhere. FAM TPO recently rolled out a new COVID-19 loan program geared at assisting borrowers who experienced a disruption in their income or employment during the pandemic. The broker makes the connection, and you have a win-win for everyone.

Additionally, FAM TPO offers a suite of proprietary non-QM and jumbo loans that give borrowers enhanced purchasing or refinancing power compared to standard-fare loans. Known as Two-X Flex, this product suite is a pillar of FAM TPO’s success in helping our broker partners better serve a more diverse group of borrowers

The FAM TPO Two-X Flex suite includes:

  • Two-X Flex – A full-documentation loan with common sense guidelines.
  • Two-X Flex Bank – A loan that requires no tax returns and enables self-employed borrowers to qualify using bank statements. 
  • Two-X Flex 1 Year – A loan that enables borrowers to qualify using only one year of income. 
  • Two-X Flex Asset – A program that lets some borrowers qualify based on assets alone and no employment.
  • Two-X Flex 1099 – A new limited documentation program that simplifies underwriting for self-employed and gig workers who receive a 1099 IRS form for independent contract work.
  • Two-X Flex P&L – A new solution for self-employed borrowers with inconsistent payment history.

Finance of America Mortgage (FAM TPO) elevates a broker’s business by providing a suite of products to help even the most unique borrower afford a home.

The post How brokers can help today’s unique borrower appeared first on HousingWire.



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Six months after raising capital, digital mortgage startup Maxwell announced Tuesday the launch of a trading platform to provide community lenders access to the secondary market, connecting these loan sellers to buyers.  

The initiative attempts to reduce the volume of loans in small and midsize lenders’ balance sheets, so they can capture the volume of new loans available in the market and compete with the industry’s largest players.

The new solution, called Maxwell Capital, is intended for lenders who originate loans on the Maxwell platform and have an average total volume between $200 million and $2 billion a year.

Maxwell will provide the platform service for sellers and attract buyers. (The company said it has already gone through the process of getting four investors onboard.)      

Also, the startup will use its own capital to buy loans from community lenders. Part of the money for the solution came from $16.3 million raised in a Series B funding round in March, led by Fin VC and TTV Capital.


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Other investors included Rotor CapitalThe Mortgage Collaborative Emerging Technology Fund, Prudence Holdings, and existing investors, including Anthemis GroupRoute 66 Ventures, and Sovereign’s Capital

The industry veteran Sadie Gurley will lead Maxwell Capital. The executive joined the startup early this year after a career at Goldman Sachs, Fortress, and Marathon.

“Our goal is to make the process better, faster, and more replicable. Also, we want to use our balance sheet because we may have more capital than some of our clients,” she said.

According to the executive, the company will not own the loans but sell to investors, gaining the spread in the transactions. However, as buying and selling mortgages is a capital-intensive business, Maxwell will probably need to raise more capital if the platform grows.

John Paasonen, Maxwell co-founder and CEO, said in a statement that the new platform is giving local and regional lenders a financial edge to compete.

“Lenders serving communities across the country face an enormous challenge in competing against the largest lenders who have the technology and the scale to generate higher margins that deliver competitive rates to borrowers,” he said.

Founded in 2016, Maxwell looks to digitize the entire mortgage transaction with fulfillment, payments, and due diligence solutions. The company uses artificial intelligence to streamline and accelerate the mortgage process for community lenders, a group that represents roughly half of $4 trillion U.S. mortgage market.

The company claims it has 250 lenders and facilitated over $60 billion in loan volume last year. Also, it says that its clients close 20% more loans per month and save over 13 days to close deals compared to the market.  

The post Maxwell launches new secondary platform for small lenders appeared first on HousingWire.



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The week following Labor Day saw a flurry of mortgage loan application activity, with volume jumping by 4.9% for the seven days ending Sept. 17, according to the Mortgage Bankers Association. Refis were on the front foot again.

The increase in application activity is quite different from the MBA’s survey published in early September, which saw application volume decline by 1.9%, dragged down in part by low refi activity and unexpectedly low purchase volume.

Joel Kan, associate vice president of economic and industry forecasting at MBA, at the time noted that the “economic data has sent mixed signals.” But it seems that this week’s data is more straightforward.

Both the refi index and the purchase index came in strong. According to the MBA, the refi index increased by 7% from the previous week but hovered 5% lower than the same week on year ago today.

Moreover, the purchase index increased by 2% from one week earlier, while the unadjusted purchase index grew by 12% compared with the previous week.

Kan said in a statement that the surge in both refis and purchases was mainly driven by rates that remained low at 3.03%.

“There was a resurgence in mortgage applications the week after Labor Day, with activity overall at its highest level in over a month, and purchase applications jumping to a high last seen in April 2021,” said Kan.

He added, “Housing demand is strong heading into the fall, despite fast-rising home prices and low inventory. The inventory situation is improving, with more new homes under construction and more homeowners listing their home for sale.”

However, Kan did note that despite the uptick in activity, purchase applications “were still 13% lower than the same week a year ago.”

Overall, the refi share of mortgage activity once again increased, inching up to 66.2% of total applications from 64.9% last week.

The MBA said that the refi activity was pushed by an increase in FHA and VA applications, with the share of total FHA applications increasing to 11.5% from 9.9% the week prior.

The VA share of total applications jumped to 10.4% from 10.2% the previous week, while the USDA share increased to 0.5% from 0.4%, the trade group said.

The post Refis stubbornly make a bit of a comeback appeared first on HousingWire.



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In the world of real estate, the “BRRRR method” refers to the process of buy, rehab, rent, refinance, and repeat (hence the acronym!). In this investment strategy, a real estate investor will buy and then flip a distressed property, collect rental income by renting it out to a tenant, and then cash-out refinancing the investment property to continue purchasing additional rental properties for investment.

A key difference between traditional investment property strategies and the BRRRR method—and the reason for many of the BRRRR risks—is the focus on flipping distressed properties before refinancing them to fund additional real estate purchases.

As a real estate investor conducting the cash-out refinance step in the BRRRR method, you essentially convert your equity into dollars. When you take out bigger mortgages on your rental properties, you borrow more money than what you owe on these investments, which grants you access to your equity. The left-over funds can be used for other purchases such as (but not limited to) additional rental properties.

While this is an excellent investment method for the right person, there are risks associated with this type of real estate investment strategy.

Let’s discuss the BRRRR risks you need to be aware of before attempting the BRRRR method of real estate investments.

1. Renovation period

If you’ve ever hired a handy person or a contractor for a bigger-ticket repair or improvement to your own home or an investment property, at some point, you’ve most likely experienced the job taking significantly longer than was originally anticipated.

It can happen easily, and it’s not always anyone’s fault. Sometimes, property renovations get put on hold because of winter storms, for example. It’s not possible to replace roofs or siding or do outdoor painting when snow is swirling or ice is forming.

2. Renovation cost

One of the most frustrating things that can happen to any investor who owns real estate is an unexpected major expense mucking up their expected rehab costs.

Major expenses can make the difference between a profitable real estate investment and an unprofitable one. Even as an investor buying a rent-ready rental property, meaning no repairs are assumed to be needed, you should always hire an independent property inspector to thoroughly confirm the condition of the property so that you can be aware of any specific impending major repair costs.

Anything unknown before you buy a property can pop up later as a major or unexpected repair cost.

3. Rehab management

A downside to a BRRRR is that you need to manage a rehab. You hear that contractors are the hardest people to work with in this business. Finding them is tough, too, and good ones are like gold.

As a new investor, what makes you think you will find a great contractor?

If you were a contractor, who would you rather work with a seasoned investor who knows exactly what they are doing or a new investor who will ask a lot of questions and do one or two deals this year?

It’s not impossible, as a newbie, to find a good contractor, but it is unlikely. Additionally, you’ll need to manage this entire process, which is a lot of work.

4. Appraisal

One factor in a BRRRR or flip, if not the primary factor, is what the property will be worth after you put the work into it: the appraisal.

Improving the property to increase the appreciation is the whole point of putting in the work. So, back to the numbers. If your property doesn’t appraise at what you expect, you could be looking at a heap of trouble regarding your profit margin. You can probably handle this easier in a BRRRR strategy, as long as the property has cash flow as a rental.

This assumes you didn’t do any “creative” financing and/or didn’t make promises to investors about a return.

5. Time to rent

You obviously won’t be able to rent out the property until that rehab is completed. For BRRRR properties, if you plan to rent it out and then refinance it, a rehab delay of any sort will prolong the time before you can place tenants.

This timing matters because the refinance depends on having tenants (in most cases), and you won’t start having cash flow until you have tenants living in the property. That means the longer the rehab is delayed, the longer before you start getting your money back out of the project.

If you have the financial means to handle a delay, then the time to rent isn’t as critical. But it must be considered for a BRRRR property. Along with time being a crucial factor, keep in mind that so is how much you’ll be able to rent the property for.

6. Rental amount

Yes, the rental amount matters. If you are BRRRRing, your initial numbers analysis should include the anticipated rent amount you expect to receive once tenants are in place.

This matters because you’ll know whether or not the property will have positive cash flow. If you can’t expect cash flow, reconsider your strategy.

The point of a BRRRR is to refinance the property after it’s been fixed up. But if you won’t have cash flow after you have tenants, you can flip it rather than hold it. Your decisions will depend on why you are doing a BRRRR, but the idea is to rent the property out rather than sell it as a flip. Cash flow is a big part of that equation.


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7. Time to refinance

If you ask a lender how quickly you can refinance after a tenant is obtained, the answer will most likely be six months.

With this six-month seasoning period, your money is now tied up for—you guessed it—at least six months. In fact, it is likely going to be longer than that because it is six months after the tenant moves in. When you include time for the rehab, we are now talking nine to twelve months before you can move onto the next property.

For example, let’s say you have $100,000 to invest in a BRRRR deal. You will not be able to reinvest that money for at least six to twelve months. The maximum amount of properties you could obtain in one year is two because of that six-month seasoning period.

However, with traditional rental property investing, if you have that same $100,000, you could buy five $100,000 properties with 20% down.

Whose portfolio will have more cash flow? One with five properties or one with two?

8. Limits to the refinancing amount

What makes a BRRRR investing deal so powerful is the ability to pull your money out and reinvest it. In a perfect world, you’ll be able to do this on every BRRRR deal.

Unfortunately, we do not live in a perfect world.

Pulling all of your money out on a BRRRR is a home run of a deal. You can’t reasonably expect every deal you do to be a home run.

In most cases, after that six-month seasoning period, you will likely leave $5,000 to $10,000 in the deal due to the amount the lenders will allow you to refinance.

Not bad, but you still have to wait six months for refinancing.

With traditional rental properties, you need to save up that 20% to 25% down payment. This may be more difficult depending on the market (say, a high down payment is needed) or the amount of liquid capital you have (low savings rate).

If there are ways you can spend less money and make more of it, do it—and then invest that difference into traditional rental properties.

Who shouldn’t use the BRRRR strategy?

Are you looking to attain financial independence as quickly as possible through cash-flowing rental properties? If so, BRRRR is not the best real estate investment option for you.

Do you know what the best strategy is?

Believe it or not, it isn’t house hacking (although house hacking is a subset of this category).

If you guessed “good old-fashioned rental property investing,” that’s correct. Find a property that you can purchase with 5% to 25% down and that you can immediately place a tenant in to start generating passive income.

You could be better off putting your time, effort, energy, and finances into traditional rental property investing. What’s more, the more rentals you can invest in, the better.


BRRRR guide 1

Systemize your investing with BRRRR

Through the BRRRR method, you’ll buy homes quickly, add value through rehab, build cash flow by renting, refinance into a better financial position—and then do the whole thing again. Over time, you’ll build a real estate portfolio that’s the envy of your fellow investors.


Who should use the BRRRR method?

The BRRRR strategy is right for you if you are looking for deals with a hard money loan or private money and looking to refinance after the seasoning period for cheaper debt.

Keep in mind that you have to invest the time to rehab a home, vet tenant applicants, and allow for seasoning before you get to the cash-out refinance step.

If you can afford to be patient in your investment opportunities, then give the BRRRR method a try.

Evaluating BRRRR risks and alternative solutions

If you’ve determined that BRRRR risks outweigh the rewards for you, look at some alternative investment strategies.

For example, you could consider crowdfunding. Real estate investors use this method to pool their money, which allows them individually to invest less money, effort, and work while still reaping and enjoying the benefits.

Another strategy, which we discussed above, is to simply purchase a ready-to-live-in-home and collect traditional rental income.

A traditional rental property that is turnkey might only need some minor improvements. You can get a handyperson to complete minor repairs in a single day.

After the repairs are completed, you turn the unit over to a property manager who helps find tenants to occupy the rental. That starts the cash flow process practically from Day One.

Don’t worry if the BRRRR risks are not for you. There are plenty of other real estate investment options out there.



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On Tuesday, the U.S. Census Bureau reported that housing starts hit 1,615,000 for August and housing permits came in nicely at 1,728,000. These data lines beat expectations, and we had slight positive revisions to the previous months — overall, a good report on all fronts.

I have always been mindful that the month-to-month housing starts data can be wild, both positive and negative, so the trend is what matters the most. The movement says slow and steady is bringing sexy back to the housing data, and the wild action we saw due to COVID-19 is moderating.

Single-family starts have been slowing recently to move along with the moderation in new home sales and the rise in monthly supply.

However, a lot of housing data was going to moderate from the massive distortion COVID-19 created in the data lines. The key is always knowing the difference from fundamental weakness in the data and what is returning to a normal base from an extreme move. This is why I believed it was vital for me to discuss the fact that housing data was going to moderate and be careful not to read too much in that moderation.

Unfortunately, our housing crash bros sounded the alarm too early again when they saw the decline in many housing data lines from their recent COVID-19 peaks. This is very common as this sensitive lot tends to believe they’re Wile Coyote, and every weakness is sending our friend to hold up the sign that says That’s All Folks before falling down a cliff.

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    The post Housing permits hold the key for economic expansion appeared first on HousingWire.



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    This week’s question comes from Roosevelt on the Real Estate Rookie Facebook Group. Roosevelt is asking: I’m currently preapproved with one lender but another lender has a loan option my current one isn’t offering. Can you be preapproved with multiple lenders at once? And are there any issues I could run into with this?

    It’s commonplace in the real estate investing world to be preapproved by multiple lenders, that way, you’re never stuck without an option to finance a deal. Many investors also opt to use a mortgage broker that can help shop for loans on your behalf. If you’re worried about your credit score dropping because of preapprovals, try to apply for your loan applications within thirty days so credit bureaus count the multiple hard credit pulls as a singular instance.

    If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

    Ashley:
    This is Real Estate Rookie episode 114. My name is Ashley Kehr. And I’m here with Tony Robinson. Tony, what is going on today?

    Tony:
    What’s going on with me? The usual, we got a bunch of properties in their contract trying to find some more, but we actually had a pretty funny, we can laugh at it now. It wasn’t funny in the moment, but we had to call the cops on an Airbnb guest earlier this week, two days ago, super sketchy guests. They were supposed to check out at 11, my cleaner showed up at 12. They wouldn’t let my cleaner in. They weren’t opening the door. I’m calling them. They’re not picking up so I let them stay in the property until 1:00. And I think the only reason they left is because I texted them and said, “Hey, I’m calling the police. I’m calling the Sheriff’s department. They’re going to come over here and escort you out.” And then once I sent that, they finally packed out and left, but they completely trashed the place. Luckily nothing was damaged. They broke a small kitchen things, but there was trash everywhere. Literally the sinks and the cabinets were filled with trash.

    Ashley:
    How long were they there for?

    Tony:
    They were there for three days. So they checked in on Friday night and they left on Monday. Yeah, it was probably the worst experience we’ve had so far. So we had to deep, clean and bleach the entire place. And it was a mess. But part of what comes with being an Airbnb host, you get a lot of good guests, but every once in a while, there’s those a not so desirable people that come through.

    Ashley:
    Well let me ask you this. So how does this work? When you have an Airbnb and somebody doesn’t leave, you can call the cops and the cops will escort them out because it’s not a long-term residency? Yeah.

    Tony:
    Yeah. I called the Sheriff’s department and I let them know the address. They’re like, “Okay, cool. We’ll send somebody over and we’ll help get them out.” Yeah. It was that easy. That was the first time we had to call.

    Ashley:
    Right. Yeah. Do you know, is there a length of time if someone stays there over a month, you can’t do that or anything like that?

    Tony:
    I’m almost certain that’s the case, but we don’t allow for bookings that long at any of our properties. So hopefully we never have to run into that issue.

    Ashley:
    Yeah. Well, I’m so sorry that happened, but.

    Tony:
    Yeah, so that was my day.

    Ashley:
    I guess good content. And I learned something that if that happens at my Airbnb, I just call the cops and they will come and take [crosstalk 00:02:15].

    Tony:
    Kick them out. Yeah. What about you Ashley. What’s going on?

    Ashley:
    So you guys listened to all our episodes. A while ago, I went to Virginia Beach and my cousin and I let her kids all by hermit crabs. And I went from Virginia Beach to Tennessee and we recorded in there in the hotel room. And while I was recording, as soon as we finished, one of the kids said, “Mom, we lost a hermit crab in the hotel room.” So we found it, whatever, we have hermit crabs. Well, we just went on another road trip with my cousin. We get back to my cousin’s house. The hermit crab is missing out of their cage. We found it, it had gotten out and climbed into a planter that they had up on their mantle or something. Then we get home. And my son tells me that before we left, he caught a toad outside and put the toad in the cage and it is now gone.
    So we’ve been looking for this toad forever. And I mean, I don’t really have that much stuff in my house. I looked everywhere under furniture, everything for this toad. And we did not find it. Well, I come in here, I opened my lovely closet door to the podcast studio. And I’m like, “What is that smell?” And there is that toad no longer alive in the corner of my podcast room. I have this furry rug on the floor, snuggled up into the furry rug. Luckily Dave had just come in the door and I was like, “Dave, I need you, can you get this?” I’m like to the kids, “I found the toad.” But yeah, it’s like, I knew for some reason that I was going to be recording a podcast and it was going to jump out at me or something like that, but kind of happened, I guess.

    Tony:
    Well, exciting things, right? We got crazy crack heads going into our Airbnbs, dead reptiles in your podcasting booth. It’s just all in a day in the life of good podcast host.

    Ashley:
    So Tony, what is our question today? We found one. This one’s off Facebook, correct?

    Tony:
    Yes. So this one came from the Real Estate Rookie Facebook group. So again, if you guys are not in that group, you are missing out. It is one of the most active, most engaged real estate Facebook groups that are out there, especially for rookies like yourselves. But today’s question comes from Roosevelt [Scheider 00:04:29]. And Roosevelt’s question is, “Hey guys, I’m currently pre-approved with one lender, but another lender has a loan option that my current one isn’t offering. Can you be pre-approved with multiple lenders at once? And are there any issues I could run into by doing this?” Great question, Roosevelt. What are your thoughts Ash? I’ll let you start first.

    Ashley:
    Well, I would say that there is no issue. So there is a, Tony is it a 30 day window where you can run your credit. Maybe even 60 days. There’s a window of time where you can have multiple loan officers run your credit and it won’t affect your credit score if you have it within that certain window of time. So as long as you’re in that window, it won’t affect your credit that you’re being pre-approved again. And honestly, having another hard inquiry. If you have really good credit, it’s not going to affect it that much anyways, to bring it down, getting pre-approved. So that’s the only red flag I can really think of, but yes, you can go out and you can shop rates with different loan officers and get pre-approved. And then when you find your property, you can go with the loan officer that first gets back to you right away that you’re ready to close on a house. And also who has the best rate at the time or the best loan package that you’re looking for that will fit that property.

    Tony:
    Yeah. A preapproval isn’t a contractual obligation in any way to work with that lender. Right. It’s just, and it’s not even the lender saying that you’re 100% approved, right? You can get a pre-approval try and go out and buy a property. And maybe it still doesn’t work out because the specifics of the property. So a preapproval is just a lender saying, “Hey, we’ve taken a quick glance at your credit profile. And we feel that you have credit worthiness to get approved, but potentially up to this amount,” but they can’t come after you if you end up going to some other lender, because hey, we pre-approved you, you got to stay with us for the rest of your life. It’s not that kind of thing, so. Like Ashley said, it’s good to get one, shop around a little bit, and see who can offer the best terms for you.

    Ashley:
    Yeah. So I just looked it up and it says that it’s typically between 14 to 45 days. And then it varies depending on the credit scoring model that is used, because there’s all the different kinds of, there’s Equifax. There’s, what are some of the other credit reporting agencies?

    Tony:
    TransUnion.

    Ashley:
    TransUnion. Yeah. So just watch out for that window and see, just make sure you stay within that window of time. And then you can also ask the loan officer too, but if you have good credit, it shouldn’t affect you that much anyways, if you happen to get two hard inquiries.

    Tony:
    And I guess one of the things that you can try and leverage also, Roosevelt, is maybe working with a mortgage broker, if you go to one mortgage broker, they’re typically going to shop around for multiple different loan options for you. So you’re still kind of getting the ability to shop around, but you’re only kind of dealing with one person. So just another option. If you’re looking for other ways to make it happen.

    Ashley:
    Tony, that’s a great point because I don’t think that’s talked about enough. Everyone just says, “Oh, go to small local banks and talk to the loan officer at the bank that you use,” or things like that. And we don’t talk about the mortgage brokers. Have you ever used one?

    Tony:
    Before we bought our primary residence, we were using a mortgage broker, but since we bought new construction, we ended up going with their lender because there was a bunch of incentives and whatnot. But yeah, we’ve had conversations with them. I feel like you see the mortgage broker play a more active role in the commercial real estate investing space than you do in the single family residential. So no, we haven’t personally closed in a deal with a mortgage broker yet. What about you Ash? Have you guys?

    Ashley:
    Yeah. I’ve done one deal. And then the house that I own with my sister, she got it through the same guy. And it was a great process full times. And we have different companies that are servicing our loan. The only thing is, is that you got to watch out because there’s even a greater chance. I feel like that your loan is serviced by another company. I just got a letter in the mail that my mortgage was sold to another company and all my online banking is switching for it and things like that, which isn’t a huge deal.
    But with that experience, I actually had a mortgage lined up with a small bank. I had been pre-approved for that. And I was going to go and purchase it. Well, the loan officer there waited two weeks before even entering my information into the system. And the seller was waiting for commitment. And so my realtor actually found me, or she has referred a lot of people to this mortgage broker. So I started working with him and it was a super fast turnaround time and worked out great. But it’s a realtor or an insurance agent. You have to see which one can work best for you. You’re not going to be guaranteed success by going with a bank or with going with a mortgage broker.

    Tony:
    Nope. Roosevelt, hope that answers the question for you. Nice deep dive into the world of getting approved for a loan. But I love these questions because these are the things that a lot of people are thinking, but just haven’t asked anyone yet. Right? In these, this small question might be holding Roosevelt or someone else that’s listening back from getting started because they’re not sure how to handle the situation. So I love we can kind of deep dive some of these rookie questions.

    Ashley:
    Yeah. And I think a big thing too, is how he found out that there’s another lending option out there is when you are talking with lenders, ask them what they have to offer. Don’t tell them what you think you need, ask them what they can do, tell them what your current situation is and what you’re looking to do. So maybe if you already have a primary residence and you want to buy your first investment property, ask them what the options are and let them present to you because there are different banks that have different kinds of little things that they can do and flexibility and different kind of loan options and packages. So make sure that you’re asking, you’re not just saying, “I want an FHA loan.” Take the opportunity to listen to them to see what they can offer you too.

    Tony:
    Ashley. That is great advice. So when we found the credit union, there’s actually two banks we found in Louisiana that did the whole fund, the whole purchase and the rehab. And as long as you get it by the right ARV and whatnot. But I wanted to find a third bank that could do the same thing. So I spent the day driving around town, just walking into different banks. And I wasn’t telling them, “Hey, do you have a loan that does this?” I was doing exactly what you said. I was like, “Hey, if I find a property and the purchase price and the rehab are 70 to 75% of the ARV, do you have anything where you can fund all of that?” And a lot of banks said, “No,” and there was one bank, the third bank in Louisiana that said, “Yeah, sure. We can do that.”
    It’s like, if you give them this small hole, they have to fit into like, “Hey, I’m looking for this specific loan,” maybe the gears aren’t turning for them. Right. But if you say, “Here’s what I’m trying to accomplish, how can you help me?” I think it opens the conversation up a little bit more so great, great advice, Ash.

    Ashley:
    Yeah. And I had the kind of the same experience as you. I went to a bank and me and my partner had gotten a property under contract and we didn’t have the money for it. We didn’t know how we were going to pay for it yet, but we were actually closing on-

    Tony:
    That’s the best kind of deals by the way, right?

    Ashley:
    Yeah. We were actually closing on a loan on another property at the bank. And so I had brought my BiggerPockets calculator report. And I said to the loan officer, I said, “This is what we’re trying to buy next. We’re not sure what we’re going to do.” And I wasn’t even saying that, what kind of package it lending package do you have for this? He just offered to me. He was like, “Well, if your private money lender, if I can beat his interest rate, I can offer you a 90 day unsecured loan to purchase the property. And then as soon as you close we’ll refinance it and put it into a long-term mortgage,” and that’s what we did. And I never even would have thought to ask for something like that. So yeah, definitely ask to see what’s available out there.

    Tony:
    Yeah. Bankers can get creative. So give them the flexibility to do that.

    Ashley:
    Well, thank you guys so much for joining us today for another Rookie Reply. I’m Ashley @wealthfromrentals and he’s Tony @TonyJRobinson. And we will be back on Wednesday with another great guest on the Real Estate Rookie Podcast.

     



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    Despite pressure from some notable economic experts for an increase in the Fed funds rate to combat inflation, the Federal Reserve has held fast to its existing zero interest rate policy, otherwise known as ZIRP. Recent comments from Federal Reserve Vice Chair Richard Clarida reaffirmed the Fed’s previously stated timeline of 2023, and unless economic conditions improve drastically over the next 12 to 18 months, this would be the earliest that the Fed would consider raising the Fed funds rate.

    While the Fed’s interest rate policy certainly has an influence on mortgage rates via its effect on the 5-year and 10-year Treasury note rates, there is by no means a one-to-one correlation between the two. Thus, lenders can and should expect continued volatility in mortgage rates through the end of 2021 and into 2022. A quick look at recent historical interest rate trends provides ample evidence of this.

    Data from Freddie Mac’s Primary Mortgage Market Survey starting just before the beginning of the pandemic in December 2019 through August 2021 shows numerous peaks and valleys in the average rate for 30-year fixed mortgages despite the general downward trend, with average rates drifting north of 3% several times since the Fed’s rate policy announcement on March 15, 2020.

    In fact, the average for a 30-year fixed-rate mortgage jumped 29 basis points in the days following the announcement and didn’t hit sub-3% until mid-July 2020.   

    image-6

    While the largest swing so far this year has only been 50 basis points in yields (which occurred in only a six-week span during February and March), history tells us that swings of 400 to even 800 basis points in MBS prices are possible even with the Fed Funds rate locked down near the zero bound. This exact scenario occurred in 2013 during what was known as the taper tantrum.

    Although the Fed had instituted ZIRP at the start of the global financial drisis in December 2008, rumblings of a potential liftoff in the Fed Funds rate sent mortgage interest rates soaring by more than 100 basis points, only to see MBS prices reverse and recover by over 6 full points several weeks later — all of which occurred nearly two years before the Fed began increasing the Fed funds rate in December 2015.

    On the flip side, events unrelated to the Fed’s activities can also have a tremendous impact on the market. Case in point would be the policy implementation by the GSEs in March 2021 restricting the number of non-owner-occupied and second home mortgages they could purchase, which left many lenders scrambling as prices for these loans dropped as much as 700 basis points.

    Eventually, lenders figured out the right strategy for these loans — whether it was to price them accordingly as private-label securities, hold them in portfolio for good yields or continue to sell to or securitize with Fannie Mae and Freddie Mac within the specified limits — and the second home and investment market calmed down to the point where most lenders felt comfortable hedging those as they had previously been.

    Of course, now that FHFA has announced that it is suspending the purchase cap, this is all rendered moot going forward.

    However, it does underscores the point that ZIRP is no guarantee of market stability, and looking ahead, full FDA approval of COVID-19 vaccines for all ages, the effects of the Delta variant on consumer behavior and changes in macro-economic data or geopolitical events all have the potential to trigger a significant spike or drop in interest rates and bond prices independent of the Fed’s rate policy.

    For the 70% of lenders anticipating margin compression in Q3 2021 and beyond, per Fannie Mae’s most recent Mortgage Lender Sentiment Survey, this is not encouraging news as rising interest rates will most certainly curtail the already dwindling refinance market, thus driving down volumes and expected profits. As is often the case, the best defense is a good offense, and for lenders, this means taking advantage of high-volume periods to build a buffer against future margin compression.

    In general, lenders are quick to cut their margins when volumes decline but slow to expand them as volumes increase, lest they reverse this uptick in business. Yet, the cyclical nature of the industry practically demands that lenders capitalize on the good times to hedge against the bad, and those that are willing to do so put themselves in a better position to withstand sustained periods of market decline, as well as the brief dips that occur even in the best of times.

    As difficult as it can be to predict market movements, one constant lenders can rely upon is that every market upswing is eventually followed by a downturn. The craving for market stability — and the willingness to believe that a change like ZIRP will deliver it — is understandable but misguided. By taking an “eyes wide open” approach to long-term planning vis a vis secondary/capital markets planning and margin management, lenders can better protect themselves against the unexpected.

    Chris Bennett is principal of mortgage industry hedge advisory firm Vice Capital Markets.

    This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

    To contact the author of this story:
    Chris Bennett at cbennett@vicecapitalmarkets.com

    To contact the editor responsible for this story:
    Sarah Wheeler at swheeler@housingwire.com

    The post Market volatility persists despite Fed’s commitment to ZIRP appeared first on HousingWire.



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