Real Estate

Questions about BRRR and diminishing returns regarding 80% refinancing

  • Last Updated:
  • Mar 24th, 2021 3:32 pm
[OP]
Sr. Member
Jan 26, 2020
538 posts
131 upvotes
Canada

Questions about BRRR and diminishing returns regarding 80% refinancing

Rewritten again March 24.

Say you buy a house for $200,000 with 20% down (the loan is $160,000 + $40,000 down payment).
You do the BRRR rehab for $50,000; now you've sunk $90,000 cash into it.
You refinance it for 80% of $350,000 or $280,000. (An optimistic profit.)
So your mortgage has gone from $160,000 to $280,000.
But its a nice place now and you've anticipated being able to rent it as a $350,000 house so the tenants should be paying the mortgage. This is provided there are no surprises. Because there are never surprises when you work on a house! Right!
I'm curious if the $350,000 refinance figure is arrived at by just the house/land/location or also the revenue you can show you're getting from the house over an extended period? I wonder how much influence a skilled landlord (who can extract significantly more money from a property than most investors) would have on the refinance amount offered by the lender? In most places a $200,000 house would probably rent for about $1000-1500. But if they partition a couple of rooms not usually rented, say the living or dining or rec rooms, they may have 2 more bedrooms which could raise their rental income of their 3 bedroom home by 40% or more (because living/dining/rec rooms tend to be a lot bigger than bedrooms). If they are able to put more than 1 person in each bedroom their revenue goes up by about 40% per room. Combine this all and you could conceivably double your rental income and do it perfectly legally because its shared accommodation. Best to do this without a lease so the renters feel free to leave anytime they want.

If one was selling the home to an investor the rental revenue would probably make a big difference if you can show consistent high rental income. But would a bank look at it the same way to refinance?

Would a bank care about that knowing that the next purchaser is unlikely to bother going through all the trouble and headaches of managing a group of people instead of just 1 family and wouldn't be able to extract anywhere near that amount of revenue from that property?

Once you get your $280,000 you pay off the original mortgage of $160,000 and have $120,000 minus $90,000 invested for a profit of $30,000. And we know that raising the finance value of a $200,000 house to $350,000 with $50,000 work is rather unlikely. Things always go wrong and one could easily go way over budget.

Anyway you're covering your mortgage with the rental revenue.

So you take your $30,000 and now you can buy a place for about $100,000 spending $20,000 on the down payment, getting an $80,000 mortgage and spend $10,000 on the reno. At least you got into it with no cash. You've improved it and now you rent it as a $130,000 house and refinance it at that value of 80% equaling $104,000. You pay off the $80,000 mortgage and have $24,000 left to buy another property.

$24,000 allows you $16,000 for a down payment and $8,000 for a renovation.

Do you notice a pattern here? The problem is the 80% refinance rate. When you sell you're getting 100%. But there are the taxes. If one didn't have any other income and structured their savings well so they never needed to sell to pay their bills this could work but I really doubt most BRRR newcomers are doing anything of the kind.
Last edited by MichaelZZZ on Mar 24th, 2021 10:08 am, edited 5 times in total.
21 replies
Deal Addict
Jul 29, 2006
4148 posts
983 upvotes
I'm not sure what you're asking, are you asking how they pay for the mortgage payments & renovation cost before it's new appraised value?
Banned
Jan 4, 2021
325 posts
344 upvotes
MichaelZZZ wrote: Say you buy a house for $200,000 with 20% down. So the loan is $160,000. You do the BRRR rehab for $50,000 and are able to refinance it for $350,000 for a great on paper profit. But just how do you pay for that? They never seem to talk about that. One would expect rental revenue to cover the mortgage or are they expecting the rental revenue to pay for the refinanced monthly payments? And to arrive at the $350,000 figure are they looking more at just the house/land/location or the revenue you can show you're getting from the house over an extended period? I wonder how much influence a skilled landlord (who can extract significantly more money from a property than most investors) would have on the refinance amount offered by the lender?
well the idea would be to use your unsecured line of credit, or, refinance another property (e.g. your principal residence) to fix the new one.
[OP]
Sr. Member
Jan 26, 2020
538 posts
131 upvotes
Canada
I asked about the ability to pay a mortgage that is now much much higher.
Say there were no taxes on real estate gains. Would it be ever preferable to get a loan for $350,000 instead of someone buying the property for $350,000? I'm just wondering if all the fans of BRRR are considering this angle. Of course there are taxes on properties that aren't our principle residence so maybe this is all mute. I just wish the people flogging BRRR online would focus more on the numbers. Maybe some do. I just haven't seen many of those yet.

Also I wonder how many people doing BRRR are expecting to buy a property with none or very little of their own money. I'm suspecting its a lot. These people are rather delusional. Also probably very inexperienced in business where partners can turn your business into a living hell. How would you like to have to answer to one or more people every day? Its tortuous having your decisions questioned when you're the one doing the work and are hands on and they are cluelessy criticizing not bothering to invest any time in their project after giving you the money to start.
[OP]
Sr. Member
Jan 26, 2020
538 posts
131 upvotes
Canada
Every BRRR promoter I see is renting the house to just 1 person or family instead of using shared accommodation and renting it to several individuals. This is chopping 25-40% off their potential rental revenue. One wonders if they care about actual revenue. Or are just packaging their video/podcast to sell as many courses as possible.
Last edited by MichaelZZZ on Mar 24th, 2021 9:35 am, edited 1 time in total.
[OP]
Sr. Member
Jan 26, 2020
538 posts
131 upvotes
Canada
born2beburned wrote: well the idea would be to use your unsecured line of credit, or, refinance another property (e.g. your principal residence) to fix the new one.
What do people mean when they say "unsecured line of credit"? Is that like a Line of Credit bank account for a few thousand? What use is that in real estate? Are they broke and have no savings at all? (That's a great way to go into business so the first storm that comes along wipes you out.)

I notice on Meetup and Facebook there are scores of real estate groups but they all seem to be geared to either selling financial products by the group starter or selling courses or coaching.
[OP]
Sr. Member
Jan 26, 2020
538 posts
131 upvotes
Canada
nx6288 wrote: I'm not sure what you're asking, are you asking how they pay for the mortgage payments & renovation cost before it's new appraised value?
As I understand BRRR most people would do the renovation first thing. So if they bought that house for $200,000 and got a mortgage for $160,000 with the standard 20% down payment, they'd need $50,000 of their own money to pay for our renovation example. Then they would rent it as a $350,000 house and hope to get financed at that point. But....would they get $350,000 or 80% of that? I'm wondering what most of these investors expect if the house is assessed at $350,000. Whatever they get they pay off the first mortgage (aren't there legal costs with each mortgage?) and use the rental income on their $350,000 house to pay their $350,000 or $350,000 - 20% mortgage.

Sure is complicated compared to saving your money and plopping down the cash to buy your house in one transaction and a handshake.
Banned
Jan 4, 2021
325 posts
344 upvotes
MichaelZZZ wrote: What do people mean when they say "unsecured line of credit"? Is that like a Line of Credit bank account for a few thousand? What use is that in real estate? Are they broke and have no savings at all? (That's a great way to go into business so the first storm that comes along wipes you out.)

I notice on Meetup and Facebook there are scores of real estate groups but they all seem to be geared to either selling financial products by the group starter or selling courses or coaching.
My unsecured line of credit is $100,000.

will refi your home to 80% of the appraised value.
Last edited by born2beburned on Mar 23rd, 2021 8:50 pm, edited 1 time in total.
Banned
Jan 4, 2021
325 posts
344 upvotes
MichaelZZZ wrote: As I understand BRRR most people would do the renovation first thing. So if they bought that house for $200,000 and got a mortgage for $160,000 with the standard 20% down payment, they'd need $50,000 of their own money to pay for our renovation example. Then they would rent it as a $350,000 house and hope to get financed at that point. But....would they get $350,000 or 80% of that? I'm wondering what most of these investors expect if the house is assessed at $350,000. Whatever they get they pay off the first mortgage (aren't there legal costs with each mortgage?) and use the rental income on their $350,000 house to pay their $350,000 or $350,000 - 20% mortgage.

Sure is complicated compared to saving your money and plopping down the cash to buy your house in one transaction and a handshake.
If you like, I can have a 1:1 coaching session with you and you can ask me all these questions for $50 an hour.
Deal Addict
Jul 29, 2006
4148 posts
983 upvotes
It sounds like you're thinking about the BRRR backwards. The people who do this often already know the rents and appraisal values they'll get after their renovations are done.

Also many of these projects are at the minimum on a duplex conversion, the only reason they would BRRR a single family is if they bought it for so much under market value that it is worth it.
[OP]
Sr. Member
Jan 26, 2020
538 posts
131 upvotes
Canada
born2beburned wrote: My unsecured line of credit is $100,000.
will refi your home to 80% of the appraised value.
I would think very few new investors have a 100k unsecured line of credit!
The 80% figure seems logical. Thank you.
[OP]
Sr. Member
Jan 26, 2020
538 posts
131 upvotes
Canada
> It sounds like you're thinking about the BRRR backwards. The people who do this often already know the rents and appraisal values they'll get after their renovations are done.

If they know the market that would make sense. I get the feeling that many new investors are way too optimistic about it and get rudely surprised later.

> Also many of these projects are at the minimum on a duplex conversion,

I'm not understanding "at the minimum on a duplex conversion". Are you saying they are doing BRRR with at least 2 units? Or?

> the only reason they would BRRR a single family is if they bought it for so much under market value that it is worth it.

Why is it worth it if its so much under market value? Why not just sell it? Is it the tax they'd pay on the gain or are there other reasons?
And do you think some people are choosing refinancing because its easier to refinance most properties than it is to sell them?
Last edited by MichaelZZZ on Mar 24th, 2021 9:31 am, edited 1 time in total.
Banned
Jan 4, 2021
325 posts
344 upvotes
MichaelZZZ wrote: I would think very few new investors have a 100k unsecured line of credit!
The 80% figure seems logical. Thank you.
not really.
anyone worth their salt has a $50k loc easy.
Deal Addict
Jul 29, 2006
4148 posts
983 upvotes
I think you need more education on what's involved in a BRRR and how to be successful at it. The questions you're asking are very basic to answer. Go listen to a few Canadian real estate podcasts.
[OP]
Sr. Member
Jan 26, 2020
538 posts
131 upvotes
Canada
nx6288 wrote: I think you need more education on what's involved in a BRRR and how to be successful at it. The questions you're asking are very basic to answer. Go listen to a few Canadian real estate podcasts.
If my questions are very basic it should be easy to answer them. I bring up these points because a lot of people are getting fooled into thinking investing in real estate this way is an easy way to riches. Some answers would help many people come down to reality. Give it a shot, nx6288!
Deal Addict
Jul 29, 2006
4148 posts
983 upvotes
MichaelZZZ wrote: If my questions are very basic it should be easy to answer them. I bring up these points because a lot of people are getting fooled into thinking investing in real estate this way is an easy way to riches. Some answers would help many people come down to reality. Give it a shot, nx6288!
sure pay me and i'll answer them or stop being entitled and go learn for yourself.
Banned
Jan 4, 2021
325 posts
344 upvotes
MichaelZZZ wrote: If my questions are very basic it should be easy to answer them. I bring up these points because a lot of people are getting fooled into thinking investing in real estate this way is an easy way to riches. Some answers would help many people come down to reality. Give it a shot, nx6288!
Like I said, I will coach you on any questions you have.
$50 an hour.
We can chat on discord, or teamspeak, or google chat or zoom.

let me know.
[OP]
Sr. Member
Jan 26, 2020
538 posts
131 upvotes
Canada
nx6288 wrote: sure pay me and i'll answer them or stop being entitled and go learn for yourself.
Sure I'll get right on that. Especially when you offer no evidence of specific knowledge here so far. People pay once they are reasonably sure the other party has something to teach them. You're the first person on here to ask for payment I've seen. Its not exactly the reason people go to online forums.
[OP]
Sr. Member
Jan 26, 2020
538 posts
131 upvotes
Canada
born2beburned wrote: Like I said, I will coach you on any questions you have.
$50 an hour.
We can chat on discord, or teamspeak, or google chat or zoom.
let me know.
You're rather delusional, aren't you?
Jr. Member
Jan 31, 2013
124 posts
106 upvotes
Toronto
MichaelZZZ wrote: But if they partition a couple of rooms not usually rented, say the living or dining or rec rooms, they may have 2 more bedrooms which could raise their rental income of their 3 bedroom home by 40% or more (because living/dining/rec rooms tend to be a lot bigger than bedrooms). If they are able to put more than 1 person in each bedroom their revenue goes up by about 40% per room. Combine this all and you could conceivably double your rental income and do it perfectly legally because its shared accommodation. Best to do this without a lease so the renters feel free to leave anytime they want.
You may want to read up on the relevant tenant laws, not to mention the applicable laws for creating multi-family dwellings in the jurisdiction you're going to be pursuing your "strategy" in.

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