5. BRRRR Strategy and the LTV
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.
You purchased a property for $75,000, spent $15,000 on repairs, and now have it rent stabilized at $1,000 per month. Your next step is to refinance it and return your investment capital.
Congratulations! You have completed the first three Rs of the BRRRR strategy. That third R is just within reach.
You determined the ARV to be $135,000 and contact us to start the refi process. Great news! You qualify for a 75% LTV provided it appraises.
LTV or loan to value is the percentage of the total value of the property the lender will loan up to.
Can you really refinance out 100% of your investment in this property? Let’s take a closer look.
$75,000 – Purchase Price
$1,500 – Closing
$15,000 – Repairs
$3,000 – Holding
$5,000 – Refi
$99,500 – Total Costs
$135,000 – Appraisal
$101,250 – Refi Amount ($135,000 X .75)
$1,750 – Cash Out
So, did the BRRRR strategy work? Yes! Not only did you recoup your entire investment, but you put an additional $1,750 in your pocket.
In this example, your entire investment capital is returned to you while keeping the lender sufficiently leveraged at the appropriate LTV.
Still, there are many occasions where BRRRR investors leave part of their investment in the loan all attributed to the LTV. Here are some of the reasons that can lower your LTV:
1. A lender will look at your experience level and financials and offer you a lower LTV. This is especially true for new investors.
2. Low than average rents can adversely affect your minimum Debt Coverage Ratio (more on this in a later episode). To meet this requirement, the LTV must be lowered to increase the DCR.
3. You did not adequately calculate the costs for closing, holding, and refinancing.
4. You exceeded your rehab budget.
5. The property appraises lower.
This is why the LTV is so important.
Therefore, it is extremely important to be as precise as you possibly can when you analyze and run your numbers before purchasing the property.
Many wholesalers offering low end properties suggesting they can be kept as cash flow properties simply do not work for BRRRR investors because the ARV falls below the minimum loan amount lenders allow.
Of course, it works if you pay cash and have no intention of refinancing but as a BRRRR investor, that is not your model. Unless you want to commit your capital indefinitely, your only alternative is to flip the property and take profits. Make sure you have an alternative exit strategy if you are unable to refinance the property.
You need to fully educate yourself and understand the ARV and LTV as well as the acquisition, renovation, holding and refinance costs so you do not exceed your total investment of 75% LTV of the appraised value when it comes time to refinance.
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Looking for funding? REI Trader, LLC has purchase, refi and fix and flip loan programs for your SFR, rental and multifamily portfolios. For rates and terms, please email jonathan@reitrader.com
Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader, LLC. and a licensed real estate broker since 2011 with Real Equity, Inc. He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 1,700 projects.
Category : Blog