18 months ago I was introduced to the BRRRR concept as I began learning about real estate investing on BiggerPockets. There were some confusing aspects to it for a new investor, but overall the idea made sense:
Buy a property
Rent it out
As time went on the concept was no longer foreign to me, but it was elusive. How would I find such a good deal that I could make this work? So many people talked about how great the strategy was, how did I do it for myself?
Then I found the portfolio of duplexes on the MLS. You can read all of the backstory on one of my first blog posts about the acquisition so I won't get into it now, but the bottom line was that I found a great deal! At the very least I thought it would be a partial BRRRR, at least pulling out a good portion of the cash that was initially invested.
My most recent update on the property ended as I began the search for the right refinance option, conveniently timed in conjunction with the uptick of Covid-19 cases and tightening of lending throughout the country.
The end result - I refinanced through a regional North Carolina bank (People's Bank NC) for $255,000!!!
Before getting into the details, here's a quick look at the numbers:
Purchase price: $155,000
Rehab & Property Subdivision: $7,500
All in: $162,500
Appraised value: $255,000 (!!!!!)
Cash flow: $700/mo
Cash on Cash Return: 20.9%
I didn't end up going the cash out route, more on that later, but if I had I would've pulled out all of my cash plus an additional $15,000! My first BRRRR was not just successful, it was incredible!
The primary value add for the property came from subdividing each of the three duplexes into their own parcels. This gave me a significant amount of flexibility in my financing options - they were now residential units so I could refinance each one individually with a conventional mortgage or I could refinance them commercially as a portfolio loan. No matter what path I took I estimated the value to be around $210,000, which would've cashed out around $35,000.
I started off going down the path of a conventional cash-out refinance. There were a couple of major pros and cons to this approach:
Pros - cash out at 75% LTV, good terms/low payments
Cons - extremely high closing costs, counted against my number of allowed mortgages
The biggest concern came down to the closing costs. As lenders started tightening their belts at the onset of Covid-19, conventional refinances had points attached to them on top of the standard origination costs. Total closing costs for the three loans would come out to be over $10,000, eliminating one-third of our returned capital.
Around the same time my CPA (check him out! Thanks Mark) introduced me to a gentleman from Peoples Bank NC who specialized in commercial loans for real estate. As a commercial loan the terms were different than the conventional mortgage, and as a bank they typically avoid cash-out refinances. But they did have a very interesting combination of options that was incredibly appealing:
Rate-Term Refinance - they would refinance my existing loan plus closing costs into a commercial loan at 4.5%, 7yr fixed, 20yr amortization
Line of Credit - they would then issue a line of credit on up to 80% of the remaining value of the property at 1pt over prime (currently 4.25%)
The rate-term + line of credit was different, and not exactly what I was looking for, but it was ultimately a great option! The rates were good, we'd have more funds available to us (80% of the value as opposed to 75%), the closing costs were significantly cheaper, and our cash flow would be much better by only paying on the balance when we draw.
Thanks to Mark Lewis (reach out to him at email@example.com or 704-202-4628) at Peoples Bank, the process was incredibly easy. We got the ball rolling, got the appraisal scheduled, and anxiously awaited the results. When the appraisal reports hit my inbox my jaw dropped - where I previously expected each property to come in at $70,000, they each came in at $85,000.
Over the course of 8 months, this property generated $100,000 in additional net worth for my partner and I! I was beside myself.
Mark ended up writing the term loan a little higher than needed to cover all costs, allowing my partner and I to still pull some cash out. After paying $5,300 in combined closing costs for the loan and line of credit, we wound up with the following:
$132,000 term loan (paying $3 less per month than the previous loan)
$72,000 line of credit
$6,100 cash out
My partner and I were absolutely thrilled! The line of credit will be used to purchase our next deal, and the wealth snowball will continue!
You may hear it on podcasts all the time, but real estate is not one- or even two-dimensional. There is an approach you may know best, but that certainly doesn't mean it's the only approach. Taking the term + line of credit route was certainly not something I had in mind, and it definitely does not work in every circumstance, but by being flexible and looking at different options this worked perfectly!
Have you used a creative technique to finance or refinance a property? Are you in North Carolina and looking for a good lender? Want to know more? Don't ever hesitate to reach out! I'd be happy to help in any way possible!