let’s talk : FLIPPING IS OUT, BRRRR-ing IS IN
Good morning!
I want to talk to you all about a trend I keep seeing in the real estate “headlines”. Despite what I felt was an increase in popularity, flipping activity is actually trending down. We spent the past two weeks discussing how the market was “slowing” a bit, but you guys, that does not mean it is a bad market! Data shows that experts are backing away from flipping as competition increases and profits shrink. House flipping used to primarily be contractors buying and fixing up houses one at a time for a nice profit. Today it has become a much more automated industry run by companies who can flip these properties on a much larger scale. This increased competition has driven down flipping profits; just this past fall, gross flipping profits were the lowest they had been since 2006.
As you all know we have been working on a “flip” ourselves – Project Philadelphia – for quite some time now (5 months to be exact). What we had intended on originally flipping has actually turned into a BRRRR project. What does that mean? And why are we doing it? Let’s talk about that.
So, as we do, let’s talk Real Estate, let’s talk FLIPPING IS OUT, BRRRR IS IN…
FIRST OFF ALL, WAIT A SECOND, WHAT IS THE LATEST ON PROJECT PHILADELPHIA?
Well, we got delayed A TON in November.
Hiccup #1: The zoning vs use registration issue we discussed HERE.
Hiccup # 2: WE COULD NOT GET THE ELECTRICAL INSPECTOR OUT TO OUR PROPERTY FOR 4+ WEEKS. Seriously, the interior of the home sat untouched for 4 weeks. Anyways, the electrical inspection is finally done, and insulation and drywall are going up as we speak!
We are exactly 6 weeks behind schedule as of today and that initial idea of a quick profit is not as really a thing at this point. BUT that all being said, we are making progress, and even before we knew of this massive delay, we had changed our project goals from flipping to BRRRRing. So what is that? And, why?
WHAT DOES BRRRR STAND FOR?
Buy, Rehab,Rent, Refinance, Repeat. Now this is nothing new. Investors have been doing it for quite some time now, BUT we are starting to see it more than ever, ESPECIALLY in Philadelphia.
WHY IS THIS METHOD BECOMING MORE POPULAR?
A few reasons!
(1) The market, while it is still growing, is slowing down. Or, growing at a slower pace, making it harder for flippers to attain that sweet quick profit they could in the early 2018 market.
(2) OWNING REAL ESTATE IS IN. Well, being financially free is in. We are hitting a time in our economy where multiple streams of income is a NECESSITY. We have put ~6 months of our time into this property, and while I do try to keep my emotions completely separate from any business transaction, I am not currently interested in selling it for a one time profit. Instead, I rather market it, rent it out, and build that steady long term cash flow.
IF YOU ARE GOING TO RENT IT OUT, WHY NOT JUST BUY A RENTAL READY PROPERTY FROM THE GET GO? WHY GO THROUGH THE EFFORT OF FIXING IT UP AND THEN RENTING IT OUT?
BECAUSE using this method can allow you to acquire multiple properties with less cash requirements. Let me explain with an example.
Full disclosure these numbers are purely for example purposes only and do not reflect the figures attached to Project Philadelphia.
Buy
Let’s say you purchase a property for $100,000.
Rehab
You decide to put $75,000 into the home. Now, your total investment is $175,000 BUT after you make these renovations your home is worth $300,000. Essentially you just took $175,000 and made a $125,000 “profit” on it. Now what would I do next?
Rent
So once the renovation is over, get some RENTERS in there!
Refinance
Once we have renters in there, we can now take this RENOVATED, RENTED home to a bank and take out a mortgage. A bank will typically let you take out 75% of the value of the home. If I were to take 75% of the value out of the home in the form of a bank loan, and my home was valued at $300,000, I would get $225,000 back in cash from the bank in exchange for my mortgage. Wait a minute – quick recap, I put $175,000 into the home and took $225,000 out while still leaving 25% equity in the property?! YES, it is true. This is how this works.
Repeat
You can THEN take that $225,000 you took out of the home and use it to REPEAT that process!
THIS SOUNDS TOO GOOD TO BE TRUE SO WHAT IS THE CATCH HERE? WHAT SHOULD I LOOK OUT FOR?
While this does sound like the BEST THING EVER, you do have to keep in mind that there are some “hard” requirements here.
You will need access to funds
You will need access to funds in order to purchase and renovate the home. In our example, we would need access to $175,000 in cash. Whether you have that in your bank account or can borrow from a relative, friend, or a private money lender is totally up to you, but you will need access to the funds required to purchase and renovate the home.
Additional Costs
Outside of the purchase price and renovation costs, you will experience additional costs such as insurance, taxes, utility costs, permit costs, etc.
Seasoning
So here is the thing, you cannot always refi the home if you have not owned it for 6 months. If you were to refinance the home before owning it for 6 months, you will probably only be able to pull out 75% of the purchase price listed on the HUD. This 6 month waiting period is called seasoning. SO, if you bought the home for $100,000 and you renovated and rented it out in less than 6 months, you might not be able to pull out 75% of that ARV (after repair value) of $300,000. There is a chance you will only be able to pull out 75% of that $100,000 purchase price that was listed on the HUD. So how can we avoid this? By including your renovation budget, insurance costs, and additional expected incurred costs ON YOUR HUD and using a delayed financing program. Delayed financing essentially means you purchase the property all cash and then finance it after the deal is closed. This delayed finance exception allows you to skip that six-month minimum seasoning period! Now full disclosure, we did NOT do this for Project Philadelphia, but “luckily” we will hit that 6 month ownership mark by the time we are ready to refinance. I will circle back in on this with you guys on this once we refinance!
Have you all ever BRRRR-ed before?! Any tips or tricks for us!?
Feel free to comment on the blog post HERE and let us know what YOU think!
Happy Wednesday!
Erin
p.s. we are getting more PERSONAL this year and now have a new Instagram handle – check us out at @erin.home.and.realestate
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Data Sources for Today’s Content:
My own personal experience
https://www.cnbc.com/2018/11/01/home-flippers-are-fleeing-the-market-as-their-profits-shrink.html
https://www.attomdata.com/news/market-trends/flipping/home-flipping-report-q2-2018/
http://www.under30wealth.com/brrr-real-estate-investing-strategy/
https://www.biggerpockets.com/renewsblog/work-with-lenders-brrrr-method/
