A Foray into Creative Financing

BRRRR!

It is a little chilly here, but I'm talking about the BRRRR strategy in real estate. That stands for Buy, Rehab, Rent, Refinance, Repeat. I am about to implement this strategy.

I'm not much of a worrier. I think that to some extent, you have to have the nervous system of a shark in order to do real estate and still sleep at night. Being the first time I'm doing this, it does make me mildly nervous. I'll be happy when it's successfully completed. Let me tell you about it.

I found a house in a neighborhood with which I am familiar, but for whatever reason, property values on this street are a little higher than the rest of the 'hood. Locked down the price on the house. Got a rehab estimate for most of the work, which came in as expected. Looks good.

Now, I do not have 15% to put down on this house and also finance the reno, but I have a motivated seller and I'm a motivated buyer - so that's where the creativity comes in. I'm buying the house with a loan from a hard money lender. This means I put 0% down, I just pay closing costs. Not that those are anything to sneeze at, but it's better than the ~8k or so I'd otherwise have to cough up. Then, I borrow a little $$$ from my friend's 401k (self-directed investing for the win, baby!) for the rehab. I do the reno, and then within about two months, I go to the bank, do a cash-out refi, and pay both of them off. In the meantime, I'm paying interest-only on those loans, which are 11% and 10% interest, respectively. When I refi with the bank, that'll drop to about 5%, depending on what rates do in the next two months or so.

*If* this works, I should have maybe $4k of my own money into this place for the closings and holding costs for two months. I'll owe the lenders about $58,000. The house should appraise around 80k. I can borrow 85% LTV. That means I should be able to get about 68k out of it. I can cover their costs and my costs. I basically get a house with $0 of my own money in it if all goes as planned.

The main reason I'm taking the risk on this one....well, it's two things. One is that the level of ridiculousness where I work hit a new height this week. A co-worker of mine allegedly threatened to hit another one with a shoe. I won't even say anything else. Anywho, that was one reason why I'm a motivated buyer right now :)

The other reason though, is that this one might have the largest profit margin of any of my deals. It's the largest house I'll have bought, which means it will rent for more. If I can make $200 a month after expenses and financing and all that instead of $100 a month, even if I end up with some of my own money into it if it doesn't appraise as planned, it's still a pretty good deal.

I have some before pictures, and eventually I'll have some after pictures as well. In the meantime, here's the furry one looking at me approvingly:

Good idea, mom!

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