One of the best ways to invest in Boston real estate with little to no money out of your own pocket, is the BRRR strategy. BRRR stands for Buy, Renovate, Rent & Refinance. With this strategy the goal is to buy single or multifamily homes that need significant work. You would then renovate this property and bring it to current rental standards. Once the property is fully rehabbed, and rented, you would seek out permanent bank financing to pay off your construction financing.
Part 1: The goal is to create enough equity via your rehab, and to stabilize the property with tenants, that the banks will not require a down payment when you attempt to refinance. An ideal situation is laid out below.
Purchase Price – $350,000
Rehab Cost – $130,000
Financing Cost – $20,000
Total Invested = $500,000 (Refinance Amount)
ARV = $625,000
$500/ $625 = .80 or 80% LTV
Part 2: The second part of the equation, is making sure that your rents fully cover your monthly debts after refinancing. In other words you need your income to exceed your expenses and to producing cash flow for the banks to consider this a good loan. The numbers should look similar to below.
Total Rents Collected – $6,000 Monthly
Mortgage Payment – $2,000
Taxes & Insurance – $1,500
Other Cost = $500
Total Monthly Cost = $4,000
$6000 Rents – $4000 Expenses = $2000 Monthly Cash Flow
Want to see a current BRRR project in process? Come check out our latest 3 family investment as we prepare to bring this rental property back to life! This is a buy and hold deal that’s getting a full rehab. During the property tour we’ll explain:
• Exactly how we acquired the property
• How we raised the capital to purchase
• Our rehab budget & plans for the units
• Our timeline & issues we’ve had along the way
• Rental expectations & cash flow projections
For more details and to RSVP to the meeting, please visit the link below. Hope to see you there!Read more
If you want to invest in Boston real estate, or real estate in any part of the country, here are the 10 terms or concepts you must be familiar with. These are the topics of concern and equations that show up in every real estate transaction.
1 Debt to Income Ratio (DTI):
DTI is a financial measure banks and lenders use to determine whether you can afford to purchase a particular property. It measures the amount of monthly liability you have compared to your monthly income. A high debt to income ratio will tell the banks that you cannot, or should not take on any more debt. For example, if you have auto loans, credit cards, school loans, and an existing mortgage that total $3000 per month with a gross monthly income of $4000 per month, you have a 75% DTI. $3000 in expenses divided by $4000 in income equals .75. While this may be perfectly acceptable to most individuals, banks typically do not like to loan to individuals with a DTI above 50%. You can decrease your DTI by consolidating or lowering your expenses, or increasing your income. Rental income does count toward your DTI measure.
2 Loan-to-value (LTV):
If you own a property that has a market value of $100,000, and the mortgage on that property is $80,000, you have a loan-to-value ratio of 80%. $80,000 divided by $100,000 equals .80, or 80%. This is important to you as an investor because banks often look at this measure to determine their risk before lending you money. The lower the debt compared to the value, the lower your LTV number is. The lower your LTV, the better this loan is for the banks and the more likely you are to get favorable financing. You can lower the properties LTV by placing a larger down payment, or making improvements that increase the property’s value.
If you have a property valued at 400,000, and a mortgage on that same property of 300,000, you have $100,000 in equity within the property. Your equity is determined simply by the value of the property minus the debt. The equity is yours to do what you wish. You can sell this particular property and walk away with 100,000. You can’t refinance this property and pull out some of your equity. As the property value grows and as you continue to pay down your debt, your equity will continue to increase.
The deed for the property shows ownership. It is also called the title. When you own property your name is placed on the deed along with any other owners. Here in Boston that deed is recorded at the Suffolk County Registry of Deeds and is a public document.
A lien is someone else’s financial claim against your property. If you don’t pay your taxes to the state they will put a municipal lien against your home. If you don’t pay your contractor he or she may put a mechanics lien on your property.
The most common lien against your property is called a mortgage. Most people cannot afford to buy a home in New England without borrowing money from the bank. The bank will lend you money to purchase your home and in exchange they place a lien against your property for the balance due. You will not be able to sell a property and tell all liens have been removed and claims against the property have been settled. While you own the home via the deed, if you do not pay your mortgage the bank could take the property (Collateral) from you.
7 LLC: (Limited Liability Company)
An LLC is an entity in which many investors hold property. An LLC provides these investors with protection against financial claims. When you own investment property in your personal name and there is a claim against that property, your personal assets can also be attacked. Owning a property within an LLC insulates that liability and protects you personally. The individual making the claim can only go after the assets of the LLC.
Appreciation the increase in your property’s value over time. The value of land and real estate can go down but more often than not increases in value as time goes on. The longer you own a piece of property the more likely you are to experience a good amount of appreciation.
9 Net Worth:
Your net worth is the total amount of assets you own, minus your total liabilities. An asset is anything you own that holds value. It could be cash, jewelry, furniture, antiques, real estate or variety of other things. A liability is that that you have someone else. It could be a credit card, student loans, personal loans, a mortgage or various other debts. If you total all of your assets in total all of your liabilities then subtract your liabilities from your assets you will calculate your net worth. As an investor, if your NW number is negative, the goal is to get to a positive position. If the number is already positive your goal should be to grow this number.
10 Cash flow:
When you own rental property you have income via your rents, and expenses like your mortgage, taxes, insurance, water, and repairs. Cash flow is simply your income minus your expenses. For example if you are collecting $1000 a month for each of your for tenants you have a total income of $4000 monthly. If all of your expenses equal $2500 per month, you have a cash flow of $1500 per month (or 4000-2500). If you can increase rents and (or) reduce your expenses, you will ultimately increase your cash flow and the money going into your pocket.Read more