Closing day is, arguably, the most exciting day in a real estate transaction. It’s the day where you get to take possession of your new asset or collect proceeds from the sale of your home. In a standard residential transaction, this may seem like another term or step in the process — one that is 30-45 days away from the contract’s execution date. But did you know that strategically choosing the closing date could provide you with up to an extra 30 days to pay your first mortgage payment? Find out how you should be leveraging your closing date!

You see, your first mortgage payment is due on the first day of the second month following your mortgage closing. Meaning, if you closed on June 15th, your first payment would be due on August 1st. Paying your mortgage differs slightly from making rent payments, which are typically paid for the upcoming month. Mortgages are paid in arrears, which means you’re paying for the previous month.

For this reason, closing early in the month can provide both investors and homeowners more flexibility with their cash flow. As an investor or a homeowner, it could provide you a full 60 days after closing before your first payment is due. This could be extra time you use to take care of make-ready repairs, find and vet the right qualified tenants, or purchase some appliances or furniture. It can also significantly change the numbers on your cash flow for a rental property if you can find and place a tenant within the first 30 days. The prorated rent + the first month’s rent would all be a net income because there is no MPI expense until the following month.

Utilizing this strategy can also help you in a leaseback scenario with multiple offers. Oftentimes sellers expect a free leaseback or look for one when considering offers. Paying a mortgage while someone else occupies your new home could be a tough pill to swallow for a lot of buyers. Aligning the closing date to be on the first of the month with the leaseback termination date to be on the first of the following month could provide you with a win-win scenario that gets you to an accepted offer. That’s because the first payment wouldn’t be due until 60 days after closing.

As you can see in the chart below, the earlier in the month your transaction closes, the more time you have to make your first payment. While sellers will often prefer the fastest close possible when reviewing offers, it may be a term you can negotiate in a give and take scenario. Using this payment schedule, you can leverage your closing date to maximize your cashflow flexibility.

I am happy to help you leverage your closing date to work for your schedule and your budget. As your real estate advisor, I put my knowledge and expertise to work for you, and I offer all kinds of resources, including a deal calculator. If you have any questions, please contact me at tmcneil@kw.com or (970) 627-7392.

If you’ve been pursuing your passion for investing in real estate, you may have heard, “Your home or the house you live in is not an investment — it’s a liability.”

While this statement at its core can be true, it doesn’t mean that your primary home can’t be an investment. All it takes is the right plan.

Typically, when buying an investment property with traditional financing, the bank will require a 20% down payment. Which, depending on your market, could be anywhere from $20,000 – $100,000+. This is where purchasing a home as a primary residence can have a huge advantage, especially for those just starting out. You can put as little as 3.5% down on an FHA loan as long as you live in the property for a year. Taking advantage of that opportunity can reduce your capital investment tremendously.

But how do you make that primary residence an investment if you live there with no roommates? You do so with the BLRRRR method.

Now, you’re probably thinking BLRRRR? Doesn’t he mean BRRRR? No, that is not a typo. While the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) is tried and true, it requires a hard money loan or a 20% down payment and a higher interest rate.

The BLRRRR method (Buy, Live-in, Rehab, Refinance, Rent, Repeat) is a longer investment (2-3 years), but it can allow you to stretch your capital the furthest while still having ownership rights and taking advantage of a lower interest rate and a significantly lower down payment.

Breaking down the BLRRRR Method

1. Buy

The most important step of the process is buying the right property. Look for the path of progress in your market. Where are the new highways extending to, what businesses or companies are coming to the area, what does future public transportation growth look like? Targeting areas that are along this path of progress will maximize the probability of your home appreciating over the 2-3 year period you plan to live there. Look for a home with good bones and mechanical systems that can be updated with little effort and knowledge or a home that has a flexible layout and lot that would allow for conversion or extension of living space.

2. Live-in

Living in the home, house hacking, and renting out additional rooms right away is a bonus to this strategy but not required. Living in the home provides a few advantages, like a lower interest rate, lower monthly payment, and tax benefits depending on the state you live in. States like Texas, Florida, Iowa, Kansas, Oklahoma, and South Dakota all have a homestead tax exemption, which puts a cap on how much your property tax bill can change year-over-year and reduces the assessed taxable value of your home. This means you’ll pay less property tax vs. a traditional investment property. Additionally, living in the home for 2 of the last 5 years will protect up to $250K (single) and $500k (married) equity from capital gains tax if sold according to the current tax code.

3. Rehab

The rehab portion is at your own pace, as you won’t be under the gun to pay off that hard money loan. While this works best for DIY’ers, it doesn’t mean you can’t succeed if you hire contractors. Your goal during the rehab is to work on projects in phases and not over-renovate. A budget of $5-10K per year in upgrades can go a long way. When renovating, have your future renter in mind. What products are durable, what appliances/ fixtures are energy efficient and low maintenance? What can you add that will attract the best tenants? These are all things that should be considered in step one and executed throughout your occupancy.

4. Refinance

This is where the fun starts. It’s now 2+ years since you bought this home, and you’ve been making cost-effective, functional updates. The house has appreciated 3-10% each year (depending on your market), plus you’ve added value to the home with your renovations — let’s call that 20% and say you got close to dollar for dollar back inequity on the rehab costs (it will be more for DIYers). You are now in a position to either pull a Home Equity Line of Credit (HELOC) or refinance and pull your initial investment out. Both those options allow you to access up to 80% of the appraised equity in the home. For example, let’s say you purchased a home in Austin, Texas for $280,000 with $9,800 down (3.5%), you spent $20,000 in upgrades over two years that increased the value of your home by $40,000, and the path of progress has reached your neighborhood, your house has now appreciated 8% both years. That same house is now worth $370,000. The bank will now allow you to refinance or open HELOC because your equity is around 30% despite only putting 3.5% down. You can draw on up to 80% of the equity, in this case, $72,000, giving you a 20% down payment for your next property

5. Repeat / Rent

After pulling out your initial capital investment of this property with a refinance or a HELOC, you can now use that equity to repeat this process. You can either upgrade to a larger home at essentially the same cost as your first home because of a higher down payment, or you can find another property to repeat the process, allowing you to collect cash flow on the first property while it appreciates. If and when the home value increases, you can continue to use that equity to purchase other investments. This is how you build wealth.

The BLRRRR method is my favorite way for anyone getting started in real estate investing because it allows the investor time to learn, put their team together, and get started with limited capital and risk. If you have any questions about investing in real estate, please contact me at tmcneil@kw.com or (970) 627-7392.