So I'm a 21 years old learning the dynamics of real estate property holding and investing. I'm having a hard time understanding the BRRRR method and how your PML gets paid back.
OK so for example...
Let's say I need 100K loan from a PML for 12 months, interest at 10% with 2 points. From my understanding 2 points means I have to give 2K upfront. So where I'm partly confused is now during the rehab am I only paying the 10% percent interest only? Or the whole loan of 100K plus the 10K of interest for a monthly total? Next is after I refinance for the 70% appraisal value, do I get a big check from the bank of 70K? And if I did how would I pay back the PML because that still wouldn't be enough to cover my original 100K Loan. Help I'm so lost lol. Thank you!
Is the 100K to buy the property out right?
You need to figure in the acquisition cost, the interest expenses, all the other expenses, the holding costs, the rehab costs, and the after repair value. And then the 70% ideally will cover all that.
What is your projected after repair value for the property?
Also why can't you get conventional financing with 25% down? That's what I did and it worked out well.
read through this, it may help.
@Luis Peguero During the period of a PML you will be paying the 10% of the loan amount every month or 10k in this case. At the end of the 12 months that is is when the 100k is due. It is an interest only loan meaning your monthly 10% payments dont deduct the principle amount due after 12 months.
The goal is to raise the value of the property by fixing it up that way when you refinance it will pay off the PML.
So for example if you aquire the house for 100k with a PML and you put 30k of your own cash into repairs. Lets say after fixing it up and adding value your new value is 185k.
Well if you refiance that at 70% of the 185k valuation then you would get a refinance of 130k. That 130k would pay off the 100k PML and reimburse you for the 30k of your repairs.
After refinancing you esssentially have none if your money left in the deal. This is why the BRRR method is very popular it allows you to recycle your money and scale quickly.
Updated 5 months ago
Just to clarify the 10% is paid on an annual basis not monthly. So in this case it would be 10k/12= monthly payment.
@Nicholas Lohr and @ Natalie Thanks for answering but my question is a hypothetical. In this scenario, I don't have much money to put down, thats why I went to the PML. My basic question is how do I do the whole process, where I know exactly how much I'll end up putting myself for the lender... points wise to then the DP for the refinance. Basically I just don't understand the BRRRR strategy.
@Joseph Weisenbloom Now I understand it! I get it now. Thank you!
@Luis Peguero - you are right about the points: 2 points = 2% of the loan amount = $2k in your example, normally paid up front.
Private money loans are normally interest only, so taking the 10% rate * $100k = $10k per year, or $833.33 per month. The principle is paid when you refi into longer-term money.
For the last part of your question, normally you are not borrowing 100% of ARV, rather borrowing to cover purchase and rehab funds, or some other calculation that the lender prefers (like 70% of ARV). Since part of the aim of the BRRRR strategy is to force appreciation by buying at a discount and improving the property, once you are done with the rehab, the property should appraise higher. If in your example $100k = $60k purchase and $40k rehab, perhaps the ARV lands at $140k when you go to refi. 70% of $140k = $98k. In this case you would need to cover $2k plus the refi closing costs. Note that we are now refinancing at 75%, which would cover closing plus the original loan amount in your example.
Basically, you can negotiate the PML terms different ways. I pay mine interest only on a monthly basis. 100k loan equals 10k in interest in a year. Divide by 12 for interest payment (833 per month). Most lenders want you to have some skin in the game and will lend 65 to 70% of the ARV. The key to all of this is buying right.
In your example, you would need the property to appraise at 142,800 to get your 100k loan paid off. This doesn't include closing costs.
You will still need to fund repairs from somewhere. Also, usually to get 70 percent of the appraised value, you will need to hold it for six months before refinancing. If you don't wait, the mortgage will probably be based on the purchase price or 70 percent of the new appraised value, whichever is less.
The refinance will pay off the PM loan if all things work out. I would recommend having some padding in your accounts to do all of this. Sometimes appraisals don't come in where you think they will. Hope this helps.
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