#AskBP - BRRRR method - Refi

8 Replies

In the BRRRR system...can you explain the process, in as much detail as possible, of refinancing in order to get your money out of the deal to then go and purchase another investment property?

For example, we are looking to use a HELOC we have recently acquired to purchase an investment process. We are contemplating the use of the BRRRR method, but I am looking for more info on pulling the money out of the deal once the rehab etc. is finished so that we can purchase another investment property. Hope this isn't too confusing.

Thanks in advance!

When you use a HELOC to buy a property, think of it as the same as buying cash. So you bought a property all cash, and that means you have no mortgage on it. Yes, you have that HELOC to pay back, but it's not connected to this new house.

You will have bought the house under the ARV and fix it up. The ARV once it's fixed up should be more than ALL the money you put into it (purchase, closing, holding fees, repairs, etc). When it's all fixed up and looking good, you decide you want to take a loan out on all that equity. So you get it "refinanced" even though you didn't have an original mortgage on it. Assuming you did all the numbers right, the value will be in your favor and the lender will cut you a check. You take that money and pay off the HELOC. You then pay your new mortgage as usual. Be sure before you do this deal that not only will the ARV be in your favor, but it will cash-flow as a rental once it's mortgaged.

With your HELOC paid back thanks to the mortgage you got on the fixed up new property, you can do the process all over again.

That clears things up a lot for me. It made sense, but I wasn't sure how the process went exactly. I really appreciate the insight!

You can cash out from this property as soon as the rehab is done. HELOC is acceptable source of money under delayed financing exception.

Awesome! That is good to know!

Think of BRRRR as flipping a house to yourself. Basically, instead of using your equity to make a profit, you're using it as a downpayment.

So let's say you buy a house for $50,000 and put $25,000 into it. You are all in for $75,000. 

And let's say the ARV is $100,000. So you refinance with a bank (and pay off whatever private loan you used to buy the property) at 75% LTV.

75% of $100,000 is $75,000, so you pay off your first loan (minus loan fees in this example). 

The goal of BRRRR is to buy and hold property for zero or little down. Does that make sense?

Talk to your lender BEFORE you close on the unit so you can strategize to include rehab costs in the deal. if you use delayed financing they will only allow you to pull out 100% of HUD from the deal, that will not include rehab unless you put it in escrow and on the HUD before you close. Otherwise you wait 6 months to get back the whole thing. Common but expensive oversight imo.

@Alexander Felice Could you explain further? Is this assuming one is not using the HELOC for both purchase and rehab of the new property?

Originally posted by @Nicole A. :

@Alexander Felice Could you explain further? Is this assuming one is not using the HELOC for both purchase and rehab of the new property?

Shouldn't matter the method of payment, as far as I know when you use delayed financing you are allowed to pull out 100% of what's on the HUD, essentially what you paid for the house. Well if you have a 40K house and a 20K rehab, you don't want to leave that 20K in the deal, you want it cash, so it has to be on the HUD.

Well it's not going to be on the HUD because you don't pay for rehab at closing.....unless you do. So I tell my agent to put 20K on the hud for repairs, then I pay that to the lawyer at closing along with what contractor I want it made out to. Then it disburses during the rehab, and I can finance it out when I use delayed financing.

talk to your lender, I'm certainly no expert I just do what mine tells me ;)

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