BRRRR - the refi and repeat is stumping me

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Hi all, trying to wrap my mind around BRRRR. It all seems straightforward enough - Buy, Rehab, Rent, Refi, Repeat... the part I'm having a hard time with is the refi and repeat. Since banks use debt-to-income to qualify/approve you for a loan, how do you get around the "debt" part, since income isn't yet established? Perhaps I'm overthinking this, but I would be a real bummer to close on a deal, and not be able to refi and repeat. Thanks all!

when you're doing a BRRRR on a SFR it's going to go by your personal income.

Basically your T/R average income, minus your credit report debt service. 

As you accumulate positive cash flow on your schedule E (not your projections) they will ADD to your DTI not subtract. So if you're buying good BRRRR's you should be able to go faster, not slower. You will need more in reserves as you grow though (usually 6 mos PITI for each unit)

also, always talk to your lender FIRST before you close on everything. This is the number one hurdle that people tell me they run into. They get stuck at refi. Talk to a lender and build your exit strategy from the start.

I am no expert on this but maybe we can help each other's understanding.  

When qualifying for a loan, the mortgage officer makes sure your debts do not exceed 30% of your total monthly income. So if you bought a house that had no previous rental history they would look at just your income to qualify for the loan. If your income were $4000 per month, you would qualify for a monthly mortgage of $1200. ($4000 x 0.3= $1200)

If you try to refinance your home, and the monthly mortgage exceeds the $1200 they will not approve a refinance.

The goal of a BRRRR is to buy a home who's ARV is $1200/month, but you buy it for $750/month. That way you have already been qualified on the income side of the deal, and you will have no problem doing a refinance on the property.

You Qualified for - $200K based on your income.

You Bought the home for- $105K 

Down Payment-$21000

Home ARV is- $185K

Refinance is 80% LTV = $148K

In this example you can do a cash out refinance up $148000.  So you can recoup not only your down payment of $21000, but an additional $43000.  That can be used on the next investment property and you can do it again and again.

I've included a link that goes to the question of how long you have to rent a property before lenders start counting your rental income.

https://www.biggerpockets.com/forums/49/topics/333839-how-long-before-lenders-count-rent-income-towards-dti-ratios

Using the BRRRR strategy to refinance and take money back out for next property do you then have to pay PMI on the first property? If the ARV goes up then doesn't also the equity amount of 20-25% go up to avoid PMI?

Originally posted by @Seth Tate :

Using the BRRRR strategy to refinance and take money back out for next property do you then have to pay PMI on the first property? If the ARV goes up then doesn't also the equity amount of 20-25% go up to avoid PMI?

No PMI because the bank will not give you more than 75-80% of the ARV. For example, ARV = $500k, the bank will cash out refi between $375k and $400k. This leaves 20% or more in equity in the p[roperty, thus PMI is not necessary.