Confusion on BRRRR and Refinancing
Hey all!
I need some clarification when it comes to Refinancing in the BRRRR model. The most recent BiggerPockets Podcast was on BRRRR and I've studied it a bit here and there. I intend on getting the BRRRR book as well to get more information.
I understand refinancing is a way of paying off the initial loan used to purchase and rehab a house thanks to the equity you get out. Now theoretically, the new refinanced loan should have better terms than the original loan.
So the basic walkthrough;
If I buy a home and it's valued at $100k with a down payment of 25%, I will need a loan for $75k. I put another $10k of my own money into the renovation and the end result is an ARV of $150k. I now have $35k invested with $75k loan and a $150k house.
I go to refinance and it does in fact appraise for $150k and I get a loan for 75% of that which is $112.5k. I use $75k of this to pay off the original loan and am left with $37.5k in my hand and a loan of $112.5k.
Now the reason this is so confusing to me is something that they never seem to mention in the podcast(s) and other people glaze over; is this new refinanced loan at that much better of an interest rate to make this a no brainer? I've been trying to rap my head around this but I keep getting confused at the fact I just ended up with a new larger loan than when I began.
David Greene mentions on the podcast that these type of BRRRR rehabs are more closely associated with Private/Hard Money Investors because of the condition of the original property. These investors have a higher interest rate as I have heard before and he discusses. Thus, this would entice me to refinance, however would I need to shop around for the best possible option? Would I need to recalculate the feasibility of it and the resulting cash flow of the property for each one?
I am fairly new to this so thank you for all of your input ahead of time. Thanks!