So I've been listening to several Bigger Pockets podcast on the BRRRR strategy and I think I understand for the most part, except for one aspect I'm still having trouble wrapping my head around. After borrowing money from a lender for the purchase and rehab of the property, and then the refinancing, how is the lender making their money back? I'm assuming it's from the funds from the refinance, but how are you left with enough to then go "repeat"? I know I am missing something here. Can anyone explain? Am I totally off?
Hey @Haley Ensminger
Here's an Example with some round numbers.
- Let's say you are buying a house for $100,000 with $25,000 of your own money and a$75,000 loan.
- You then spend another $50,000 of your own money on the repairs.
- After you finish the repairs the house get apprised for $200,000!
- You then do a cash-out refinance of 75% of the appraisal which is $150,000
- So, you bought the house for $100,000, put $50,000 into the rehab and are able to refinance and pull out the entire $150,000. You then pay back the lender their $75,000 and have your original $75,000 back.
- At that point you have all of your money back along with a mortgaged property with $50,000 equity.
Since you've got your money back you can go back for another loan and repeat the process on another house.
This example was super simple and there are a lot of nuances to deal with. For example, you may not be able to qualify for another mortgage to do it again...Good to have a relationship with a good mortgage broker to help you understand what you'll qualify for.
Anyways, I hope that helps. Let me know if its unclear.
Ah yes thank you, @Scott Jensen ! That example definitely makes sense in my head. Appreciate the time you took to answer my question!