Lobsterman · Arundel, ME · Member since 2015 · 62 posts · 29 votes
After reading The Book on Rental Property Investing I am really interested in starting out house hacking and moving on to the BRRRR strategy after I build more capital and understand the game better. But I don't fully understand how refinancing gets you all of your invested capital back can anyone further explain this process to me?
I'm no expert by any means, but I can try to explain it to the best of my understanding.
Say you find a house with an after repair value of 200k and you can buy it for 120k, put 30k into it - so you're into it for 150k, then you refinance it and the refinancing lender gives you a 75% loan to value refinance, you've now pulled back out your original 150k plus you have 50k worth of equity already. This works if you pay 150k out of your pocket or if you get a hard money loan to originally finance the deal or whatever. The refinance reimburses the 150k to whomever put it in. So you can now use that for the next deal. As I understand it this only works with value add deals, ones where you can get forced appreciation by rehabbing the property. If you bought a property at retail value there would be no value add so if you were to refinance and get 75% LTV you wouldn't get all your money back to use for the next deal.
You purchase the house well under market value and after renovating it, your total expenditures (purchase + renovation) are still at or under 75-80% of the ARV of the home. That way you can get all (preferably more) of the money you invested up front and leverage it against the tenant.
If it's a success, you have a house that paid you back your initial capital plus instant profit, plus cashflow profit each year. Something like that.
I'm no expert by any means, but I can try to explain it to the best of my understanding.
Say you find a house with an after repair value of 200k and you can buy it for 120k, put 30k into it - so you're into it for 150k, then you refinance it and the refinancing lender gives you a 75% loan to value refinance, you've now pulled back out your original 150k plus you have 50k worth of equity already. This works if you pay 150k out of your pocket or if you get a hard money loan to originally finance the deal or whatever. The refinance reimburses the 150k to whomever put it in. So you can now use that for the next deal. As I understand it this only works with value add deals, ones where you can get forced appreciation by rehabbing the property. If you bought a property at retail value there would be no value add so if you were to refinance and get 75% LTV you wouldn't get all your money back to use for the next deal.
So by refinancing are you taking out a chunk of that equity to use towards a deal? I just don't fully understand where the money comes from through the refinancing process
Tyler Goulden Brrrr is based on the idea of building value in a property. It works best when the property isn't fit to be listed for the end user. In other words almost no one wants to live there.
I'm in a long term Brrrr right now. I bought a 3 family in 07 and every few years I have renovated. Later I would refi. In my case I did not reinvest because I was paying down credit cards used to renovate but commonly people take the cash revived at closing the refi to invest in other properties.
Yes, when you refinance the home you'll get approximately 75 - 80% of the actual appraised value of the home in cash (assuming you own it outright). The money comes from the bank. They're just giving you a chunk of cash based on the value of the home and you pay it back over 15/30 years.
So the idea is to buy low, only make necessary repairs/upgrades to increase the value of the home significantly, refinance the home to get all the cash you put in the home upfront AND a profit and then rent it for a monthly profit as well.
So there wouldn't be any issue with the refinance institution seeing that a HML has a lien against the property first? Would they still refi knowing that the 75% of ARV they would be giving you as cash would be added to the money you already borrowed from the HML?
is is better to own the property outright (i.e. pay all cash for it)?
I just want to add that it goes based on appraised value and you can get the maximum cash out after 6 months on title. The LTV for a SFR is 75% and the LTV for a MFR is 70%.
They will know that you have a hard money loan in the property and that will be paid off first with the refinance. You get the additional cash after all liens are paid off.
So the $150 000 is essentially a Home Line of Credit from the bank that you will use to pay off the HML for the cost of the property and the rehab? Is that correct?
@Jerry Padilla can you refinance from a hard money loan into an FHA or 203K loan? It looks like hard money or private money is the route I'll have to take to get started so now I'm really curious to get this right.
Does the BRRRR strategy only work with cash only and Hard money/private money deals?
Nope. Works best if you can borrow conventionally from day one! The intended purpose of refinancing is for you to have bought or created enough additional equity, that refinancing it will get you ALL your original deposit back (if not more), so you do it all again with your NEXT smart "B"!...
@Brent Coombs, 4 years late here, but your response is related to my exact situation right now. I'm setting the strategic groundwork for my MMLLC to expand quickly in REI. I know we're limited to only getting commercial loans from a bank/credit union since we're an LLC. I know there are options out there like HML, Private Money Lenders, Portfolio Lenders, and the least favorable big banks.
I really want to make sure I kick off our BRRRR process properly. We don't have the cash to buy our first property out right. Conventional won't work in our case because of the mentioned LLC. Can this BRRRR still work with a commercial loan? Would it all come down to making sure we find a proper deal with great rise in appraisal after rehabbing? I think this is the last thing I'm stuck on before I can hit the ground running and get out of planning phase.