BRRRR Strategy Explained & Cash-Out Refinancing

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BRRRR Strategy Explained & Cash-Out Refinancing

Account Closed
Real Estate Investor · Columbia, PA · Member since 2017 · 28 posts · 5 votes

I've read a bunch of articles on BP but still can't get my head wrapped around the BRRRR strategies and specifically the financing parts of it... Could someone help me fill in the gaps?

Obviously BRRRR stands for:


B - Buy

R - Rehab

R - Rent

R - Refinance

R - Repeat

Buy

For Buy, you can use the traditional methods of finding a property like looking for REOs on the MLS, networking, etc. With BRRRR, you're looking for a house that you would look for where you are going to flip it.

So you might find a house for $50,000 that needs $30,000 of repairs, but after you have comped it out, you figure out that the After Repair Value is $175,000. Here's J Scott's article on finding ARV or MPP.

then you also have to take into account your fixed costs as well. There's a great article on Calculating Fixed Costs here by J Scott. For Conversation sake and to make the math easy, let's say the fixed costs are $20,000.

QUESTION: Would you get a short-term loan for your purchase price + repairs + fixed costs? In this case $100,000?

So, I'll assume the answer to that question is yes. So we've now purchased the house for $50,000 and have a loan through our PML or HML of $100,000 at let's say 8% and the lender wants to be paid back in 6 months.

QUESTION: Would you be able to do a "30 year" loan and pay it back after 6 months so your monthly payments aren't so high? for example, a $100,000 loan at 8% due in 6 months would be $17,057.71 a month. vs a $100,000 loan at 8% due in 30 yeras is 733.76 a month. Or do these lenders just want their 8% paid out at the end of the loan term? so it's not a monthly payment, but in 6 months, they just want a check for $108,000?

Rehab

So now you have your house, and you get to work on your rehab just like you normally would for a flip. For me, I need a project manager or a GC because I don't have that experience. I can say, I love J Scott's book on Estimating Rehabs and Flipping Houses.

With this, because you're not flipping it for top dollar, you're really just putting what will get you top rent. And sticking with the flipping mentality, the property still needs to stand out and look clean and nice, just doesn't need to have all the bells and whistles.

So the rehab is done and you're, for sake of conversation, spot on budget still. You estimated $30,000 and it took $30,000 on the nose. :-)

Rent

So instead of turning around and selling the property, you rent out the property. So this is the shift now between flipping and buy & hold properties. 

I personally will be using a Property Management Company so I don't have to be a landlord. 

I'll use my property management company to find myself a renter. And from everything I've read, you can't refinance before you get a renter.

QUESTION: Is this correct? you need a renter before you can refinance?

Refinance

This is where i probably have the most questions...

From my understanding, you need to find a bank that will do a cash-out refinance. From my understanding again, this is where you have the ability to cash-out on the equity you have in the house.

So, back to the numbers... You have a short-term loan for $108,000 after interest.

If the house appraises for $175,000, the bank will then give me a loan for $175,000. 

QUESTION: So if i have a loan for $175,000, what money am I putting towards the loan? the $108,000 that i've already spent on repairs and to pay for the house and such?

The difference between $108,000 and $175,000is only $67,000. QUESTION: so would my equity only be $67,000? Which wouldn't be enough money to pay back the loan?

QUESTION: What type of loan are you refinancing to? I've heard of a homeowners loan or even a commercial loan?

Repeat

Let's say my scenario leaves me with walking away with $67,000, you can take that cash out to purchase another house and do it again.

Anyway, I'm hoping this overview is correct and helpful to other people. I'm trying to find like a comprehensive guide on BRRRR, but can't find anything that really just walks you through every step of it. There are some great articles, but i'm hoping some of the gaps that i'm having are some the same gaps others are having and this post will be useful for others moving forward...

Where am I off base in this? What am I missing?

thank you,

Jason

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Jason D.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
9y
You have most of it right, I'm on a phone so I'll try to keep it short and sweet. The main reason that you don't want to BUY with a conventional loan is that most co conventional lenders will not finance the rehab, so you will have to come up with that out of your own pocket. HML will finance the purchase and rehab. The REHAB is pretty self explanatory, you have that covered. The RENT is important for the refinance part because lenders will use a percentage, or all, of rental income as income, and make it easier to be approved. The REFINANCE is where people get tripped up. In your scenario, you are all in for $108k with an ARV of $175k. After 6 or 12 months, depending on the lender, you can cash out refinance. A lender will generally refinance at 75% of ARV, so you can get an new loan of up to $131,250. So you will pay off the $108 initial loan and have $23000 in your pocket. Your equity, at that point, will be $43,750 ($175k ARV minus $131,250 loan). Now this is assuming that you can find a HML to fund 100% of your project, which is unlikely. Most will require at least 10% down so at cash out you would get your down payment PLUS the $23000 "profit". Hope that helps answer what you were asking.
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  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    9y
    You have most of it right, I'm on a phone so I'll try to keep it short and sweet. The main reason that you don't want to BUY with a conventional loan is that most co conventional lenders will not finance the rehab, so you will have to come up with that out of your own pocket. HML will finance the purchase and rehab. The REHAB is pretty self explanatory, you have that covered. The RENT is important for the refinance part because lenders will use a percentage, or all, of rental income as income, and make it easier to be approved. The REFINANCE is where people get tripped up. In your scenario, you are all in for $108k with an ARV of $175k. After 6 or 12 months, depending on the lender, you can cash out refinance. A lender will generally refinance at 75% of ARV, so you can get an new loan of up to $131,250. So you will pay off the $108 initial loan and have $23000 in your pocket. Your equity, at that point, will be $43,750 ($175k ARV minus $131,250 loan). Now this is assuming that you can find a HML to fund 100% of your project, which is unlikely. Most will require at least 10% down so at cash out you would get your down payment PLUS the $23000 "profit". Hope that helps answer what you were asking.
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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y

    Hi @Account Closed,

    You can. That is one option. If the property is juuuust barely good enough for a vanilla Fannie loan, I've seen people do that too. There are also rehab loans that are not hard money.

    What you're mixing up here (you've kind of smooshed all 3 together) is the amortization, the loan term, and balloon payments. A loan can have a 30 or 25 year amortization, but 12 month balloon. What that would look like is the monthly payment calculated as if it were a 30 year term loan, but it "pops" on you in 12 months. So you have 12 months to make regular 30 year am payments, and then you better have some way to write a check for whatever remains after 12 months.

    We've been able to push this a little bit. Lease signed, security deposit made, and maybe some moving boxes visible when the appraiser shows up.... your loan wouldn't be denied because the tenant isn't moving in fast, because clearly there is a real tenant. But, yes, on a refinance there needs to be a tenant. On a purchase mortgage, it can be about your intent to rent it out, but on a refi what matters is the current actual non-hypothetical use of the property. 

    No. LTV cap will apply. For a SFR investment property cash out, that limit is 75%. $175k * 75% = $131,250. On a purchase mortgage we force you to make a down payment as your skin in the game, on a refinance mortgage we force you to leave X amount of equity in the property as your skin in the game.

    $131,250 minus closing costs minus the $108k existing loan would approximately equal the cash out amount.

    Yup, it certainly can.

    6Reply
  • Account Closed
    OP
    Real Estate Investor · Columbia, PA · Member since 2017 · 28 posts · 5 votes
    9y

    Thank you all for your replies @Jason D. and @Chris Mason!

    So for the refinancing side of it, they will literally cash out 75% of the ARV? I thought I was reading somewhere that it was 75% of the equity which doesn't make a lot of sense.

    So in the scenario:

    ARV: $175,000

    Cash out: $131,250 (75% of ARV)

    HML: $108,000

    Cash in pocket: $23,250

    Equity: $43,750

    Now if I'm renting the place for $1,000/mo and their paying utilities..

    Rent: $1,000

    Mortgage: $665

    Repairs: $100

    Property Management: $60

    Cash Flow: $175

    So in this hypothetical scenario, I could walk away with $23,250 to reinvest and cash flow $175/mo?

    Now I see why it's the best of both worlds! I though it was because you got to fix it up and rent it out (which seem like fun projects to me), but it's really because you cash out like you would on a flip and cash flow like you would on a rental.

    0Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    9y
    Exactly! You are, in a sense, flipping it to yourself and maintaining 25% equity. Now on your cash flow. I think your expenses are light and don't forget insurance. I would reserve 20% for vacancy, maintenance, and capital expenses, in addition to property management. But this is where the BRRRR is really cool. You can adjust the amount of cash you get back to make the cash flow work. Instead of taking the whole 75% ARV, you can scale that back to, say 65%, still walk away with a little cash in your pocket, and get better cash flow. With the BRRRR it's a balancing act of cash on hand vs. cash flow, and that's what makes it so much fun!
    4Reply
  • Account Closed
    OP
    Real Estate Investor · Columbia, PA · Member since 2017 · 28 posts · 5 votes
    9y

    @Jason D., yeah, in this scenario, if i took into the vacancy, cap x, i'd probably be under water on the cash flow. lol. but this is really neat. I really like the numbers and running comps so it's kind of like the math part of both scenarios that are neat!

    So you would allot for a 65% ARV just to be on the safe side. That's a good tip!

    0Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    9y
    I would adjust the refinance amount to see where it needed to be for the cash flow I want and see if it still made sense. I look for $250 per month on single family homes so even if I could break even and just get my down payment back and it made $250 per month, I would do the deal. I don't generally look at getting extra cash out of a BRRRR, just my down payment to use again because my focus is cash flow, not extra cash. If I need cash I'll do a flip.
    4Reply
  • Steve K.
    Denver, CO · Member since 2017 · 265 posts · 234 votes
    9y

    @Account Closed , I"m a big fan of the BRRRR method. Once you see that you can get a refi mortgage for 75% ARV, and if you can buy smartly wherein your purchase+rehab costs are under 75% of ARV, the cash-out refi can essentially return all of your upfront down payment to you. It is the 75% of ARV on both fronts that makes this beautiful music called "BRRRR" work.

    After refi, you have 25% equity in the property, but that ideally is your "rehab" of "flip" profit. So, with your original down payment back in your hands, you then repeat. You grow wealth fastest, because you essentially have 100% financing on your rental.....none of your precious original capital tied up.

    Back to your original post, during the 6 months on HML, you likely are paying interest only payments to the HML....then he gets his principal back at the refi.

    Beware of "seasoning" requirements. Look into this further, so it doesn't trip you up. Some lenders will only do cash out refi if you've owned the place 6 or 12 months. Some lenders will say they won't use a new appraisal for 6 or 12 months, but loan you on "costs". Some lenders are happy to do a "rate and term" refi with no seasoning...but that is a variation wherein you take no cash out. So, in your example, they refi you, you've solved your 6mo time clock on the HML....but your $23,250 could be stuck in as extra equity.

    Consider getting a HML that lasts more than 6 months....so, if you need 6 mo seasoning, you can refi in 7th month.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Account Closed, if you've found a good HML that will let you borrow 100% of what you need (according to your post), AND you can find deals that give that give you such a high appraised mark-up (ARV), then you won't need ANY any extra cash out, but, only what you need to pay out your HML after each Refi. Right?

    The idea is: (BRRRR) Refi gets you ALL your outlay back, be it originally loaned money, and/or your own cash! Cheers...

    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    9y

    You would pay off the private or short term loan with the new bank loan. Think of it as flipping the loan from short term to long term. And instead of making a profit with your equity, that becomes your downpayment allowing you to hold the property without any cash into it. 

    Podcast Guest on Show #121
    1Reply
  • Account Closed
    OP
    Real Estate Investor · Columbia, PA · Member since 2017 · 28 posts · 5 votes
    9y

    so really you refinance up to what you've borrowed and put down. Not more than that necessarily? 

    @Andrew Syrios I like that flipping the loan from yourself to yourself. That's a good way to put it. 

    Once I'm by a computer I'll try and rework the example so it makes more actual sense based on all of your feedback. 

    This is super helpful as I'm looking at properties!

    Would you pass up on a traditional rental property to do a brrrr property or would you say that really comes down to preference?

    0Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    9y
    I prefer BRRRR because of the instant equity and getting my money back out. With a traditional rental you put 20% down and that money stays in the property.
    0Reply
  • Account Closed
    OP
    Real Estate Investor · Columbia, PA · Member since 2017 · 28 posts · 5 votes
    9y

    That makes sense. Now can you do the BRRRR method without doing a rehab? For example if I just walk through an apartment, and everything looks good, tenants are already there, could I theoretically by the unit With someone else's money, don't rehab it, and in six months refinance?

    0Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    9y
    As long as the equity is there, sure. It would be very difficult to find a property with tenants that requires no work, for 20%-25% under appraised value. But, in theory, yes you could.
    1Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    9y
    Originally posted by @Account Closed:

    so really you refinance up to what you've borrowed and put down. Not more than that necessarily? 

    @Andrew Syrios I like that flipping the loan from yourself to yourself. That's a good way to put it. 

    Once I'm by a computer I'll try and rework the example so it makes more actual sense based on all of your feedback. 

    This is super helpful as I'm looking at properties!

    Would you pass up on a traditional rental property to do a brrrr property or would you say that really comes down to preference?

    The BRRRR strategy is just a method of acquisition and financing for rental properties, so I wouldn't say there's necessariily any difference between it and a traditional rental property, it's just a difference in how you acquire it. I wrote an article on the BRRRR strategy a while back you might find helpful in explaining the ends and outs of the process: https://www.biggerpockets.com/renewsblog/brrrr-buyrehabrentrefinancerepeatprimer/

    I hope that helps. Good luck!

    Podcast Guest on Show #121
    1Reply
  • Manuel Angeles
    Lender · Los Angeles, CA · Member since 2015 · 278 posts · 78 votes
    9y

    This is a good strategy, especially if you're working with Commercial Properties. After you increase the values of the property, you can refi it at the new stabilized value. Once you refinance, you can pull cash out tax-free.

    0Reply
  • Jordan Puffer
    Grand Rapids, MI · Member since 2017 · 26 posts · 12 votes
    9y

    This has been such a great source of information!

    1Reply
  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    9y

    personally I just can't get myself to leverage that much.  

    I have nightmares of having 10 or 20 of these and the market takes a turn.  

    Unable to pay the 10 or 20 mortgages would stress me to no end 

    0Reply
  • Krissy MussendenPro Member
    Rental Property Investor · Los Angeles, CA · Member since 2018 · 13 posts · 9 votes
    8y

    Thanks for the great info everyone. I'm still a bit confused about the cashing out part. Essentially the new 75% ARV loan from the bank will replace the hard money loan that had a shorter term and higher interest rates. But how do you actually pay off the HML after you refinance? Does the bank give you the cash for the HML, or do you have to pay the HML out of your pocket and then pay yourself back slowly through cashflow?

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y
    Originally posted by @Krissy Mussenden:

    Thanks for the great info everyone. I'm still a bit confused about the cashing out part. Essentially the new 75% ARV loan from the bank will replace the hard money loan that had a shorter term and higher interest rates. But how do you actually pay off the HML after you refinance? Does the bank give you the cash for the HML, or do you have to pay the HML out of your pocket and then pay yourself back slowly through cashflow?

     Yes, the refinanced loan amount is used directly to pay out your HML. [The property's cashflow pays for the refi loan].

    You can see why it's super important not to have borrowed more than 75% of its ARV from your HML in the first place!

    Around BiggerPockets, a more common recommendation is: All-in, owe/pay no more than 70% of its ARV! Cheers...

    0Reply
  • Bob Floss II
    Attorney · Northbrook, IL · Member since 2017 · 719 posts · 549 votes
    8y

    @Krissy Mussenden A refinance is almost like a mini closing. The lender will want you to go through a title company so they can get a lenders policy, but the procedure is much more relaxed and sometimes they can send a notary to you. You'll provide a payoff from your hard money lender for the loan. The title company will prepare a settlement statement that will show the new money coming in, the payoff for the hard money lender, any closing fees, and the bottom line of any additional money you need to bring or (hopefully!!) proceeds you are getting. 

    One of the best feelings is when you switch from a hard money to conventional loan and walk away with a check.

    1Reply
  • Krissy MussendenPro Member
    Rental Property Investor · Los Angeles, CA · Member since 2018 · 13 posts · 9 votes
    8y

    @Bob Floss II and @Brent Coombs thank you for the info. That definitely filled in the missing pieces! 

    0Reply
  • Bryan Johnson
    Huntington New York · Member since 2018 · 18 posts · 2 votes
    7y

    I’m late on this thread and have been doing so much research on this strategy my big thing is that I understand the process up to the refi part so when it’s time to refi out of the HM what requirements are there from the banks (what kind of bank) to get the refi I understand that if you have high dti or you  can’t get a refi because I feel that will be a issue with already my personal mortgage car loan and cc’s also all the money and reserves I will have will come from business credit cc’s which won’t  show up on my personal credit report but won’t banks ask where this money came from

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    7y

    @Bryan Johnson, put simply, people shouldn't be borrowing from HML unless they would already qualify to get a conventional investment loan. 

    ie. The purpose of the HML is only to get the needed investment money quicker!

    That is to say, unless you're using a HML to cover you before you (quickly) resell your buy!... 

    0Reply
  • Chris H.
    Billings, MT · Member since 2018 · 12 posts · 5 votes
    7y

    Does this only work in the case that you have a HML to start and not a traditional financing on the property? For example you found an undervalued SF home, did traditional 15% -20% down. Did necessary work and got it rented. 6-12 months do a cash out refi?

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    7y
    Originally posted by @Chris H.:

    Does this only work in the case that you have a HML to start and not a traditional financing on the property? For example you found an undervalued SF home, did traditional 15% -20% down. Did necessary work and got it rented. 6-12 months do a cash out refi?

    First off, "traditional" investment loans are usually more like 25-30% down! (But yes, maybe 20%).

    Here at BP, Refinancing is mentioned for the purpose of getting all your original 20-30% outlay back!

    And the only way that happens is if you buy real bargains in the first place! Cheers...

    1Reply
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