What exactly does refinance mean in the "BRRRR" strategy?

42 Replies

Hello BP!! I'm currently reading "The book on rental property investing" and just finished the section speaking on the "BRRRR" strategy and how this is beneficial. I've also heard and seen other people mention this strategy multiple times. Im trying to grasp this fully because it sounds like something that I'd like to utilize also but I'm having a hard time fully understanding what the refinance section means. In the book it states that a purchase of a property would be 105k on a home with an ARV of 150k and that a lender would "typically" lend 70% of the "loan to value" which would equal out to be 105K, and we could get back 100% of our capital. My question is, if we refinance the home wouldn't we still have to pay back this loan that the lender gives us? Is it possible to do the "BRRRR" method without buying the property outright? Hopefully I posed the question correctly so I am understood clearly. PLEASE HELP!!!

There are 2 things at play here.

First, when figuring ARV, it means you are talking about a hard money lender because conventional financing doesn't provide for rehab lending in general (FHA has a 203K program, and I think there is also a conventional version, but this is a specific product). So, the idea to refinance is to get out of the higher interest rate that the hard money lender is charging for the loan to acquire and rehab.

Second, if you DID obtain a conventional loan to purchase at the $105K, you had to put the 30% down from there. So, the suggestion to refinance is to get the loan to a place where the ARV can be considered, and you could cash out the difference between what you paid and the ARV.

The BRRRR strategy (buy, rehab, rent, refi, repeat) is a way to acquire a property with less money down than buying with a conventional loan with a 20% down payment and funding the rehab out of pocket. Say you can buy that house that, when fixed up, will be worth $150K for $80K. And that it needs $20K in rehab. With a conventional loan, you would need to put down $16K on the purchase along with $20K in rehab. So, you would end up with a $64K loan and would have $36K of your own cash into the deal.

With the BRRRR strategy instead of buying with a conventional loan you use hard money and get a hard money loan based on the "after repaired value" of $150K. Hard money lenders will make loan based on the value after work, rather than based on the initial purchase price. That's key, because in this example you could borrow $105K up front. You'll still have closing costs and the interest on this hard money loan for six month (a typical timeline in one of these deals) is going to cost you about 10% of the loan amount, or $10K in this case. And hard money lenders typically require you to do the work, have it inspected, and then get reimbursed from the loan. So, this doesn't mean you can buy with none of your own cash. But, in this example, you would have costs of $80K purchase, $20K rehab, and $10K interest for a total of $110K. You've borrowed $105K, so only $5K of your own cash is in the deal. You'll need another $5-10K for fronting the cost of the rehab, but they you'll get that money back once the work is inspected. After you finish the rehab, you refinance using a conventional loan. Because you've added value, the lender will base the "value" for the loan on a new appraisal. The LTV isn't as high on this type of refi as on a conventional purchase - 70% rather than 80%, but because the lender is using the new value, you're still able to borrow $105K. That gives you enough on the refi to pay off the hard money lender. You end up with a $105K loan and only have $5K of your own cash in the deal.

The downside is you have a $105K loan instead of $64K as in conventional loan at purchase case.  The upside is you have only $5K of your own money tied up rather than $36K.

I don't understand what you're asking with

Is it possible to do the "BRRRR" method without buying the property outright?
real simple and quick here. buy house 100k w/ 20k down payment ARV of house is 150k spend 5k repairs (probably unrealistic, I'm just using easy numbers) do a "cash out refinance" for 70% of the ARV (that means the house had to appraise at 150k after you did your repairs) the refi gives you 105k, from that 80k pays off the initial mortgage, 20k goes back to you (repaying yourself the down payment) and 5k goes back to you (repaying your rehab costs). make sense?
@Jon Holdman you don't have to use non conventional loan for the BRRRR strategy. in your first example, the 36k out of pocket, you could still do a cash out refi to get your money back. I've looked at using conventional lending for both loans of the brrrr. the idea isn't to "get out of a high interest loan" it's to get your cash back out, regardless of the loan type used.

True enough, @Donald S. .  Using hard money, though, can get you into properties that need significant work and don't qualify for conventional financing.   If you have the $36K and the property qualifies, doing a conventional loan and then a conventional refi saves you the high cost of the hard money loan.

@Jon Holdman

Jon,

Thanks for your reply! So if I am understanding and hearing you correctly in order to utilize the BRRRR method I would need to put my own hard money down AND THEN refinance the property based on the ARV? Would I be expected to mention to the lenders that I am rehabbing and flipping? Again I'm trying to gain as much insight to this method as possible so please excuse me if my questions are a little confusing

@donaldshaver

Donald,

Thanks also for your replies!!

So the key here is using your own hard money down? My next question is... once you would "refinance" from the lender would you then owe that money back to them?

@John Morgan I don't understand your question. Hard money does not mean your money, hard money loans are a type of loan usually short term, 6-12 months is typical. 

It's called hard money because the loan is based mostly off the hard asset (the house in this case) and less so off you're credit, although that still plays a part. Now in a Hard money lender gives you a loan, you still usually have to put money down, because they want you to have "skin in the game", but HML aren't traditional banks so terms are very different.

Generally HML cost more to use, but can be useful. It's not uncommon for a HML to lend 80% loan to value on the purchase price, and 100% rehab cost. So in this case you'd have to cash out refinance to pay off the Hard money lender, and then anything left over gives you back your down payment and possibly more.

@Donaldshaver

That clears up everything!!! I was under the impression that hard money was in fact liquid capital and cash. When in fact hard money is a type of loan that lenders will fund. Lol this changes my question because now I have a better understanding of it all. I guess that's what BP forums are for! Thanks again for the clarification =)

@John Morgan , think of BRRRR as a method to get some/all of your money back out of a buy and hold real estate transaction after you buy, fix and rent it. It doesn't matter if you pay cash, use hard money, a line of credit, or a conventional loan to purchase the deal in the first place. What matters is that you are able to recoup your money after refinancing.

Originally posted by @Cara Lonsdale :

There are 2 things at play here.

First, when figuring ARV, it means you are talking about a hard money lender because conventional financing doesn't provide for rehab lending in general (FHA has a 203K program, and I think there is also a conventional version, but this is a specific product). So, the idea to refinance is to get out of the higher interest rate that the hard money lender is charging for the loan to acquire and rehab.

Second, if you DID obtain a conventional loan to purchase at the $105K, you had to put the 30% down from there. So, the suggestion to refinance is to get the loan to a place where the ARV can be considered, and you could cash out the difference between what you paid and the ARV.

Donald Shaver answers your "higher interest rate" point:- "the idea isn't to 'get out of a high interest loan'; it's to get your cash back out, regardless of the loan type used".

Oh, and that same thought corrects your last sentence too, because you're not trying to "cash out the difference between what you paid and the ARV". Cheers...

Seems like your point of confusion was that you were thinking "hard money" is your own cash.  Its not.  Its a type of loan.

OTOH, this strategy does work if you have your own cash.  Buy and rehab with your own cash, then do a cash-out refi based on the improved value to get all or most of your money back.

Originally posted by @Brent Coombs :
Originally posted by @Cara Lonsdale:

There are 2 things at play here.

First, when figuring ARV, it means you are talking about a hard money lender because conventional financing doesn't provide for rehab lending in general (FHA has a 203K program, and I think there is also a conventional version, but this is a specific product). So, the idea to refinance is to get out of the higher interest rate that the hard money lender is charging for the loan to acquire and rehab.

Second, if you DID obtain a conventional loan to purchase at the $105K, you had to put the 30% down from there. So, the suggestion to refinance is to get the loan to a place where the ARV can be considered, and you could cash out the difference between what you paid and the ARV.

Donald Shaver answers your "higher interest rate" point:- "the idea isn't to 'get out of a high interest loan'; it's to get your cash back out, regardless of the loan type used".

Oh, and that same thought corrects your last sentence too, because you're not trying to "cash out the difference between what you paid and the ARV". Cheers...

 I am not sure what you are trying to say, or correct me on.

I was trying to answer the OP's question as best I could with the confusing nature in which it was asked.

Have a great day!

@John Morgan Your post and the replied in here answered many questions for me as well. I have an alert for the word "BRRRR" and this post was worth the 20 notifications I get a day ha ha.

@Jon Holdman So when doing the cash out refinance portion of the deal, how does one pay back the HML? I feel stupid asking but I cant seem to understand that part without detail apparently.

@Owen D. Gotcha. So the bank I am doing the cash out refi with is the party that moves the money back to the HML paying off my debt to them. So if the loan is 100k hard money and the ARV is 160K then the bank gives me a 70% LTV loan of 112k. That 12k minus fees and closing costs goes in my pocket? All the while my new mortgage on my rental is for 112k. I think I jacked that up but I'll wait for your reply. Thanks for the help.

@David Olson its the title company that deals with the money, not the new lender. The way a closing works is the title company (or attorney, in some eastern state) gathers all the info about existing loans and any other encumbrances (e.g., property taxes, water bills) and figure out who needs to be paid how much. They will request any existing lender provide "payoff statements" that show how much they're owned. The new lenders and the borrower send their money to the title company. Lenders typically wire the money to the title company the day of closing or the day before. Borrowers typically are told to bring cashiers checks for their part. So, before the actual closing where everyone signs docs, all the money lands in the title company's bank account. After closing, the title company hands out checks or wires money to everyone who's getting something. The HUD-1 settlement statement shows where all the money is coming from and going to.

@Owen D. understood. In my example that would a poor return i'm sure. Hopefully I can get back more than 12k although my main goal is to have the property pulling in a nice cash on cash return. Seems to be that the ARV is crucial and the after rehab appraisal is the time when most would begin to stress.

@Jon Holdman Thanks for the clarity! That helped a lot. 

Question for both of you. Lets assume I was to get 5-10 properties through the BRRRR method. All of which have a 70% LTV cash out loan. With 5-10 properties and each having 30% equity still in them since I was only able to get a 70% LTV cash out loan, is it possible to then get a HELOC for that remaining equity in each property? Or is that equity only available or realized when you sell the home?

@Owen D. I was saying 70% to be conservative and for some reason I thought it was the norm for SFH. I'm not to familiar with Commercial cash out loans. In my example I was assuming the conventional 30 year term to be honest. Commercial loans have a smaller term correct? Harder to get than residential? Sorry a little foggy in this area.

@David Olson when you do the cash oot, how much % the bank will go up to is dependant on the bank, some do 70, 80 85, it's up to the bank. But getting the most out as you can isn't always the best. 

say i have a 200k ARV house and only 120k into the deal total (my money and let's say a Hard money lender) I could do a cash out refinance at 70% for a total of 140k, pay off my HML and get all of my money left and pocket the additional 20k, but that means a higher mortgage and higher payment, so I have to make sure it's worth it. in the same scenario if I only refinanced for say 110k I would pay off the Hard money lender, but leave 10k of my money in the deal.

as for HELOC on a property, again its up to the bank how much equity they'd require you keep in the property. 200k house that I have 60k equity, they may only give me a HELOC for say 40k so I have 10% equity in the property. again its going to depend on the lender.

I believe the current fannie/freddie guideline for a cash out refi is 75% LTV. If you want 30 year fixed rate loans, you are stuck with fannie/freddie rules. You may go higher than 75% with a commercial loan. But those won't be 30 year fixed rate loans. They will have shorter amortization periods and will likely have ARM or balloon terms. Commercial loans vary A LOT, though. Individual lenders (e.g., smaller local banks, credit unions) may have terms you find acceptable with higher LTVs.

lol I've never had this many notifications on BP Ever! Kind of crazy and overwhelming at the same time but it's great! I learned so much from you guys. THANKS SO MUCH!!!

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