What exactly does refinance mean in the "BRRRR" strategy?
Rental Property Investor · Akron, OH · Member since 2017 · 70 posts · 17 votes
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
@John Morgan I'd say keep consuming real estate investment content, and I promise you it will stick.
That said, I can't help myself, so let's do a quick real-life example (hypothetically, let's say you have 80k in the piggy but you can do this with a mortgaged property as well, but let's keep it simple eh):
Refinance: You tell the bank that you want a mortgage, so the bank sends an appraiser to check out your newly renovated home. The appraiser sends a report to the bank telling them your house is worth 100k. Yipee!
So, the bank gives you an 80% LTV [Loan To Value mortgage], meaning you put down 20% [20k]. Now, what does this really mean?
Loan/Value = Mortgage from bank/How Much Your House is Worth = 80,000/100,000 = 80%.
Remember, you spent 40k to buy, 20k to rehab, and now you have to come up with the 20k down payment. All in at 80k.
So, you spend 80k you get 80k back. However, all this time Mr/Mrs tenants are still paying you monies/month :)
Repeat → DO IT AGAIN! Do it ALL over again... BRRRR
Hope this helps. Goodluck. Thanks! - Ola
Note: Unequivocally, there are variations to this strategy, so this is just a simplistic version (no closing costs and/or fees). There is a great book about this as well:
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!
I'll try again. The OP can not "cash out the difference between what was paid and the ARV".
ie. The "cash out" only gets you 70-75% of the ARV. Hopefully, that covers all of "what you paid"!
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!
I'll try again. The OP can not "cash out the difference between what was paid and the ARV".
ie. The "cash out" only gets you 70-75% of the ARV. Hopefully, that covers all of "what you paid"!
OK. Now let ME try again, as I apparently was not clear enough for you....
The OPs situation was a little confusing, and I was trying to sort it out by giving him 2 scenarios fo what I though he was asking. The part you were referring to was the second scenario I spoke of. In that 2nd scenario, I was speaking about OP using a conventional loan to purchase at $105K, which would have required him to put 25-30% down...let's say 25% for this example $26,250...which would be a loan amount of $78,750.
With an ARV of $150K, after the project is completed, the OP could refinance to $112,500 ($150K - 25%). THUS a DIFFERENCE from $78,750 to $112,500 being $33,750 which he could CASH OUT at the second refi, and still have the 75% LTV, but have cash in hand from beginning to the end position.
Sometimes you have to read all the way through a post before you start blasting the person who wrote it. Sorry if I was unclear before. Hope that clears it up for you.
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!
I'll try again. The OP can not "cash out the difference between what was paid and the ARV".
ie. The "cash out" only gets you 70-75% of the ARV. Hopefully, that covers all of "what you paid"!
OK. Now let ME try again, as I apparently was not clear enough for you....
The OPs situation was a little confusing, and I was trying to sort it out by giving him 2 scenarios fo what I though he was asking. The part you were referring to was the second scenario I spoke of. In that 2nd scenario, I was speaking about OP using a conventional loan to purchase at $105K, which would have required him to put 25-30% down...let's say 25% for this example $26,250...which would be a loan amount of $78,750.
With an ARV of $150K, after the project is completed, the OP could refinance to $112,500 ($150K - 25%). THUS a DIFFERENCE from $78,750 to $112,500 being $33,750 which he could CASH OUT at the second refi, and still have the 75% LTV, but have cash in hand from beginning to the end position.
Sometimes you have to read all the way through a post before you start blasting the person who wrote it. Sorry if I was unclear before. Hope that clears it up for you.
What clears it up for me is if your last sentence of your first post, which reads: "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", reads instead, as follows:
"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"! Cheers...
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!
I'll try again. The OP can not "cash out the difference between what was paid and the ARV".
ie. The "cash out" only gets you 70-75% of the ARV. Hopefully, that covers all of "what you paid"!
OK. Now let ME try again, as I apparently was not clear enough for you....
The OPs situation was a little confusing, and I was trying to sort it out by giving him 2 scenarios fo what I though he was asking. The part you were referring to was the second scenario I spoke of. In that 2nd scenario, I was speaking about OP using a conventional loan to purchase at $105K, which would have required him to put 25-30% down...let's say 25% for this example $26,250...which would be a loan amount of $78,750.
With an ARV of $150K, after the project is completed, the OP could refinance to $112,500 ($150K - 25%). THUS a DIFFERENCE from $78,750 to $112,500 being $33,750 which he could CASH OUT at the second refi, and still have the 75% LTV, but have cash in hand from beginning to the end position.
Sometimes you have to read all the way through a post before you start blasting the person who wrote it. Sorry if I was unclear before. Hope that clears it up for you.
What clears it up for me is if your last sentence of your first post, which reads: "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", reads instead, as follows:
"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"! Cheers...
What a treat you are to have on BP! Thanks for the English lesson.
@Ola Dantis the 20% down to refi is one part of the cash out refi I was forgetting. So hypothetically one could do the whole deal through a hard money lender (purchase + rehab). Once this is complete and you move to a cash out refi, you would need 20% of the 75% LTV that the bank is allowing you to finance correct? Once this is complete they turnaround and write you a check for the difference once the lender is paid in full essentially giving you back the 20% you just put down? Sorry somewhat of a newbie here.
I've read some of your posts on a couple of threads and see some points of confusion. Some things to note:
See @Ola Dantis 's post for a specific scenario with numbers.
@Nghi Le thanks for the details!! In point #2 You state that I only need to put a down payment on the first loan so during my Rate/Term or Cash-Out refi there is no need to put an additional amount down? In the case of a HML, that could potentially fund the purchase and rehab at 100%, at which point does one put his % down then? At the refi stage? Sorry I apparently have it beat in my head that I need 20% down to get this BRRR on the road.
@Nghi Le thanks for the details!! In point #2 You state that I only need to put a down payment on the first loan so during my Rate/Term or Cash-Out refi there is no need to put an additional amount down? In the case of a HML, that could potentially fund the purchase and rehab at 100%, at which point does one put his % down then? At the refi stage? Sorry I apparently have it beat in my head that I need 20% down to get this BRRR on the road.
You don't need to put additional money down in a refinance; "down payment" is usually reserved for purchases. There are some cases where you have to bring in money for a refinance, and that's if the refinance loan isn't enough to pay off the first loan. This only happens if there isn't enough equity because you ran your numbers wrong at the beginning of the deal.
If the HML lends 100%, there is no down payment. 20% down is a requirement of most lenders (so it's a good idea to beat that into your head to do a deal), although there are some that only require 10% down.
@Jon Holdman. On the refinance part of BRRRR, I am having trouble with bank saying they cant do a conventional refinance because the property was bought in LLC. Hard money lender usually required me to use LLC for their loan. How can I refinance out of hard money into conventional under my name?
I assume you're talking about the cash-out refinance requirement? It used to be that you can only do rate & term refis if you previously owned in your LLC. That rule changed as of December 19, 2017:
https://www.fanniemae.com/content/announcement/sel...
"We will now allow time held in an LLC that is controlled or majority owned by the borrower(s) to count towards the borrower's six-month ownership requirement."
You should be able to transfer title of the property from the LLC to your personal name at the same time the refinance happens. If the bank won't accept it, find a new bank.
@Jay Thomas see what @Nghi Le said. If you want a conventional loan, the property will need to be titled in your name, not an entity. If you want to title the property in an LLC, you'll need a commercial loan, which will not be a 30 year, fixed rate, fully amortized loan. Pick your poison.
@Jon Holdman Let me explain clearly. I want to keep the property in my personal name but hard money lender will only loan to LLC. Once I get the loan through hard money in LLC I will like to refinance back into my name.
@Nghi Le right on spot. I guess the banks I talked to haven't gotten the memo yet. I will keep looking.
@Jon Holdman Let me explain clearly. I want to keep the property in my personal name but hard money lender will only loan to LLC. Once I get the loan through hard money in LLC I will like to refinance back into my name.
@Nghi Le right on spot. I guess the banks I talked to haven't gotten the memo yet. I will keep looking.
Jay, I think I understand why a (conventional) Bank won't lend to an LLC, but, I'm not sure about why a HML would refuse to lend unless it's to an LLC! Is this standard? Do they say why?
ie. If HML believe it's such a good idea, why do conventional Banks make such a fuss against it?...
@Brent Coombs I dont know why. I have talked to about 4 different hard money lenders and they will only lend to a business entity.
I can't say for certain why conventional loans are only to individuals and the HMLs you're encountering only lend to entities. I really have no idea why fannie and freddie impose the individuals only rule. I suspect the HML restriction has to do with the need to avoid the loans they make being residential loans. Residential loans are much more highly regulated than commercial loans and HMLs are doing ONLY commercial loans.
Hello, I have a question about the refinance piece of the brrrr: I am able to put in all the money for the property and the rehab costs using my self directed IRA (it's ok if you aren't sure what that is). My question is this: when the refinance comes back, I will not have a loan to pay off because I used all my own cash in the deal. Then I walk away with that loan money to use for a new deal. Does the bank only look at the rehabed, rented, house and the arv to give me the loan? Or, do they also take my other financial assets into consideration in deciding how much money to give to me? Hope this makes sense.
Thank you
Annette