BRRRR Refinance Step Help

8 Replies

Good Morning Everyone, I have been putting this off for a little bit because honestly I am kind of embarrassed but I realize that to learn I need to actually ask the questions that I need answers to so here it goes.

for the refinancing portion of the BRRRR strategy I for some reason cant seem to wrap my head around how all the numbers work. I know that it is pretty straight forward but I think I am overcomplicating it.

So lets just say $250,000 is the purchase price with down payment of $50,000, $50,000 is the rehab cost, when done it would sell for $450,000. So I purchase, Rehab and rent out the property, now the seasoning period for the loan is up and now I can refinance. From there the bank appraises it and says it is worth the $450,000 so I can refinance it to 80% of the appraised value (80% is what my bank will refinance at). That leaves the refinanced loan at $360,000. THIS is where my brain gets stuck for some reason.

Is it $360,000 - $250,000 = $110,000 equity now in the property??

This is why I am embarrassed because I know it is a simple concept but I just cant seem to get it.

Thanks!

Although I am still learning as well, from my understanding your math is incorrect. Your equity would be what the property is worth minus what you owe after the refi...

450,000-360,000 = 90k equity left in the deal.

Also new here - but you're close.  

If you refi for 360k, you pay off the note for 250k, you pay yourself back for the 100k down/rehab (50+50), and end up with 10k extra (obviously that will likely be soaked up with closing costs/etc).... BUT, you will have ZERO cash invested, and hopefully have a cash-flowing property, which provides "infinite" cash on cash return. (In addition to the 90k equity left in the deal)

Hope this helps!!

See so right there THAT is what I keep getting hung up on. Why cant I figure out how I can pull the $100,000 but ALSO have the $90,000 Equity left in the deal??

I just don't see how I can pull all of the money invested out but also still have the $90,000 equity still in the deal, please could you explain how I would have $90,000 in equity PLUS be able to pull all the money invested ($100,000) in the deal out where does the $90,000 equity come from?

Howdy @Amadeus Hladun

The most important number you need to establish is the ARV. Everything else is derived or subtracted from that number. Let me show you what I mean using your numbers.

ARV x LTV = Refi Amount - Rehab Cost - Closing Costs - Holding Costs = MAO

ARV $450,000

x 70% - 80% (LTV) = this is your All-in Costs target = x 80% = $360,000 (Refinance Loan Amount)

- Rehab Cost $50,000

- Closing Costs $ ???? (Acquisition Loan, HML Points, Refinance Fees)

- Holding Costs $ ???? (This includes mortgage payments, taxes, insurance, utilities, HOA fees, etc. that occur during the Rehab Phase and up until the property is fully rented)

= $310,000 (not including Closing and Holding Costs) Maximum Allowable Offer

Your Purchase price of $250,000 is below this amount.  That is good considering you did not provide Closing and Holding Costs.  The Cash-out Refinance loan will cover the $250,000 Purchase price and $50,000 Rehab.  That leaves $10,000 cash remaining to cover the Closing and Holding Costs.  If they add up to more than $10,000 that overage will remain in the property as equity.

You now have $90,000 remaining in property as equity.  ($450,000 - $360,000)

Yes you put $360,000 as the Refinance amount.

Thank you John, that explanation answered literally ever question I have ever had with regards to the BRRRR method.

Cant thank you enough and would up vote you more than once if I could! :)

@John Leavelle my concern is that now that it has been refinanced at a higher value, then the mortgage and taxes would be higher. I believe that this would have to be considered in the initial purchase to provide a positive cash flow. Am I correct?

@Richard Haug

The mortgage is definitely higher.  But, we include that in our calculations as part of the process.  All properties that you make significant improvements to should be assessed at a higher value.  You should consider that in all your investments.  So you are correct to include that in your analysis.