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.
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?
Also to do the BRRRR calculator, what number would I put in the refinance loan amount section. In this field would I put the$360,000?
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
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! :)
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.