What exactly is refinancing and how does work when you BRRRR

Question

BP!!!

I’m having trouble grasping the refinance part of the BRRRR strategy.

I’m working on my 3rd deal, and I’m going to see if a hard money refinance strategy would work. The only issue is I am having trouble understanding the refi part and I have listened to 2/3 of the podcasts. Lol

If I purchase a property for 100k and after rehab it is worth 200k, how do I refinance and how does it work?

Not real numbers, just using simple numbers to help me understand.

Kurtis Green · Answer

@William DeLuca

The others did a good job of simplifying it, but let me try to in another way.

You purchase a house for $100... Repairs are $20... The After Repair Value is $180

You borrow $120 at a high interest rate from somewhere, lets say a hard money lender, who charges a high interest rate on a short term loan.

For simplification purposes, lets say the payment to your hard money guy is $1 a month and it takes you 5 months to complete. Your total investment into this property is now $120 for the loan and $5 for the payments = $125.

When you complete the remodel you will want to refinance out of that high interest hard money loan ASAP and hopefully recoup your $5. Refinancing with a conventional lender will get that monthly payment down to $.50 a month, because it would have a much lower interest rate over a longer term.

Now lets say your new lender will refi at 75% of the appraised value of the home. Now that the house worth $180, you can refi with the new lender, for up to $135. That money would be used to pay off your initial loan of $120 and pay you back the $5 you took out of pocket for the monthly payments. But wait... what happens to the extra $10, you ask? You can take that check to the bank and deposit it.

At this point, here is what you have accomplished.... You will have left in 25% equity in the house that you now own (25% = $45) that is your money for a later date. Your monthly payment is now much cheaper at $.50 and you will put a renter in the house who is paying you $.80 - so you will make $.30 a month in cash flow, which your girlfriend will demand you spend on her. Your renter is also paying off your mortgage for you over a period of time, the property will appreciate year over year. You also recouped all of your initial investment and even made an additional $10 to roll into another project.

Mind you that this example is a "home run deal" and is an over simplification. You will have additional costs associated that will eat into your gains like bank origination fees, closing costs with attorney fees, etc.

Hopefully that helps a little.

Kurt

Chris Mason · Answer

Banks don't use the term "ARV," unless they happen to be people that browse biggerpockets.com.

After six months they will use current appraised value based on the condition the property is in at the time of appraisal.

So... yes.

Chris Mason · Answer

Pretty sure you're overthinking, so I'll explain in the simplest terms possible.

You have a $100k loan.

You apply for and receive a $150k loan.

First $100k is used to pay off the existing loan.

The change, $50k, is deposited tax free into your checking account and you can do with it what you wish.

Make sense?

You are also $150k in debt, not $100k. Your net worth didn't change at all, you have $50k less equity and $50k more liquid.

Chris Mason · Answer

For some people it isn't. It depends on your goals, etc. Your net worth didn't change, you're just more liquid and more in debt.

The Church of Leverage says to do this all day every day.

The Church of Dave Ramsey says to never do it, no matter what, without exception.

Kenneth Garrett · Answer

@William DeLuca

Refinancing out of the BRRRR is going to a bank or financial institution and securing a mortgage.  It’s best to work with local banks or credit unions.

If the property is worth 200,000 a typical refinance is 75% of ARV.  In other words you could secure a loan up to 150k.  The goal is to pull all of your money out so you have no funds stuck in.

Hope this helps.

William D. · Answer

@Kurtis Green

Great explanation, and entertaining. Haha. I’m going to dive in and get to work. Thanks Kurtis

Tim Herman · Answer

@William DeLuca Leverage is the name of the game. You have $150000. Takes you a year to season it. You pull out the $150000. Year 2 buy another BRRR or you leave your $150000 in one house. Do this for 10 years, have 10 houses with $50000 equity in them, not counting loan paydown or appreciation. house completely paid off grows to $325000 at 5% growth. House 1 on the ladder $325000-$150000(loan)=$175000 house 2 9 years of growth=$310000-$150000=$160000. With just 2 houses your equity will be $335000 more than 1 paid off house. I didn't even include mortgage paydown. Calculators are your best tool.

William D. · Answer

@Chris Mason

Question, so after I refinance out of the hard money loan, I will pay the hard money loan off. But now I have a mortgage for the house with the new appraised amount, which will now be higher. So I have a 30 year mortgage for a higher amount. Does that sound correct? If so, how is that beneficial?

William D. · Answer

@Chris Mason

Love it. Thank you for clearing that up.

William D. · Answer

@Chris Mason

So the bank will give me a loan based on the ARV?

What exactly is refinancing and how does work when you BRRRR

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