I'm sure most of you have seen the recent article about the BRRRR method. In case you didn't this is the article I'm referring to:
My question relates to the refi aspect of this article. Everything leading up to that is straight forward. However, with the refi part of this article where is the money coming from to repay the investor? My confusion comes from that this article only has one year of payments towards the loan. The first few years are dominated mostly by interest so where is the equity coming from that allows the author to pull that much money out of refi?
Sorry if this a stupid question I’m just not connecting the dots on where he’s pulling the money from to repay his investor.
@Hunter Ross , looks to me as if Brandon has been mixing his metaphors a bit. ie. If he hadn't sold, he'd still be out of pocket $20k. A true "BRRRR property" would have enabled him to get all his outlay back when he Refinanced, so that he could Repeat - without selling!
[Aah, I see Brandon chose to leave $20k in the deal to aid cash flow, but, he flipped it anyway].
So Hunter, not a stupid question at all. The extra equity is supposed to come from the (35%+) difference between what he/you pay for it (all-in), and what it then appraises for. My 2c...
Howdy @Hunter Ross
The key to the whole process is the ability to establish a solid ARV for the property. If you do not know the ARV it is difficult to determine the proper purchase price that will allow you to eventually complete the Refi portion of the process. To be successful you must strive to keep your All-in costs to 70% of ARV. That means Purchase price (HML/PML), Rehab costs, Holding costs, and Closing costs (2 closings) within 70% of ARV. The reason I say 70% is because the Refinance Lender will be providing a loan amount that is 70% to 80% LTV based on a new appraisal (Hopefully the same as your ARV). The typical amount is 75% LTV. Example:
List Price $124,000
All-in Target $140,000 (70%) Refi Loan amount
Rehab Estimate $30,000
Holding costs $6,000 (Includes PML interest only payment, insurance, utilities)
Closing costs $7,000 (Acquisition and Refi closing)
Purchase Price $97,000 (MAO) PML loan amount
So in this example you have a Private Loan amount of $97K. Since you bought the property correctly (Low) you have enough to pay it off and get cash back for the Rehab, Holding and closing costs ($43K) to be covered by the Refi loan of $140K. What happens if you did not determine the ARV (rent ready Market Value) up front. Then the appraisal comes in lower than you hoped. Let's see:
List Price $120,000
Purchase Price $97,000
Rehab Cost $30,000
Holding cost $6,000
Closing costs $7,000
All-in costs $140,000
Refi Appraisal $150,000
Refi Loan Amount $105,000 (70% TLV based on appraised value)
Now you can payoff the Private Lender loan ($97K), but, only have $8 Cash back. Meaning you had to leave $35,000 of your money in equity in the property. I've seen much worse from other investors. They were not even able to payoff the Private Loan.
The bottom line is if you want to make sure you can pull 100% of the cash needed to payoff any acquisition loans, reclaim rehab, holding, and closing costs form the Refi loan make sure you establish a solid ARV first. Then work backwards from there to calculate you MAO (Maximum Allowable Offer).
Hope this help clear things up a little.
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