Closing costs and BRRR

9 Replies

I have a property I bought a year ago for $50,000, rehabed $15,000, now worth $100,000, current loan balance about $50,000. In theory I can refinance and pull $75,000 out doing BRRR strategy. Applied for conventional loan and closing costs are going to be $4,400. Clearing a little more than $150 a month after all expenses including cap ex, etc. It looks like due to the closing costs it will take away 29 months of profit (4,400/150). Does the brrr strategy just consider this a cost of business? Is there a way to get the closing costs down (I suppose I should shop other lenders) Maybe I should look at it as spending $4,400 to get $25,000 but I still have to pay back $25,000. Any thoughts on improving this and keeping refinance costs down for either this house or the next one I do?

Originally posted by @Todd Willhoite :

I have a property I bought a year ago for $50,000, rehabed $15,000, now worth $100,000, current loan balance about $50,000. In theory I can refinance and pull $75,000 out doing BRRR strategy. Applied for conventional loan and closing costs are going to be $4,400. Clearing a little more than $150 a month after all expenses including cap ex, etc. It looks like due to the closing costs it will take away 29 months of profit (4,400/150). Does the brrr strategy just consider this a cost of business? Is there a way to get the closing costs down (I suppose I should shop other lenders) Maybe I should look at it as spending $4,400 to get $25,000 but I still have to pay back $25,000. Any thoughts on improving this and keeping refinance costs down for either this house or the next one I do?

This is a great question and one that I haven't thought about much with the BRRRR method. Definitely interested in any tips or tricks to keep the costs low, Those closing costs do seem VERY high though! Like double what they should be?

I think the problem may be that you're missing an R! A very important R..."Repeat." Yes, you spend the $4,400, or whatever the closing costs are, to get $25,000 and then purchase another income producing property. Keeping growing your portfolio!

I agree 100% with @George Despotopoulos . This is money you would otherwise have locked in this property as equity, fair cost for the wealth you would be building if you just Repeat. Your ROI should be infinite at this point with no money left in the deal. That sounds like a win-win situation to me, unless you don't plan to scale.

Effectively the closing costs are just the cost of doing business. If you apply the 70% rule flipper use, that extra 5% equity would cover the closing costs (in the same way you have to cover commissions and closing costs when you flip), but you can't rely on getting all your money out each time. If you have a mediocre flip, say you're all in for 85%, you'll still make money. Just not as much. With BRRRR, you would have to leave some money in the property, which is why I stress that the BRRRR investors really do need to have cash reserves. It can be no-money down, but you shouldn't rely on it being no money down. That being said, $4400 sounds high for a $75,000 loan. You might want to look elsewhere for a refinance.

Probably an old thread but I had a question. If we buy a rental property using bank financing and spend $4000 in closing costs, would the refi of the same property cost another $4000 when doing the BRRR strategy?

Thanks.

@Katarina Cordero

@Philip Sriployrung

If you have the cash on hand, it is better to initially pay cash for the property and then cash out refinance after the renovation to avoid paying closing costs twice. 

Another option for the beginner investor is a renovation loan, that ties in the renovation costs to the loan and there is no need to refinance afterwards, but you will be out the initial down payment. With this product you are also limited to 4 financed properties including the subject property.