"Refinancing" Part of BRRRR

10 Replies

Hello,

Still trying to wrap my head around the refinancing part of BRRRR. I'm reading the book currently and taking notes as a go, but have already developed a few questions:

1) Ex: I find a private money lender to buy property (say $100k), I invest an additional $20k into rehab, ARV is $200k. When we go to "refinance" we are given 80% of ARV ($160k), then do we have a loan/mortgage on the remaining $40K? Would our loan/mortgage payment be pretty low assuming the loan amount is now only $40k?

1a) Assuming we are given the 80% of ARV, once we pay back private lender, we are free to invest the remaining amount on another property and repeat the process (hence BRRRR)?


I have been familiar with this process for a few years, but just now pulling the trigger and diving in. In the past, I was under the impression you needed to put 20-25% down on investment properties. At that rate I could only average 1 per year (I currently own one door). The subject of private lenders is relatively new to me, but I can already see the great benefit it provides and how it can open up many doors (yes, real estate pun intended)!


Thanks in advance on any feedback,

Zach (Structural Engineer In-Training in Indiana)    

Hi @Zach Shahan I think I may be able to provide some clarity for you.

In your example, you buy a house for $100k and put an extra $20k into the deal. I'm assuming the $100k was a loan from a private lender, and the $20k was money out of your pocket. 

If the house then appraises for $200k (ARV = $200k) you can get a loan for 80% of the ARV. (Loan = $160k)

That $160k loan has to be used first to pay back the $100k that you owe to the private money lender. Then you can take the next $20k and pay yourself back. You are left with $40k cash, free and clear. 

I hope that helped explain it a bit.

That would be an absolute home run deal if you can find it! 

@Tesho Akindele - I appreciate the quick response! Using the above numbers, won't I have a $160k loan then to pay back? I'm having trouble wrapping my head around getting a loan for something I already own (thanks to the private lender).

The $160k (80% of ARV) isn't "free and clear" money? Or is it? What happens to the other 20% of ARV?

Tesho Akindele

Tesho is correct but there is one nuance here that many novices miss. The $40K in your pocket is not truly "free and clear."  You borrowed it from the bank as part of the $160K loan and so it is accruing interest while it is in your pocket.

Originally posted by @Zach Shahan :

Hello,

Still trying to wrap my head around the refinancing part of BRRRR. I'm reading the book currently and taking notes as a go, but have already developed a few questions:

1) Ex: I find a private money lender to buy property (say $100k), I invest an additional $20k into rehab, ARV is $200k. When we go to "refinance" we are given 80% of ARV ($160k), then do we have a loan/mortgage on the remaining $40K? Would our loan/mortgage payment be pretty low assuming the loan amount is now only $40k?

1a) Assuming we are given the 80% of ARV, once we pay back private lender, we are free to invest the remaining amount on another property and repeat the process (hence BRRRR)?

I have been familiar with this process for a few years, but just now pulling the trigger and diving in. In the past, I was under the impression you needed to put 20-25% down on investment properties. At that rate I could only average 1 per year (I currently own one door). The subject of private lenders is relatively new to me, but I can already see the great benefit it provides and how it can open up many doors (yes, real estate pun intended)!

Thanks in advance on any feedback,

Zach (Structural Engineer In-Training in Indiana)    

The refinance pays off the old mortgage. SFR cash out rental is actually to 75% LTV. To use your value numbers, and assuming $4k in closing costs (cash outs have your choice of a higher rate or higher fees, esp. on rentals), it would be $200k * 75% - $100k - $4k = $46k cash out proceeds. And you have a new mortgage of $150k.

@Darius Ogloza and @Chris Mason - thank you! Those explanations made sense. So the LTV combined with 75-80% ARV is basically taking out a new loan/mortgage on the property. The "refinance" part of BRRRR just allows you to pull out your rehab costs/some profit quickly to help snowball into more deals. At the end of the day, you will still have a loan/mortgage payment on the property, even if you originally funded 100% of cost with a private money lender.

Thanks all for your help and speedy responses! It makes sense to me now and my question is answered. Until next time!

Private money lenders typically do 90% Loan to Cost OR 75% Loan to Value (ARV). And their interest rates are often high (sometimes in excess of 10%) where by a bank will loan at 3%-4% nowadays.

So a refinance would lower your cost of capital tremendously. That's the point. 

@Chris Mason   I lied. Still not sure this is adding up to me. If you can spare a few minutes it would be much appreciated! Using the example in the reply ($200k * 75% - $100k - $4k = $46k) and I would have a new loan of $150k. That $46k "profit" is still part of the $150k loan, correct? Wouldn't that have to be paid back at some point? What am I missing here?

Alexander is correct: the private lenders that I have access to will do up to 90% of the purchase and up to 100% of the rehab costs, up to 75% of the ARV. Rates start around 8.25% and go up into the 10% range. HOWEVER, this type of financing generally does not require the borrower to provide proof of income--ie. tax returns. The loan is focussed on the quality of the COLLATERAL. Additionally, these loans can close and be funded in as little as 3 weeks--even quicker prior to COVID.

Traditional banks do offer lower rates, however, they require more documentation, require perfect credit and take much longer to close. ALSO, traditional banks have seasoning requirements, meaning you must own the property for a year or more before you can refinance. 

Private lenders can refinance with NO seasoning requirement and cash-out for any purpose! Feel free to connect with me if I can help in any way.