Refinance step in BRRRR strategy not clear to me

6 Replies

From my understanding, if you renovate the property and the value goes up, you get your property evaluated. You want to value to increase from what you paid for it (plus what you put into it for renos). So when you refinance, you get a loan for about 70% of the value of the property to do new deals? I don't get where you get cash in your pocket that is yours, and not a loan.

@NhiQuann Jones from my limited knowledge, if you have a property that is paid for in all cash, say $50k... and you put in $30k of renovations... and that property appraises for $100k... you own a $100k property outright.  

On the refi, using your 70%, the bank assumes a $30k loan on your property and give you $70k of equity in cash.  Therefore, you have a $30k mortgage on the property now... but you have $70k in cash.... meaning you only have $10k of cash left inside a $100k property that is now (hopefully) giving you positive cash flow.

Here was one of my last BRRRR

purchase  36

rehab        26

all in          62

arv             95

refinance  71

cash profit - 10K

money left in the deal - 0

hopefully this helps?

okay got another dumb question:( since I came across this post related to BRRR. If I am doing a buy and hold and never ever want to sell "unless its beyond a good deal" why would I want to refi? I mean then my mortgage goes sky high due to the fact that I am taking not my original mortgage payment I am instead getting one for the new value which is going to make it ALOT more? or am I looking at this wrong? wouldn't it be better to keep the mortgage as low as possible to keep the cash flow better?

@Allan Anderton You would refi so you can pull your cash back out to reinvest into the next deal and continue to recycle your capital over and over again to ultimately grow your portfolio.

Originally posted by @Allan Anderton :

okay got another dumb question:( since I came across this post related to BRRR. If I am doing a buy and hold and never ever want to sell "unless its beyond a good deal" why would I want to refi? I mean then my mortgage goes sky high due to the fact that I am taking not my original mortgage payment I am instead getting one for the new value which is going to make it ALOT more? or am I looking at this wrong? wouldn't it be better to keep the mortgage as low as possible to keep the cash flow better?

 Allan this is a bit trickier topic, you're asking the relative benefits to debt vs equity.

Now, at face value it would seem that having a paid off house and bigger cashflow is desirable, but it misses a LOT of depth on the overall picture. for instance, I have a mortgage on the property I posted for 100% of my invested funds, meaning I have no money in the deal. My cash flow, albeit smaller is 100% FREE to me, as I have no money invested to earn it, and I still have my original investment which I can use to repeat the process.

the return on investment for a 100K house that makes 1000/month is 12%

but a 100K house with a 100K mortgage that makes $200/month is infinite.

also, when your house is paid off you have  terrible return on equity, it's important for us to all maximize what resources we have in all areas. Cash flow is just one part of real estate investing.

having a mortgage certainly makes you mitigate more risk, but it can be used to make a LOT LOT LOT more money

that's why it's called 'leverage'

Allan Anderton So if you have your own money in the deal you can keep you money in if you dont want higher payments. However, if you have private money or hard money in the deal and they want their money at a certain time, the refinancing is good because payments to the bank at 5% or less is better that 7% or higher using other people money. SO you get the money out and pay your lenders to keep good relationships so they would lend on more deals.