BRRR strategy confusion - Refinancing

30 Replies

I'm confused on the refinancing part of this strategy.

For example, with obviously hypothetical numbers, you find this situation:

Purchase: $70,000
Rehab: $35,000
ARV: $150,000

So, your total investment is $105,000. You rent it out 6-12 months (however long it takes to be able to refinance), and the bank offers 70% of ARV ($150,000), which is $105,000.

This may seem like a dumb question, but what is the benefit in this? You were originally in the hole for $105,000. The bank pays back that, but you're still in debt because it's taking another loan to pay it. It's like paying off one credit card with another from my perspective. What am I missing?

First, you originally are buying the property with cash, so the purpose of refinancing is to get your cash back to use again.

Second, this is nothing like replacing a credit card payment with another credit card payment.  You need to understand the difference between good debt and bad debt.

@Account Closed it's about leveraging and using as little of your own money in the process. 

Calculate the return on the money you would then have into it after the refi. 

If you bought well, the the rent should still more than cover your expenses. If you refinance and you take all of your original money out - you now have cash flow/equity build essentially for free. 

This is what I have heard from the bank, they will give you 80% of appraised value or 80% of purchased price, which ever is less. As an example, which I am purchasing next week, Agreed value of 100K with sell, bank values or appraised the property at 145K, bank agrees to give me 80% of 100K. I know this is not answering your question, but is on a similar subject.

The refi frees up your cash from the property. Yes you have a loan now but the rents should cover that with cash flow on top. And now you have your capital back to go do another deal.

Originally posted by @Mario Alexandrou :

This is what I have heard from the bank, they will give you 80% of appraised value or 80% of purchased price, which ever is less. As an example, which I am purchasing next week, Agreed value of 100K with sell, bank values or appraised the property at 145K, bank agrees to give me 80% of 100K. I know this is not answering your question, but is on a similar subject.

 Options and terms for refis are all over the place.

I can get them for 75% of the ARV...regardless of what I paid for it, and what the cost of rehab was...which means I can get a "cash out refi".

Seasoning periods are also all over the place as are the criteria for FICO, DTI, term length, interest rate, fees, etc...

Bottom line is, if you "don't like the movie, you can always change the channel, and find one you do like".

@Hunter Groover,

Depending on how you finance the acquisition the benefits of BRRRR can vary.

Situation 1: Private Lender or Hard Money Lender agrees to fund 70% ARV which is $105k based on your hypothetical. They will withhold the $35k in repairs and release them to you in draws (so make sure you have a line of credit or cash to get work started). After the house is repaired you immediately file your refinance paperwork (I'd have it filed before hand, but the appraisal can't be ordered until the repairs are completed). There is no need to wait 6+ months to refinance. You can typically get up to 75% ARV on the refi. In this situation, other than closing costs, you have very little out of pocket expenses. Your ROI / CCR will be great and your cash flow will jump when you lock in the lower interest rate. I've used this strategy many times!

Situation 2: You do the same as the above except you use cash for the acquisition and repairs.  I have not done this before.  There may be some seasoning required (6-12mths)  before you can do a cash out refinance.  Once you refinance though, you will free up your cash to do other deals.  This may "save" you on costs by not using an acquisitions lender, but you are tying up your cash that potentially could have gone towards other deals (opportunity cost).

Situation 3: Instead of using a PL or HML, find a local portfolio lender. Some will lend 60-70% ARV and hold repair reserves just like a HML. The difference is their rates are usually much better than HML. I did this recently and the loan was about 4% with 1pt. It was much better than 12% with 3pts. Plus, you don't have to pay for two closings. However, many portfolio lenders will want to see skin in the game so you may have to put some cash down regardless of how cheap you buy it. They will also want good credit and experience.

@Joe Villeneuve , I understand good debts vs bad debts. I didn't realize you were supposed to pay cash. Spending $30k+ is something I'd have to take out a loan for. So when refinancing the getting my money back part didn't make sense to me. Thanks for the response, though.

@Chris Bounds , thanks so much for the detailed response, it helped put everything into perspective for me. I don't happen to have $35k in cash so it was really confusing on how I'm supposed to get my money back. If I were to use hard money, I'd basically borrow the money and then pay that company back with the refinancing, which is still a loan. So in a way I had the mindset that it's like paying off one loan with another loan.

@Hunter Groover, yes - it's getting a conventional mortgage with better terms to pay off the short-term high interest mortgage (HML).

Make sure you're improving your financial position now though. Secure lines of credit, pay off consumer credit cards, and save cash. Even though HML loan based on the asset (house) they usually still require 6 months of reserves to make sure you can make payments and fund repairs.

Originally posted by @Account Closed :

@Joe Villeneuve, I understand good debts vs bad debts. I didn't realize you were supposed to pay cash. Spending $30k+ is something I'd have to take out a loan for. So when refinancing the getting my money back part didn't make sense to me. Thanks for the response, though.

 Spending cash is the ideal way to do this, however, if the loan you got wasn't tied to the property...as in non-lienable debt, it is what I refer to as a "cash like substance".  It works the same way (almost) since you can use it like cash, but only have to pay for it once.  In order to make it work though you need to set up a cash reserve that makes your payments on that debt for you every month.  The details are a little much for this format to go into, but if interested connect with me and I can explain it to you.  NLD, if you understand how to use it like cash, is almost as good as real cash.

So I purchased a property in march of this year with 100% of my cash for $37,000 and I've put 20 into it I had it appraised other day for 125,000.

So what you're saying is get a mortgage on it get my cash out and start another project? So am I understand this right?

Originally posted by @Beau Romstedt :

So I purchased a property in march of this year with 100% of my cash for $37,000 and I've put 20 into it I had it appraised other day for 125,000.

So what you're saying is get a mortgage on it get my cash out and start another project? So am I understand this right?

 Yes

Originally posted by @Beau Romstedt :

So I purchased a property in march of this year with 100% of my cash for $37,000 and I've put 20 into it I had it appraised other day for 125,000.

So what you're saying is get a mortgage on it get my cash out and start another project? So am I understand this right?

I'm not recommending that, but it is what I would do. Do your own Cash-on-Cash returns (CCR) with zero debt and with 70% debt. Compare the two. Then since the 70% debt is now cash in your pocket figure out how many other houses you could finance. Determine the CCR on those properties. Add up the total cash flow and compare it to the cash flow you had with only 1 property.

Ultimately it's a risk vs. reward calculation of opportunity cost.  Of course, your stage of life and financial position does matter with this decision.  

Originally posted by @Chris Bounds :
Originally posted by @Beau Romstedt:

So I purchased a property in march of this year with 100% of my cash for $37,000 and I've put 20 into it I had it appraised other day for 125,000.

So what you're saying is get a mortgage on it get my cash out and start another project? So am I understand this right?

I'm not recommending that, but it is what I would do. Do your own Cash-on-Cash returns (CCR) with zero debt and with 70% debt. Compare the two. Then since the 70% debt is now cash in your pocket figure out how many other houses you could finance. Determine the CCR on those properties. Add up the total cash flow and compare it to the cash flow you had with only 1 property.

Ultimately it's a risk vs. reward calculation of opportunity cost.  Of course, your stage of life and financial position does matter with this decision.  

 Except, that if you get all of your original funds back with the refi...plus if you are getting a "cash out refi", your C on Cash return will be over 100%.  Hard to beat that since you will also have that same money working for you again.

In this example, looking at the numbers, I would do this in a ...what's faster than a second?...a nanosecond.

As I see it, here are the numbers:

$37,000       Cash to buy
$20,000       Cash for rehab
$57,000       Total Cash in

$125,000 ARV

$57,000/$125,000 = 45.6% ARV
....if you can't find a lender for this ratio to do a COR, then you must be in some foreign country.

70-75% ARV typical ARV used for COR
$87,500             70% ARV (of $125,000)
(57,000)             Total Cash in
$30,000             Cash Out

$87,500/$57,000 = 154% CCR

As long as the new loan payment, when subtracted from your current cash flow, doesn't put you into a bad cash flow (as in negative), then grab it and move forward.  If this loan would mess up your cash flow by taking the max, see what would happen if you took a refi out that would get you all of your original funds (cash) back only.  If that works, pick a number between the max and min, and move forward.

Do you need a partner?

Originally posted by @Beau Romstedt :

    thank you for clarifying that, how many times can you repeat this process as in how many mortgages can you have under one names cash flowing?

 Depends on your source of funds.  I can get up to 10 with both of my main sources.  I also use other investors SDIRA's...which means I have access to an unlimited number...based on the limits of available SDIRA's and their available funds.

I wouldn't say no to a partner . I've done tons of renovations for pennies on the dollar but usually I just take the money I may do some sweat equity but now that I turn 30 I'm really motivated to build up a rental portfolio and stop turn all my cash in the trash.

Originally posted by @Chris Bounds :

@Hunter Groover,

Depending on how you finance the acquisition the benefits of BRRRR can vary.

Situation 1: Private Lender or Hard Money Lender agrees to fund 70% ARV which is $105k based on your hypothetical. They will withhold the $35k in repairs and release them to you in draws (so make sure you have a line of credit or cash to get work started). After the house is repaired you immediately file your refinance paperwork (I'd have it filed before hand, but the appraisal can't be ordered until the repairs are completed). There is no need to wait 6+ months to refinance. You can typically get up to 75% ARV on the refi. In this situation, other than closing costs, you have very little out of pocket expenses. Your ROI / CCR will be great and your cash flow will jump when you lock in the lower interest rate. I've used this strategy many times!

Situation 2: You do the same as the above except you use cash for the acquisition and repairs.  I have not done this before.  There may be some seasoning required (6-12mths)  before you can do a cash out refinance.  Once you refinance though, you will free up your cash to do other deals.  This may "save" you on costs by not using an acquisitions lender, but you are tying up your cash that potentially could have gone towards other deals (opportunity cost).

Situation 3: Instead of using a PL or HML, find a local portfolio lender. Some will lend 60-70% ARV and hold repair reserves just like a HML. The difference is their rates are usually much better than HML. I did this recently and the loan was about 4% with 1pt. It was much better than 12% with 3pts. Plus, you don't have to pay for two closings. However, many portfolio lenders will want to see skin in the game so you may have to put some cash down regardless of how cheap you buy it. They will also want good credit and experience.

In your situation 1; Where can you find a bank that will refinance you for 75% of the ARV AND without the seasoning period? This is EXACTLY what I want to do BUT it was my understanding that I had to wait that seasoning period and even then could only get about 70% of what I had into the property

Originally posted by @Richard Fields :
Originally posted by @Chris Bounds:

@Hunter Groover,

Depending on how you finance the acquisition the benefits of BRRRR can vary.

Situation 1: Private Lender or Hard Money Lender agrees to fund 70% ARV which is $105k based on your hypothetical. They will withhold the $35k in repairs and release them to you in draws (so make sure you have a line of credit or cash to get work started). After the house is repaired you immediately file your refinance paperwork (I'd have it filed before hand, but the appraisal can't be ordered until the repairs are completed). There is no need to wait 6+ months to refinance. You can typically get up to 75% ARV on the refi. In this situation, other than closing costs, you have very little out of pocket expenses. Your ROI / CCR will be great and your cash flow will jump when you lock in the lower interest rate. I've used this strategy many times!

Situation 2: You do the same as the above except you use cash for the acquisition and repairs.  I have not done this before.  There may be some seasoning required (6-12mths)  before you can do a cash out refinance.  Once you refinance though, you will free up your cash to do other deals.  This may "save" you on costs by not using an acquisitions lender, but you are tying up your cash that potentially could have gone towards other deals (opportunity cost).

Situation 3: Instead of using a PL or HML, find a local portfolio lender. Some will lend 60-70% ARV and hold repair reserves just like a HML. The difference is their rates are usually much better than HML. I did this recently and the loan was about 4% with 1pt. It was much better than 12% with 3pts. Plus, you don't have to pay for two closings. However, many portfolio lenders will want to see skin in the game so you may have to put some cash down regardless of how cheap you buy it. They will also want good credit and experience.

In your situation 1; Where can you find a bank that will refinance you for 75% of the ARV AND without the seasoning period? This is EXACTLY what I want to do BUT it was my understanding that I had to wait that seasoning period and even then could only get about 70% of what I had into the property

 If you have W-2 income and decent credit then conventional financing will do it. Find a broker that works with investors. 

Originally posted by @Chris Bounds :
Originally posted by @Richard Fields:
Originally posted by @Chris Bounds:

@Hunter Groover,

Depending on how you finance the acquisition the benefits of BRRRR can vary.

Situation 1: Private Lender or Hard Money Lender agrees to fund 70% ARV which is $105k based on your hypothetical. They will withhold the $35k in repairs and release them to you in draws (so make sure you have a line of credit or cash to get work started). After the house is repaired you immediately file your refinance paperwork (I'd have it filed before hand, but the appraisal can't be ordered until the repairs are completed). There is no need to wait 6+ months to refinance. You can typically get up to 75% ARV on the refi. In this situation, other than closing costs, you have very little out of pocket expenses. Your ROI / CCR will be great and your cash flow will jump when you lock in the lower interest rate. I've used this strategy many times!

Situation 2: You do the same as the above except you use cash for the acquisition and repairs.  I have not done this before.  There may be some seasoning required (6-12mths)  before you can do a cash out refinance.  Once you refinance though, you will free up your cash to do other deals.  This may "save" you on costs by not using an acquisitions lender, but you are tying up your cash that potentially could have gone towards other deals (opportunity cost).

Situation 3: Instead of using a PL or HML, find a local portfolio lender. Some will lend 60-70% ARV and hold repair reserves just like a HML. The difference is their rates are usually much better than HML. I did this recently and the loan was about 4% with 1pt. It was much better than 12% with 3pts. Plus, you don't have to pay for two closings. However, many portfolio lenders will want to see skin in the game so you may have to put some cash down regardless of how cheap you buy it. They will also want good credit and experience.

In your situation 1; Where can you find a bank that will refinance you for 75% of the ARV AND without the seasoning period? This is EXACTLY what I want to do BUT it was my understanding that I had to wait that seasoning period and even then could only get about 70% of what I had into the property

 If you have W-2 income and decent credit then conventional financing will do it. Find a broker that works with investors. 

 Thank you for the response. I do have W2 income and a credit score of 820. So, with conventional financing, there is no seasoning period?