BRRR strategy confusion - Refinancing

Statesboro, GA · Member since 2015 · 99 posts · 24 votes

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?

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Ceril S.Pro Member

Rental Property Investor · Ithaca, NY · Member since 2014 · 180 posts · 80 votes

10y

@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.

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Kevin Trumbull
System Administrator / Investor · Eugene, OR · Member since 2015 · 144 posts · 29 votes
10y
I'm a little confused too. Why would Situation 1 not require seasoning but Situation 2 might?
My understanding is a conventional lender will require seasoning to loan on ARV.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
A lot of this is turning over a bunch of rocks to find the right lender for your situation. I have talked with hundreds of banks and lenders for commercial properties.
Like anything banks vary with what they are lending on. Some want to only do vanilla homeowner loans. Others are investors themselves on the board and understand what an investor is trying to get for loan terms.
Where some banks see risk others see opportunity. You can't paint all lenders into one box and throw your hands up in the air and say you called one or a few so they all must be like that etc.
Is it worth it to call and get 40 no's for possible 7 maybe's and 3 yes's on what you want? I would think that is a great use of your time. There are a lot of banks out there selling crap loans and conditions passing them off to potential customers as (great deals). I have told presidents of banks before good luck with those programs but I am not even close to being a customer with those terms.
Some banks are in growth mode on certain types of lending and will get aggressive to land business. Others might not lend at all in that category or already flush with loans in that space and will only do more on very advantageous terms to them as they do not want the additional business.
Just like anything you have to find someone who is motivated for what you want to do! lol
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Brandon Z.
Chattanooga, TN · Member since 2015 · 18 posts · 0 votes
10y
It is my understanding that there are plenty of people implementing this (BRRRR) strategy using financing on the original purchase (not buying all cash).
The following hypothetical numbers outline my understanding of how this might work:
Purchase Price (-20% below market): $80K
Market Value: $100K
Cash Down (25%): $20K
Loan Amount: $60K
Rehab Needed (loaned): $10K

All In Cash: $20K (down payment)
Total Loans: $70K (purchase + rehab)
Total Into Property: $30K (down payment + rehab)
ARV: $130K

Refi @ 70%LTV: $91K
$60K pays off existing loan, $10K pays off rehab loan, $21K is your cash out plus maybe part of the refi closing costs, which covers your down payment.
Sound about right?
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Lee Haenschen
Midland, NC · Member since 2016 · 89 posts · 41 votes
10y
If you do a cash out refi don't you pay % in interest on the cash you get back out of the refi? So your getting your own money back, but having to pay interest on it?
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
10y
Yes. That's not the point. You freed up money to move forward and buy another property with cash flow, that has enough cash flow to cover the added interest...and then some. The net is you are ahead.
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