Rental Property Investor · Brockton, MA · Member since 2017 · 19 posts · 11 votes
Hi BP,
I recently watched another one of the BP webinars hosted by Brandon Turner. I'm a little confused on how the BRRRR uses "short term" and "long term" money
My understanding is that you can use short term money from lines of credit, a hard money lender, etc... to initially purchase the home and cost of repairs. The next step is to rent the home out and refinance the home with a bank or profile lender for a fixed mortgage.
My question is: If these short term funds are supposed to be paid off in 12 - 18 months, how do you pay back the high interest short term money within the 18 months after refinancing? Should the rental income alone pay off the debts within this time frame? or is there something i'm missing?
Short term money would be the original 12-18 month loan (likely from a hard money lender) while you buy and fix up the property while the long term money would be the loan after you have rehabbed and refinanced the property. In this strategy, after you rehab the property and go to refinance most banks will give you 75% of the new value of the home which should be enough to cover the original loan. So here is an example:
House Cost: 60k
Repairs: 20k
Down Payment: 12k
Short Term Loan Amount: 68k (Cost + Repairs - Down Payment)
After Repair Value: 100k
From here, the bank would generally be willing to give you a new mortgage of 75% LTV so that would come out to 75k which should allow you to pay off the original short term loan.
Short term money would be the original 12-18 month loan (likely from a hard money lender) while you buy and fix up the property while the long term money would be the loan after you have rehabbed and refinanced the property. In this strategy, after you rehab the property and go to refinance most banks will give you 75% of the new value of the home which should be enough to cover the original loan. So here is an example:
House Cost: 60k
Repairs: 20k
Down Payment: 12k
Short Term Loan Amount: 68k (Cost + Repairs - Down Payment)
After Repair Value: 100k
From here, the bank would generally be willing to give you a new mortgage of 75% LTV so that would come out to 75k which should allow you to pay off the original short term loan.
The back-end long-term loan will pay off the upfront loan during the refinance. Usually, escrow/title handles that automatically, especially if it was a hard money loan (or any loan that puts a lien on the property). They'll order a payoff to see how much you owe. If the loan from the long-term lender is less than the payoff amount of the original short-term lender (because you didn't estimate the ARV correctly), then you'll have to bring money to the closing table for the refinance.
If it's a line of credit (credit cards, a HELOC on your primary, etc), there won't be an "automatic" payoff, so you'll just use the cash you get from the refinance to pay it off yourself.
Ideally, you find yourself such a great deal that your total debt on a project is 75% of the appraisal and you pay ALL of the borrowed money off. If you can do this, you can buy every great deal you find forever.
So basically you leverage a short term loan with a higher percentage with a fixed long term loan for 30 years as the property appreciates; increasing 3% per year. Raising rents over the 30 years, as the loan comparably gets cheaper; Is that right? I'm still confused as to if a person can only get 10 mortgages and typically 1 property every 6 months to refinance. this also I'm not to sure on. But how creatively can I get more deals than just 2 a year? Is there a procedure, a order from how and where the money comes from? How do I get access to more money for more houses in a year?