Question about the refinance part of the brrrr strategy

5 Replies

I'm not sure if I'm understanding why people refinance in the brrrr strategy. It seems to me that if I refinance I'll get cash but I'll lose my cashflow. Say my mortgage is 1000 I rent it for 1500 I'm cash flowing 500. Now if I refinance I'll able to pull cash out but then my new mortgage would increase, potentially wiping out my cashflow... can someone please elaborate when and why this would be beneficial. Thank you

@Jonathan Puerta

The benefits of refinancing include:  

  1. You can cash out and re-use those funds to acquire additional property.  
  1. The BRRR strategy assumes you either used hard money or cash to initially acquire and repair the property. Hard money loans tend to have much higher interest rates and by refinancing it via a more traditional lender those rates would be significantly lower, therefore, lowering your monthly mortgage payment. If you paid cash, you would, in theory, get all or most of your cashback accelerating your money return.

Hopefully, that clarifies it for you. 

Good luck, 

Originally posted by @Cheri Crane :

If you are using hard money, I assume you could not get traditional funding in the first place.  Why would you be able to get refinanced? 

Cheri, even people with a lot of money can benefit from non bank loans. To get off market deals, REOs or auctions for example, speed is of the essence. A bank will take over a month to close and a lot of distressed houses aren't financeable in the first place.

HMLs are quicker and can fund deals that wouldn't pass an inspection.

So.. the reason why someone would be able to get refinanced is because they would have rehabbed the house (which should pass inspection) and time would be less of an issue.

@Jonathan Puerta

Comes down to how much money did you have to put down ? Typically when I do BRRR I buy and renovate with cash. An example was I bought a property for $70k, put $25k and New value was $140k. I took out a $100k mortgage on it so I got all my equity out of the deal so I have zero money now invested in the deal. The rent provides $200/month cash flow

For those who already have a mortgage it is about arbitraging the money and managing your leverage (which is like walking the fine line). If you have another opportunity and need funds refinancing out to lose cash flow on one deal but borrow money at 4% for a deal that can make you a lot more than 4% will compound your growth and build wealth.

In the example above let’s say the property is now worth $200k, I take out a new loan and take out another $60k and lose my cash flow and go negative $200 on it BUT that $60k I took gets me an additional $800 on the new unit - so now with these two units I am plus $400 a month vs only $200 with the one unit.

Make sense ?