Refinance question for BRRRR - New to the game

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
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Refinance question for BRRRR - New to the game

Matt Henderson
Member since 2023 · 8 posts · 3 votes

I'm reading about BRRRR and trying to educate myself as much as possible before investing in my first rental property. I'm stuck on one thing in the BRRRR model with the Refinance. In an example I read, person bought house for $75k and put $30k of rehab into property for a total spend of $105k. The ARV on the property is now $150k. Time to do the refinance. The example says your lender gives you the refinance at 70% LTV of the home ($150k x.7 = $105k). Here is where I'm lost...I realize you would get your $30k back because the $75k loan is paid off and now you have the extra $30k, but now don't you have a higher loan ($105k now vs original $75K) so you owe more money? Doesn't this now increase your monthly mortgage payment? Just confused on this part of the strategy and hoping someone can clear it up for me. Sorry if this seems trivial to some.

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John Chong
Lender · Houston, TX · Member since 2023 · 235 posts · 255 votes
3y

You would refi to get out of the short term interest only loan or pull your cash out if you bought it all cash. DSCR's loans are longer term, usually 30-year fixed loans.

The reason you would want to BRRRR is to build out a portfolio and leverage that portfolio to buy more properties.

You would still have the rest of the $45K in equity when you sell the home. When rates come down, you can also rate-term refi and get better cash flows. 

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  • Matthew Masoud
    Investor · Orange County, CA · Member since 2014 · 363 posts · 408 votes
    3y

    Yes, this will absolutely increase your monthly debt payments. 

    Many people are stuck on the "Refinance" part of the BRRRR because the deal does not cash flow at today's interest rates.

    A BRRRR only really works when the deal cash-flows (DSCR>1.25) at the new debt payment after refinancing.

    2Reply
  • Randall AlanPro Member
    Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
    3y
    Quote from @Matt Henderson:

    I'm reading about BRRRR and trying to educate myself as much as possible before investing in my first rental property. I'm stuck on one thing in the BRRRR model with the Refinance. In an example I read, person bought house for $75k and put $30k of rehab into property for a total spend of $105k. The ARV on the property is now $150k. Time to do the refinance. The example says your lender gives you the refinance at 70% LTV of the home ($150k x.7 = $105k). Here is where I'm lost...I realize you would get your $30k back because the $75k loan is paid off and now you have the extra $30k, but now don't you have a higher loan ($105k now vs original $75K) so you owe more money? Doesn't this now increase your monthly mortgage payment? Just confused on this part of the strategy and hoping someone can clear it up for me. Sorry if this seems trivial to some.

    @Matt Henderson

    Yes, you have a new loan at a higher rate, but you have ZERO dollars into the property  theoretically.   but if you bought your property right (read: cheaply), your rent will still exceed your fully loaded mortgage payment.  Also remember, there is no requirement to take out a new loan for the full amount invested, you can leave more money in the property if you want a lower payment. 

    There are things that are missed in your simplified example…. Closing costs of $3,000+ on the new loan; the fact that there are new rules that say you have to hold the property for 12 months before a refi (depending on who is doing your refi); and the fact you wound likely need to by your property well under-value to really pull it off.  Which is to say that if you bought it at retail, the $30,000 might be hard pressed to drive $75,000 in increased value ($75,000    —-> $150,000) which you will not really know until it is appraised after you have done all the work.  What if it appraised at $105,000?  Trust me, that  happens all the time… thus the “buy it under value to begin with.”

     Sometimes you get a crappy appraiser who looks at the fact the property just sold 12 months ago and they just have a logic about how they handle those types of things where they aren’t willing to say it’s worth 100% more in a year.

    All the best!

    Randy




    4Reply
  • John Chong
    Lender · Houston, TX · Member since 2023 · 235 posts · 255 votes
    3y

    You would refi to get out of the short term interest only loan or pull your cash out if you bought it all cash. DSCR's loans are longer term, usually 30-year fixed loans.

    The reason you would want to BRRRR is to build out a portfolio and leverage that portfolio to buy more properties.

    You would still have the rest of the $45K in equity when you sell the home. When rates come down, you can also rate-term refi and get better cash flows. 

    18Reply
  • Matt Henderson
    OP
    Member since 2023 · 8 posts · 3 votes
    3y

    Great feedback. Thank you everyone!!

    0Reply
  • Joseph Greenebaum
    Member since 2023 · 8 posts · 4 votes
    3y

    Funny, I just read this last night and had the exact same question. Thanks for asking.

    0Reply
  • Matt Henderson
    OP
    Member since 2023 · 8 posts · 3 votes
    3y

    NP. Glad I wasn't alone!

    0Reply
  • Dan N.
    Member since 2019 · 119 posts · 60 votes
    3y
    Quote from @John Chong:

    You would refi to get out of the short term interest only loan or pull your cash out if you bought it all cash. DSCR's loans are longer term, usually 30-year fixed loans.

    The reason you would want to BRRRR is to build out a portfolio and leverage that portfolio to buy more properties.

    You would still have the rest of the $45K in equity when you sell the home. When rates come down, you can also rate-term refi and get better cash flows. 


    John this is the part of BRRRR that I am stuck on. Refi´s have a seasoning period. I actually just got a quote from a conventional lender and I asked if it would apply in case I did a BRRRR and wanted to Refi. They replied:

    If you purchased the property today, you would have to wait 1 year to us the new appraised value with a cash out refinance, regardless if you purchase in cash or hard money.

    So how are people refinancing their BRRRRs and getting out of hard money/high-interest loans if they need to go through a seasoning period?

    0Reply
  • Zach Edelman
    Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
    3y

    Yes, your debt amount would increase, but your also increasing the value of the property, thus you're debt to equity ratio should remain pretty consistent. Secondly, now your debt is likely fully amortizing, so you're going to start paying down principal, versus interest only payments that you had on your hard money loan. 

    0Reply
  • John Chong
    Lender · Houston, TX · Member since 2023 · 235 posts · 255 votes
    3y

    @Dan N. Its because its a conventional lender, they have different rules and restrictions. DSCR loans are commercial loans for investors. Only requires 90 day seasoning to use the new appraisal. 3-6 months will get you 70% LTV and 6+ months will get you 75%.

    2Reply
  • Dan N.
    Member since 2019 · 119 posts · 60 votes
    3y
    Quote from @John Chong:

    @Dan N. Its because its a conventional lender, they have different rules and restrictions. DSCR loans are commercial loans for investors. Only requires 90 day seasoning to use the new appraisal. 3-6 months will get you 70% LTV and 6+ months will get you 75%.



    @John Chong thank you, this was exactly the clarification that was missing for me to understand the entire puzzle.

    0Reply
  • John Chong
    Lender · Houston, TX · Member since 2023 · 235 posts · 255 votes
    3y

    @Dan N.
    Of course, anytime!

    0Reply
  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    2w

    Hey Matt,

    Yes, when you refi on the BRRRR strategy it does increase your monthly mortgage payment. The goal really is to improve the property, increase the equity AND increase the potential rent. Therefore, if you successfully found a property that fits both criteria, the new rental figure will be able to debt cover the new mortgage payment. Yes you are borrowing more, however, the increased rents are supposed to pay down the principal balance overtime.

    Hope this helps

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    LuxePrivate Investments LLC 570 Reviews
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