Made up example:
(Using a private lender)
Purchase price= $60,000
Closing costs= $4,000
Loan amount after refinance @ 75% LTV= $90,000
Closing costs/interest after refinance= $6,000
What was the whole point of this? Why is it more attractive than the traditional method? I will try to answer my own question but feel free to correct me, add more, or agree!
1. You find a property which is under market value/discounted
2. You find a private lender or anyone who can put down all the funds needed
3. After repair/rehab you get a new value to the property so it's called the ARV
4. Refinance with a 70%-80% LTV
5. Here is where I get a bit confused and let's use the numbers in my example above.
Now is the "loan" actually a loan? The bank is loaning you $90k for this property? You made the property valued at $120k so during the refinance the bank says "here is $120k for you to borrow", is this correct? There is $30k equity here. Is this being leveraged as if it's your down payment? Is this the whole point of the BRRRR? I mean there is no money out of pocket from you. Is this the whole point? Using this example: the ARV was $120k, so the majority of that piece goes to pay back the private lender/entity who initially funded the beginning process (purchase price, repairs, closing/interest). At the end, you're left with $5,000 (Loan-Total Funding= $90k-$85k).
Basically, BRRRR allows you to start a rental property without having all the funds in the beginning. It's like the traditional method but without the $$$ from your own pocket. The trick is to find a cheap property that needs rehab and having another individual/entity pay the total costs initially. Then the other individual/entity gets paid back after refinance via the LOAN due to an ARV. The extra cash left is yours plus a new cash flowing property. Is this it? Have I grasped the concept of the BRRRR method?
The idea of BRRRR is to buy low with either cash or private/hard money and get your initial capital when you refinance. In your example your all in costs are: 60 (buy) + 15 (rehab) + 6 (closing, holding, refi)=81k so assuming you bought the house cash and was able to refi 90k, you exit the deal with:
1) All of the money you initially invested 81k + 9k extra from the bank
2) A cash flowing property, say 100-200$ a month after all expenses. Being that you have none of your original money left in the property, this represents an infinite ROI.. Nice ha?
3) 30k in equity: 120 ARV - 90k refi loan
All in all not a bad deal.. And the best part of BRRRR is that you now have all of your money (+9k extra) to Repeat this process again and again..
The BRRRR philosophy is to buy distressed properties, force the appreciation by rehabbing it. Place a renter in it. When you refinance all of your money and/or your investors money is out of the deal. The bank is loaning you 75% of the value of the property = $90K. Property is valued at 120K. LTV 75%. If you can pull money out and still have the property cash flow it's a win win. I have done many BRRRR projects. It's a great strategy.
Nothing wrong with the traditional 20% down method on a property and rent it out, provided you can recoup your money back in a reasonable time. Remember the benefits of rental property. Tax deductions of mortgage interest, property taxes and depreciation. Renter is paying down your mortgage. In the meantime you are putting money in your pocket.