St. Louis, MO · Member since 2020 · 12 posts · 5 votes
Can someone please explain to me how LTV works within the BRRRR method? I am confused on how I am able to pull my money out of each deal after repairing and refinancing it with LTV loans. Could someone walk me through how that is possible? I am currently reading BRRRR by David Greene and trying to figure it all out!
@Elliott Holdosh - I'll use a high-level example below to try and demonstrate.
You buy a building for a 125k and put 50k of rehab into it plus holing/closing costs of 15k, you're all in for 190k.
Every lender is different, but once stabilized, most lenders will give you a loan for 75% LTV of the appraised value. You go though your loan process and appraisal comes in at 250k.
Your loan will be 250*.75 = 187.5k
You pull out majority of your 190k through this refi, regardless of how that original 190k was financed.
@Tom Shallcross Can you take that 187.5k and put it into your next property? I thought that loan was to be applied only on the property that it was based off of. Another quick question, How many loans can you take out if you wanted to do the BRRRR process more than 20 times?
@Elliott Holdosh - that 187k is tied to the property but you have now recycled all your original capital you had in the deal.
Through the refi you've paf off your original loan and recouped your original down pmnt and other money out of your pocket to go run the same model on the next property. You don't gain 187k, you get all your original investment back so you can rinse and repeat.
For simplicity, If you originally had a 95k loan on your 125k purchase, you made a 30k down payment. You also had 50k in rehab you paid out of pocket and 15k in holing costs. Your new refi loan of 187k pays off the 90k loan and you cash-out 92k to (basically) recoup your 30, 50 and 15k expenses. The principle doesn't change if you finance the rehab; the refi payment should cover your expenses.
There are plenty of ways to have 20 mortgages, but I wouldn't worry bout that part until you're much closer to that reality. Focus on getting the fundamentals right as there are many moving pieces in a BRRRR and that first deal is the toughest.