BRRRR Refinance Explanation

[Michael McCabe]

Hi BP,

I've been doing a lot of learning about the realm of real estate the past 6 months and am looking to buy my first deal this year. After studying the BRRRR strategy the one part I'm still slightly confused about is the refinance portion. I have David's book and have watched the podcast episode about it, but still have a little confusion. Is this a cash out refinance? Whenever "getting your money out of the deal", or similar vernacular, gets thrown around I wonder what they mean. Any explanations are appreciated!

[Michael Kinsella]

Hi Ashley,

Just to clarify a quick point regarding the distinction between a "rate and term refinance" and a "cash-out refinance"

We can use the following simplified "BRRRR" example...

Purchase price: $100,000

Rehab amount: $50,000

ARV: $225,000

Initial loan for purchase/rehab: $127,500

After you've repaired the property and rented it out, you wait the seasoning period and then refinance...

A "rate and term refinance" would just replace the initial loan of $127,500 with a more favorable interest rate and a longer term length. The loan amount for the rate and term refinance would be $127,500, replacing the initial loan, but not providing any additional proceeds.

A "cash-out refinance", on the other hand, would mean that the new loan amount exceeds the initial loan of $127,500.

Let's say that your cash-out refinance amount is $150,000. In this case, $127,500 of the $150,000 would go towards paying off the initial loan, and the remaining amount ($22,500) would represent your cash-out proceeds.

Best,

Michael