Just need some clarity on the BRRRR model.

Purchse price: $300,000

Rehab: $100,000

All in: $400,000

Appraisal:$650,000

Equity: $250,000

For this example, lets say I put down 20% of the purchase price ($60,000) as a down payment. And now the remaining amount on the loan is $240,000.

And i took out another loan for my rehab price quote at $100,000. So now I essentially owe $340,000 in total ($240,000 for the loan amount of the house) and ($100,000 for my rehab loan)

Now since my equity is only $250,000 and I owe a total of $340,000 back in loans, The BRRRR method wouldent work here correct? If this is correct can someone please let me know when the BRRRR method would work in a situation. Thank you!

@Tarek Emam

I think you've got the numbers all wrong, or I don't think of it that way...  First of all, not sure how you are doing two loans.  If its secured by the property, it would have to appraise sufficiently to support two loans and the second loan would be a more costly second position lien..  You can work out your financing, or learn about that...

If you purchase for $300k with $60k down, then your loan is $240k and cash is $60k.  If you put in another $100k of rehab somehow with a loan, then you have $340k in loans and $60k in cash.  I don't think in terms of "all-in" (I only know it as a card game term, but I don't play).  But, you have only spent now $60k of your own money.  The rest is borrowed.

Now, you say it appraises for $650k.  That means you have $310k (650-340) in equity in the property now.

If you cash out refi at 30% down, the loan is $455k.  Since you have $340k in existing loans (lets skip trying to calc and principal payments), that means you cash out with $115k in cash. 

In summary, you start out with using $60k in cash and two loans (somehow) totaling $340k.  You end up with $115k cash in your pocket, a property appraising at $650k encumbered by $455k.

I think your issue is the mechanics of the real estate transactions / financing.

@David M.

Hey David, firstly i want to thank you for taking the time to break this down. Im following everything you are saying except for the part when you said “ you can cash out refi at 30% down, and the loan would now be at 455K” since I was at 340K in loans, how did I jump up to 455K in loans? Thats my first question.

My second question is when buying a property that needs some rehab work, i mentioned the property is set at 300K and needs 100K in rehab. If i dont have the liquid funds for the rehab, dont I need to take out a second loan or some type of borrowed funds for the rehab budget?

@Tarek Emam

The point of hte brrr is to cash out refi to get cash in hand instead of leaving equity in the property...

Lets go over loans....  When you give a mortgage, you are putting up the property as collateral anda lien is recorded against the property..  this is why the appraisal is so important.  You can't put up for more than its worth/appraised.  When you refinance, you are issued a new loan and at the same time the funds from the new loan payoff the old loans.  You need to realize that a mortgage, by definition, is a a loan secured by a piece of real estate as a first position lien. Its all about the lien position.

In your example, you just do a refi for a $340 loan to consolidate the loan...

As for as your second question, yes you need to "do something" to get the funds to rehab.  As I mentioned, how you  figure out the financing is entirely different topic.  Your question was about the brrr, not the mechanics of real estate lending.  I don't know what a "second loan" means to you.  You shouldn't be able to borrow against the property, at least not easily even if there is remaining equity.  Hell, if there was $100k+ of remaining equity, I would just sell it for $100k profit immediately.  

Anyway, is your first question answered?  The brrr method "works great" in your example since you walk away with your originial cash, in fact almost twice as much.

@David M.

Thank you very much for the clarification David ! I appreciate your time !