Refinancing a rental property

[Anthony Finger]

Hello BP community! This is my first post as I am a newbie to the real estate game. I have been bitten by the rental property bug and have challenged myself with buying my first property in the San Antonio area by the end of 2018.

I am struggling with the refinancing portion of the BRRRR strategy. Can someone please help me out with this word problem?

I buy a $100,000 house with a 20% down conventional loan and put 10,000 dollars of rehab into it. After 12 to 18 months when I am able to refinance the property it appraises at $120,000. In order to get rental income above the mortgage price I am learning that 20% down is generally the way to go; which means I have to put $24,000 down on the refi. That means I am keeping $16,000 (20K down plus 20K in appreciation minus 24K down leaves me with 16K) and not getting all of my money back out of the deal.

Is my math wrong or am I looking at this scenario incorrectly? Any and all help will be greatly appreciated! I look forward to networking with the San Antonio and BiggerPockets community.

[Patrice Penda]

Here is a good application case of the BRRRR strategy.
You, the investor, have savings of $50k and you want to invest in RE using the BRRRR strategy.

You find a property for 100k which is selling at a discount because it needs some repairs
Doing your analysis, you realize that other houses in better conditions in that neighborhood are selling at 165k.
You also could realize you could improve the value of that house and all it would need is 25k of renovation work.
Your plan is to rent out that property

Because it is an investment property, let's say the maximum the bank will lend is 80% of the value of the house, so you need to come up with 20K (which you have)
Your realtor (or attorney) also tells you that the closing costs would be 5k.
You go ahead with the purchase of that house for 100k
You spend 25k out of pockets at the closing (20k for the down payment required by the bank and 5K of closing costs)
You spend another 25k for rehabbing the property
All the end of the rehab, you would have spent 50k

You rent out of the property.
After maybe 6 months (or longer), you refinance the house by getting a new mortgage from a new lender for up to 80% of the current new value of the house.

An appraiser comes and acknowledges you have done a good job and the house is now worth 165k.

Following the same lending criteria, the new bank will then lend 132k (132k=165*0.8).
80k of the loan for 132k you get will go towards repaying the previous loan and you'll be left with 52k which you can go and use the way you want.

Remember you started with $50k of savings and no house.
Now you are the proud owner of rental property. Your tenant is paying for your mortgage and you have $52k in your pocket.

What do you do? many people would go and repeat the same process.

In brief, the refinancing part is contracting a new mortgage so that you can pull out, at the end of this strategy, most of the money you invested if not all of it