Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes
Hello BPers,
I am trying to find the right place to ask this question, so I apologize if this is the wrong forum. I am stuck trying to understand the mechanics in the Refinance portion of "BRRR" method. I understand that usually a private, or hard money lender is used to purchase the house, rehab costs may or may not be included, but how exactly does the refinance work?
Do you just figure out what you owe the hard money lender, and have a bank put the property on a conventional loan for the amount you owe the hard money/ private money lender? I don't quite grasp the mechanics of that situation.
Thanks and I look forward to continue learning here on BP!
Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
10y
@Pete Perez the general point here is that you're buying and rehabbing for less than the property will be worth. Buy for $50k put $20k in to a house worth $100. Then go to the bank to refinance and get your money back. A bank will lend 75% of appraised value on an investment property so in my example above you will get a loan for $75k which at closing will pay off your hard money lender and you'll be able to keep any remaining proceeds. So you ideally will get back any amount that you personally invested in the rehab after the hard money loan being paid off.
The appraisal determines max that the lender will fund. Now just to give you further detail on the process because you asked about how to come up with the amount... Let's say the house in the example above is actually now worth $200k and for some reason you only want to borrowe $100k against it. Well just go to the bank and tell them you want $100k loan on a $200k house. Regardless they are going to get an appraisal to make sure that the house as collateral supports the amount that you are asking for.
Thanks for the post. I think I am approaching my "ah-ha moment". So in your above example, even if the hard money lender was on the high end of points and interest, because I am a newbie (lets say 18% total). That $75k that the bank gives me will go to towards the Hard Money Lender, and the rest goes to me. One last question regarding the refinance. Does the bank actually give the money to me, or does it go directly to the source of my original loan? I guess its kind of a frivolous detail, but it helps me visualize money changing hands and tracking everything. Thanks again Derek.