BRRRR confusion on equity refinance portion

[Dave Blackman]

Hi everyone -- I'm two SFH's in on my REI journey and looking for more! Want to do some BRRRR but am a little confused on how the numbers work. Will this strategy not work when purchasing a property conventionally (i.e. 20% down on initial purchase) then refinancing after rehab? I understand there are some extra closing costs that eat into the margins a bit, but the overall philosophy shouldn't change should it? I'm working on my private money lending network, but I feel like I need to do one or two of these successfully on my own first before I can approach family/friends/professional network with opportunities.

Example:

Purchase home conventionally: 55,000 with 11,000 down

Put 20,000 rehab in (using HELOC)

Rent, wait 6 months for seasoning

Refinance, market value, let's say 110,000

So, I have a bank that will do 75% LTV cash-out refi -- this is where my confusion sets in a bit due to the 20% down I'd initially put in and why this may mess up this strategy.

I've already financed 41,250 -- on the refi I'll be financing 82500 (a difference of 41250) -- does that mean I'm getting back 41250 cash on that refi once closing (minus whatever closing costs)?  They are not wanting 25% cash to be paid in on that new refinance amount?  

If not, 41250-20,000 (rehab) -11,000 (initial downpayment) nets me 10250 gain on the cashout, am I correct?

Appreciate any help on this NOOB question -- I'm just not clear on the cash-out and how the 25% equity on the refinance is determined.

Thanks!

Dave

[Alexander Zurn]

@Dave Blackman I am a little confused but nothing we can't work through. Let me break down how it would go and see if that clears anything up. I'll use your numbers for the example.

Purchase Price: $55,000

Your own funds: $11,000

Financed funds: $44,000

Rehab: $20,000

ARV: $110,000

With these numbers, here is how the refi would work.

You have a total of $75,000 invested in the property (your funds, financed funds, rehab funds). When you refi, you'll get an appraisal that will give the ARV of the property and it comes back at $110,000. Since you have $75,000 invested, your equity in the property is $35,000. The 75% comes into play here.

Most lenders will only let you take up to 75% of the properties value in a cash out refi (for their security). For this example, 75% of $110,000 is $82,500. With this amount of cash out, you would pay everything back. So take $82,500 - $11,000 (own funds) - $44,000 (financed funds) - $20,000 (rehab) = $7,500. This number would be your profit on the deal. However, don't forget to subtract any closing costs with the first loan or refi loan.

I hope this gives you a clearer picture.