Help with BRRRR Concepts

[Natalie C.]

Hey everyone!

I have a couple VERY basic questions about refinancing and the BRRRR strategy. I appreciate your patience and kindness here!

1. When you refinance your property via BRRRR strategy, are you factoring that new debt as an expense into the numbers on the property that was refinanced, or your next property that you will be purchasing (I'm guessing the latter is the answer)? How do you evaluate the numbers if you'll be using the money from refinance to either A. purchase one more property in full with cash OR B. use the money as a down payment on multiple other properties?

2. At what point do you refinance your property? We own one single family home that is a cash flowing rental. This home has appreciated significantly since we purchased it in 2012. We're looking to start scaling up, but may end up not making that next purchase until the market becomes less bloated where we are. Should we wait until we have a deal that we're trying to secure, or refinance now and have the money ready to go? And in the meantime, before closing that next deal, we just make those payments from the money that we pulled out through the refinance?

3. Approximately how long does it take to refinance a single family home, to the point where you have cash in your account ready for that next deal?

Thank you again for helping me understand these concepts!

Natalie

[John Leavelle]

Howdy @Natalie C.

Let me try to simplify the process.

BUY.  You purchase a distressed property using cash, Private/Hard Money Lenders, or a combination.

REHAB.  Renovate the property to market standards.

RENT.  Get tenants into the property as soon as the Rehab is complete.

REFINANCE.  Obtain a conventional Cash-Out Refinance loan to payoff any original loan and receive cash to replace your costs.

REPEAT.  Do the whole thing again.

You probably already knew these.  From the financial analysis perspective this is how it works.

1. Identify a property to purchase (after your initial analysis).

2. Determine the estimated ARV.

3.  Estimate Rehab costs and how long it will take.

4. Estimate Holding costs. Includes loan payments, insurance, utilities, HOA fees, lawn care that occurs during the Rehab period and until the property is fully rented.

5.  Estimate Closing costs (2 closings).  Includes Original acquisition closing and Refinance closing.

6. Determine Maximum Allowable Offer (MAO). ARV x 70% - Rehab cost - Holding cost - Closing costs = MAO (Purchase price).

7.  Submit offer.  

8.  If Offer accepted then have property inspected and conduct due diligence.  Close.

9.   Rehab the property and start marketing for rent.

10.  Get rented.  Season for Refinance requirement (6-12 months).

11.  Refinance.  Payoff original loan and receive remainder in cash.

12.  Find another property.

To answer your question.  When you do a Cash-out Refinance on a property the new debt (mortgage) stays with that property.  But,  you can use the cash received on a new property.  So if you do a Cash-out Refi on your current rental property the new mortgage will effect the Cash Flow on that property.  Do you know what the current Market Value is on your property?  Multiply that times 75%.  Then subtract the balance of your current mortgage from that and you will have an idea of how much cash you can pull out to invest in another property.  What ever the 75% number is would be your new mortgage amount.  Will your current property still provide good Cash Flow with the higher mortgage payments?

When you look for future purchases to use the BRRRR strategy be sure they are distressed. You want to be able to buy at a significant discount in order to make this strategy work. You must be able to force appreciation through Rehabbing the property. That is key.

You should be able to refinance your current property anytime you decide to.  Start looking into now.  Unless you are not going to reinvent for a while.  Either way you need to find out how much you potentially can get.  Any future new property refinances will typically require a seasoning period of 6 to 12 months (being rented) after the Rehab.