Newbie BRRRR - Refi Math Question

[Eric Caudill]

Hello BP Community - My name is Eric and I've been reading the blogs and listening to the BP podcast for a little while now but this is my first BP post! Exciting times.

I feel that the BRRRR strategy is best for my financial situation and where I live in Northern VA. I feel pretty confident in all the letters in the acronym except the 2nd "R"...Refinance.

Here is my general understanding of the goal for this phase of the BRRRR strategy. Let me know if my understanding is correct.

Eric's Understanding: The main goal is to get as much cash out of our purchased property by refinancing the original loan using the new After Repair value (ARV). Most banks will give you 75% of the ARV based on their internal appraisal. So, to get 100% of my money back, 75% of the increase in value from my purchase price to the ARV would need to cover all my out of pocket costs on the deal.

Example: Original purchase price $475K. ARV is $550K. Total value increase is $75K. 75% of the $75K value increase is $56,250. I will effectively get back 100% of my out of pocket costs assuming that they are $56,250 or less.

That sound right???

[Steve K.]

No, @Eric Caudill , to BRRRR the $550k ARV house, you have to ideally acquire and rehab it for about 75% of the ARV. Acquire and remodel for $412,500. Then, when the bank gives you a $412,500 loan (75% LTV), you have 100% of your capital back...to be able to repeat. At this point, the new appraisal , less the loan, means you have $137,500 equity in the property (25%)....which is your "buy at a discount and make a "flip" type profit remodeling. Your $137,500 flip profit is the new 25% "down/equity" in the property....your original capital/equity is returned to you.

If you purchase+rehab this house for $475k in your example, because that's the higher 86% of ARV, you won't be able to fully extract your upfront capital. (i.e. a 75% LTV is the $412,500 loan.....you'd get $62,500 cash out at closing. )

You'd need to look for an 80% LTV cash out refi to get more.

You'd have a BRRRR-like investment, but likely half your original investment is still tied up....not quite as sexy.