BRRRR Strategy Explained & Cash-Out Refinancing

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I've read a bunch of articles on BP but still can't get my head wrapped around the BRRRR strategies and specifically the financing parts of it... Could someone help me fill in the gaps?

Obviously BRRRR stands for:

B - Buy

R - Rehab

R - Rent

R - Refinance

R - Repeat

Buy

For Buy, you can use the traditional methods of finding a property like looking for REOs on the MLS, networking, etc. With BRRRR, you're looking for a house that you would look for where you are going to flip it.

So you might find a house for $50,000 that needs $30,000 of repairs, but after you have comped it out, you figure out that the After Repair Value is $175,000. Here's J Scott's article on finding ARV or MPP.

then you also have to take into account your fixed costs as well. There's a great article on Calculating Fixed Costs here by J Scott. For Conversation sake and to make the math easy, let's say the fixed costs are $20,000.

QUESTION: Would you get a short-term loan for your purchase price + repairs + fixed costs? In this case $100,000?

So, I'll assume the answer to that question is yes. So we've now purchased the house for $50,000 and have a loan through our PML or HML of $100,000 at let's say 8% and the lender wants to be paid back in 6 months.

QUESTION: Would you be able to do a "30 year" loan and pay it back after 6 months so your monthly payments aren't so high? for example, a $100,000 loan at 8% due in 6 months would be $17,057.71 a month. vs a $100,000 loan at 8% due in 30 yeras is 733.76 a month. Or do these lenders just want their 8% paid out at the end of the loan term? so it's not a monthly payment, but in 6 months, they just want a check for $108,000?

Rehab

So now you have your house, and you get to work on your rehab just like you normally would for a flip. For me, I need a project manager or a GC because I don't have that experience. I can say, I love J Scott's book on Estimating Rehabs and Flipping Houses.

With this, because you're not flipping it for top dollar, you're really just putting what will get you top rent. And sticking with the flipping mentality, the property still needs to stand out and look clean and nice, just doesn't need to have all the bells and whistles.

So the rehab is done and you're, for sake of conversation, spot on budget still. You estimated $30,000 and it took $30,000 on the nose. :-)

Rent

So instead of turning around and selling the property, you rent out the property. So this is the shift now between flipping and buy & hold properties. 

I personally will be using a Property Management Company so I don't have to be a landlord. 

I'll use my property management company to find myself a renter. And from everything I've read, you can't refinance before you get a renter.

QUESTION: Is this correct? you need a renter before you can refinance?

Refinance

This is where i probably have the most questions...

From my understanding, you need to find a bank that will do a cash-out refinance. From my understanding again, this is where you have the ability to cash-out on the equity you have in the house.

So, back to the numbers... You have a short-term loan for $108,000 after interest.

If the house appraises for $175,000, the bank will then give me a loan for $175,000. 

QUESTION: So if i have a loan for $175,000, what money am I putting towards the loan? the $108,000 that i've already spent on repairs and to pay for the house and such?

The difference between $108,000 and $175,000is only $67,000. QUESTION: so would my equity only be $67,000? Which wouldn't be enough money to pay back the loan?

QUESTION: What type of loan are you refinancing to? I've heard of a homeowners loan or even a commercial loan?

Repeat

Let's say my scenario leaves me with walking away with $67,000, you can take that cash out to purchase another house and do it again.

Anyway, I'm hoping this overview is correct and helpful to other people. I'm trying to find like a comprehensive guide on BRRRR, but can't find anything that really just walks you through every step of it. There are some great articles, but i'm hoping some of the gaps that i'm having are some the same gaps others are having and this post will be useful for others moving forward...

Where am I off base in this? What am I missing?

thank you,

Jason

[Jason D.]

You have most of it right, I'm on a phone so I'll try to keep it short and sweet. The main reason that you don't want to BUY with a conventional loan is that most co conventional lenders will not finance the rehab, so you will have to come up with that out of your own pocket. HML will finance the purchase and rehab. The REHAB is pretty self explanatory, you have that covered. The RENT is important for the refinance part because lenders will use a percentage, or all, of rental income as income, and make it easier to be approved. The REFINANCE is where people get tripped up. In your scenario, you are all in for $108k with an ARV of $175k. After 6 or 12 months, depending on the lender, you can cash out refinance. A lender will generally refinance at 75% of ARV, so you can get an new loan of up to $131,250. So you will pay off the $108 initial loan and have $23000 in your pocket. Your equity, at that point, will be $43,750 ($175k ARV minus $131,250 loan). Now this is assuming that you can find a HML to fund 100% of your project, which is unlikely. Most will require at least 10% down so at cash out you would get your down payment PLUS the $23000 "profit". Hope that helps answer what you were asking.