Stupid question on the buy/refinance part of BRRRR

[Ryan V.]

So I have a pretty simply question that I cannot seem to wrap my head around. I just read this post by @Brandon Turnerhttps://www.biggerpockets.com/renewsblog/40000-brr...

My confusion lies within the financing part. The original private money loan was for $83k at 12% interest only. Months later after the house is rehabbed and rented the new appraisal is for $145k and a potential for $108k refinance. Let's assume for this argument he actually decided to refinance for the full amount.

Does he receive the $108k in the form of a check or wire transfer from the bank? If so, after the original lender is paid back ($83k) , you're only left with $25k, which is less than the approximate $30k out of pocket cost (rehab money, holding cost, closing, etc.) .

Why then does he say he had enough money to pay the lender back and himself on top of it? Am I missing something?

Follow up question - Can this method be done using conventional banking and/or lines of credit from a bank or does the first "buy" portion need to be completed with private money?

[Mike H.]

Here's the piece you're missing. That 83k loan was not the purchase price. The purchase price was only 70k. Closing costs on purchase were 2k. And then the lender gave him an additional 11k to be used towards his rehab. So brandon's initial 83k loan actually included the purchase price, the closing costs AND some rehab costs.

Brandon ended up paying 35k for the rehab when you count the vegas vacation he splurged on for the first craigslist contractor.

But basically, had brandon refi'd the house for the full 108k the lender would have loaned, here is how his numbers would have looked.
70k purchase
2k closing costs on purchase
35k rehab and vegas trip (11k of this came from his original 83k loan, the remaining 24k came out of brandon's pocket)

Had he refi'd for 108k, the original 83k loan would be paid off as part of the refi closing. The bank would have then deducted their closing costs for the refi (lets say 2k given I didn't see a number in the article). And brandon would have walked away with a check for 23k.  That 23k is just 1k less than what brandon came out of pocket to do the rehab.

Had he not treated the first contractor to a vegas trip, brandown actually would have gotten to pocket 4k AND picked up a house with 37k in equity and a little cash flow. Thats what BRRR is all about.

Now finding a deal where you can get paid and pick up a house is tough these days. But it happens. And it typically makes the cash flow very tight in the early years when you do it - which is likely why brandon didn't refi for the full amount on this one.

As for your last question - can you do this with other financing. The answer is yes. You could just as easily buy with a line of credit or with a traditional loan and then do a cash out refi later on to pull your money out. The two issues with that are: 

1) You typically need some seasoning when doing cash out refi's. 6 mos is probably doable. But that is true with using a hard money loan as well. If you use an LOC (which would be considered as cash), I think that might allow you to use the delayed financing product and I believe you can get around the seasoning requirements. But thats one you'd have to check into as it didn't exist when I was starting out.

2) You can only do conventional cash out refi's up to 6 properties. Once you have 6 homes with mortgages in your name, then you'd have to do commercial/portfolio loans if you wanted to do cash out refi's as I believe that is the limit for conventional cash out refi's. I think fannie is 4 and freddie is 6?  but you'd need to check on that.