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Updated almost 6 years ago on . Most recent reply
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What exactly does refinance mean in the "BRRRR" strategy?
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The BRRRR strategy (buy, rehab, rent, refi, repeat) is a way to acquire a property with less money down than buying with a conventional loan with a 20% down payment and funding the rehab out of pocket. Say you can buy that house that, when fixed up, will be worth $150K for $80K. And that it needs $20K in rehab. With a conventional loan, you would need to put down $16K on the purchase along with $20K in rehab. So, you would end up with a $64K loan and would have $36K of your own cash into the deal.
With the BRRRR strategy instead of buying with a conventional loan you use hard money and get a hard money loan based on the "after repaired value" of $150K. Hard money lenders will make loan based on the value after work, rather than based on the initial purchase price. That's key, because in this example you could borrow $105K up front. You'll still have closing costs and the interest on this hard money loan for six month (a typical timeline in one of these deals) is going to cost you about 10% of the loan amount, or $10K in this case. And hard money lenders typically require you to do the work, have it inspected, and then get reimbursed from the loan. So, this doesn't mean you can buy with none of your own cash. But, in this example, you would have costs of $80K purchase, $20K rehab, and $10K interest for a total of $110K. You've borrowed $105K, so only $5K of your own cash is in the deal. You'll need another $5-10K for fronting the cost of the rehab, but they you'll get that money back once the work is inspected. After you finish the rehab, you refinance using a conventional loan. Because you've added value, the lender will base the "value" for the loan on a new appraisal. The LTV isn't as high on this type of refi as on a conventional purchase - 70% rather than 80%, but because the lender is using the new value, you're still able to borrow $105K. That gives you enough on the refi to pay off the hard money lender. You end up with a $105K loan and only have $5K of your own cash in the deal.
The downside is you have a $105K loan instead of $64K as in conventional loan at purchase case. The upside is you have only $5K of your own money tied up rather than $36K.
I don't understand what you're asking with