BRRRR Refinance Step Help

[Amadeus Hladun]

Good Morning Everyone, I have been putting this off for a little bit because honestly I am kind of embarrassed but I realize that to learn I need to actually ask the questions that I need answers to so here it goes.

for the refinancing portion of the BRRRR strategy I for some reason cant seem to wrap my head around how all the numbers work. I know that it is pretty straight forward but I think I am overcomplicating it.

So lets just say $250,000 is the purchase price with down payment of $50,000, $50,000 is the rehab cost, when done it would sell for $450,000. So I purchase, Rehab and rent out the property, now the seasoning period for the loan is up and now I can refinance. From there the bank appraises it and says it is worth the $450,000 so I can refinance it to 80% of the appraised value (80% is what my bank will refinance at). That leaves the refinanced loan at $360,000. THIS is where my brain gets stuck for some reason.

Is it $360,000 - $250,000 = $110,000 equity now in the property??

This is why I am embarrassed because I know it is a simple concept but I just cant seem to get it.

Thanks!

[John Leavelle]

Howdy @Amadeus Hladun

The most important number you need to establish is the ARV. Everything else is derived or subtracted from that number. Let me show you what I mean using your numbers.

ARV x LTV = Refi Amount - Rehab Cost - Closing Costs - Holding Costs = MAO

ARV $450,000

x 70% - 80% (LTV) = this is your All-in Costs target = x 80% = $360,000 (Refinance Loan Amount)

- Rehab Cost $50,000

- Closing Costs $ ???? (Acquisition Loan, HML Points, Refinance Fees)

- Holding Costs $ ???? (This includes mortgage payments, taxes, insurance, utilities, HOA fees, etc. that occur during the Rehab Phase and up until the property is fully rented)

= $310,000 (not including Closing and Holding Costs) Maximum Allowable Offer

Your Purchase price of $250,000 is below this amount.  That is good considering you did not provide Closing and Holding Costs.  The Cash-out Refinance loan will cover the $250,000 Purchase price and $50,000 Rehab.  That leaves $10,000 cash remaining to cover the Closing and Holding Costs.  If they add up to more than $10,000 that overage will remain in the property as equity.

You now have $90,000 remaining in property as equity.  ($450,000 - $360,000)

Yes you put $360,000 as the Refinance amount.