BRRRR investing question?

Question

Hello BP community,  I am realatively new to this concept of BRRRR investing and I am trying to understand the whole Refinancing part of the deal, so if anyone would like to chime in about this I would like to hear your thoughts on the subject. When you refinance after having renovated a house you are able to take out the money that you put into buying the house in the original loan and use that money to buy another house with most of the same money? It seems like this I don't fully understand how a bank would give you the money back from the original deal because then it seems like you don't have much equity in the house and are taking on more debt by using that money that you take out of the original deal with no more funds than you had originally.  I feel like I am either not fully understanding the concept or my understanding is just plain wrong. Can someone please try and go into a bit more explanation about this concept? Thank you in advance.  AC

Larry Turowski · Answer

@Achille Clendenning When you refinance, the bank will lend you a percentage of the appraised value of the house.  The purchase price is irrelevant.  This is called loan to value, LTV.  For instance, as an investor, I can generally get 70% LTV.

An example helps illustrate.  I bought a house for $40K cash that was worth $65k after just cleaning in up, not even any rehab.  Most banks require a seasoning period (6-12 months) before they will approve a refinance.  (Another side note, even though I bought with cash it is still considered a refinance.  Refinance, just means something different than the original money used for purchase--in my case, my money.)

When I refinanced, the bank appraised the house at $65K.  They gave me a mortgage for 70% of that, or $45.5K.  I literally got all my money back into my bank account and could buy another house and start all over again.  It is only a 70% loan, but it was more than 100% of the money I had into the property.   Not all my deals are that good.  Sometimes I only get 85% or 90% of my money back.  But I can save back up to 100% much quicker than if I only had 70% of my original funds, and be ready to do the same thing all over again.

Achille Clendenning · Answer

Hey all, much appreciated on the contributions you have made. Keep em coming!!! I am reading all your comments and learning more as these last couple days have progressed. Merry Christmas as well to all on BP. Lets make it rain in 2019. Lol.

John Hovanec · Answer

@Achille Clendenning welcome to bp. You have to remember one of the important R in the brrrr is rent. The bank on the refi will want to see you have rented the property out. They normally ask for a copy of ur rental agreement so they know you are making money on it. Make sure you have a good cash flow after the refi is done. Don’t forget to include taxes and insurance. Good luck.

Kenneth Garrett · Answer

@Achille Clendenning

This is how the BRRRR works.

• Buy $50,000 Whose money it is doesn't matter
•  Rehab $20,000
• Appraised Value 110,000
• Total investment $70,000
• Loan is 75% of appraised value (82,500)
• Cash out refinance $12,500  (In your pocket)
• Closing cost not included above nor is insurance, property tax, holding cost if applicable
• Don't forget we want the property rented prior to refinancing
• Good Luck.

Braeden Cook · Answer

David Greene just wrote a great article that goes over this in detail. I think it will clarify a lot of the questions you have. The link is below

https://www.biggerpockets.com/renewsblog/brrrr-strategy-real-estate-investing/

Larry Turowski · Answer

Same thing. The bank will give 70% (for instance) LTV.  It doesn’t matter where the original money came from. You use those funds at loan closing to pay off your hard money lender and the rest goes to you. If we were talking about my house, you’d get your $25k back and could start all over. The bank doesn’t own the home but has a lien as with any mortgage.

Valden J Ellis · Answer

hi Achille, I’m a total newbie in fact this is my first post but I’ve been reading up on this concept and What Larry said is right.  Don’t think of the 25k as the only money you have into the deal.  If you put 25 k in of your own money and then put some sweat equity into cleaning up the property, even if you didn’t spend another dime, the property might now appraise higher so it’s as if you have more in than the 25 k.  Maybe the improvements you made caused the property to “appear” worth much  more, and therefore appraise higher so you could refinance and get all 25 of your money back.  The bank just cares about the properties new raised value, not how much money you put into it.  Cool huh!  I can’t wait to do it myself.

Achille Clendenning · Answer

Also anyone else who reads this please join the discussion, I really am interested in learning how this all works and need as much information as you guys are willing to dispence. Thanks to all you who read and share in this discussion.

Achille Clendenning · Answer

So when you originally bought the house with the 40k cash all that money was your own money and not a hard money loan? How about if I put 25k into buying a house and the rest of the money used to buy it was part of a hard money or bank loan? Will the bank let you pull the 25k out of the original house deal in the refinance or do you need to already own the home 100%? Doesn't the bank more or less own the home then? You don't have any of your own money in the house if you take it back out in the refinance,  right? Am I missing something or is what I'm thinking correct?

BRRRR investing question?

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