How does the "Refinance" part of the BRRR method work?

Question

I'm a bit confused about the refinancing part of the method. How does the process work? Say I start off with $35k capital for down payment and rehab costs. A home's value goes from $80k to an ARV of $140k. 75% of that would allow me to receive a $105k loan. Then I use the $105k to pay off the rest of the original loan + get back the $35k I had spent towards down payment/rehab costs, leaving me with $70k to repeat the process for another home (possibly 2 homes with that amount).

But how is that $105k supposed to be paid back, and wouldn't the monthly payment of that loan be higher than the original loan? I assume rehabbing the home would increase the monthly rent, and therefore cash flow, so perhaps that would make up for the higher monthly payment? Also, why do banks give 75% of the ARV loan even if the home isn't fully paid off?

Joseph Firmin · Answer

Yes, your mortgage payment will be higher, but when you run your numbers, make sure you are cash flowing before the refinance and after. The new loan replaces the old and the difference goes to you in cash. The new loan "pays off" the old - that is how it works. One bank pays the other. This is why the appraisal and the ARV is key... get really solid on that to ensure you can extract as much of your cash back out at the refinance without upsetting the cash flow.

Guifre Mora · Answer

@Mike Brown let me help you break it down.

So the home was bought for 80K. At what rate and term?

35k was down payment and rehab costs.

How much of the 35 you put to the down payment?

Ellis San Jose · Answer

If you keep the first home as a rental then the income theoretically pays the $105k mortgage. Banks will refinance a loan at 75% ARV as long as they are in first mortgage position & pay off or "refinance" the existing debt.