Is the "R" in the BRRR Calc a cash-out refi or just refi?

Question

I have a newbie question regarding the BRRRR Calculator. When I refinance, is the BRRRR calculator assuming I am doing a cash-out refi or just a refi? For example, If I have a home with an ARV of $100k, and the bank will refi me at 75% or $75,000 after the rehab is complete in 4 months but I only have $60k total into the deal, I don't get that $15k difference do I? If I wanted the $15k I would have to wait the 6 months seasoning and do a true "Cash"-out refi right?

The numbers below are for a property I am considering and I am not sure if the refinance is assuming a cash-out refi or just a refi? I assume a cash-out refi because my Total Cash Needed at Purchase is greater than my Total Cash Invested at the end telling me I am getting a portion back.

$70,000 PURCHASE PRICE

Purchase Closing Costs$2,993.00

Estimated Repairs$32,100.00

Total Project Cost$105,093.00

After Repair Value$140,000.00

Acquisition

Down Payment$0 ($28000 surplus)

Loan Amount$98,000.00

Loan Points/Fees$2,940.00

Loan Interest Rate11.990%

Monthly Interest$979.18

Total Cash Needed At Purchase$10,033.00

Refinance

Loan Amount$105,000.00

Loan Fees$3,000.00

Amortized Over30 years

Loan Interest Rate4.250%

Monthly P&I$516.54

Total Cash Invested$6,033.00

Nghi Le · Answer

Let's say these were the numbers on the deal:

Purchase = $50,000

Rehab = $25,000

ARV = $100k

So your total costs would be $75k.  Say you find a lender that lends 90% of the total cost, which brings your normal loan amount to $67,500.  However, you tell them that you're looking to BRRRR, and then they tell you, "Oh, we have a special program for that.  We can actually hold your down payment as reserves and add it to the loan amount."  Now essentially your loan amount is $75,000.  $67,500 was provided by them and $7,500 was provided by you as down payment.

Say you're done with the rehab in two months and go to do a rate & term refinance.  The bank will pay off your existing lien up to 75% of the ARV.  Well, your lien amount is $75k.  The bank will give you a $75k loan, which pays you back your down payment, and you didn't have to wait 6 months.

Now what if the purchase was $50k and the rehab only $10k?  How do you get to a $75k loan amount so that the refinance would work?  You could always throw more into the reserve beyond the down payment (the HML will probably like that as it makes them feel safer).  Or you could ask the HML to roll points and fees into the loan to raise the loan amount.  Many ways to get creative :-)

Nghi Le · Answer

The 6 months starts from when you purchased the property, but you don't need to wait 6 months to start the refinance process.  As long as it closes 6 months after you bought it, you'll meet the requirements.  Since banks typically take 45-60 days to close, I'd start the refinance process on month 4.

Also, there is a way to avoid having to be seasoned for 6 months if you can avoid the need for cash-out.  Find a HML that can roll your down payment into the loan amount so that essentially you have a 100% loan, and then you can just do a rate & term refinance to pull your money out.  Note that this isn't a 100% loan from the HML; you still need down payment.  You can also do this if the HML cross-collateralizes the equity you have in another property to replace your down payment.

Brian Garrett · Answer

@Justin Fox If you refi'd sooner than 6 months based on ARV than you used a commercial/portfolio loan and not a conventional Fannie/Freddie loan so it really just depends which type of financing the OP is looking for.

Justin Fox · Answer

@David Olson

You're right.  The acquisition, all the repairs and soft costs need to be equal to or less than 75% of the ARV, ideally.  You'll also pay closing when doing a cash-out as well, so keep that in mind.  I believe we closed sooner than the traditional 6 months.  I can give you the lender's and officer's information if you PM me.

John Leavelle · Answer

Howdy @David Olson

First, the basic purpose of the BRRRR strategy is to keep acquiring properties over and over again using the same pot of cash.  If you do not use a Cash-out Refinance (or Delayed Financing option) you will not be able to achieve this goal.

Congratulations!  Your Total Project Costs ($105,093) and Refinance loan Amount ($105,000) are basically the same.  That is the ultimate goal.

However, I do have questions on individual entries:

1.  Estimated Repairs:  $32,100.  Does this include Holding Costs?  This will include (but not limited to) loan payments, insurance, taxes, utilities, etc ... that occurs during the Rehab phase and up until the property is fully rented.

2.  Why is the Acquisition Loan Amount $98,000?  Purchase price ($70,000) and Rehab ($32,100) total $102,100.  You show a Deposit of $0 ($28,000 surplus).  This is confusing.

3.  Total Cash needed at Purchase:  $10,033.  Again, confusing.  Closing costs ($2,993) and Points ($2,940) total $5,933.    Where does the other $4,100 come from?

4.  Refinance:  Total Cash Invested:  $6,033.  If you Total Project Costs is $105,093 and Refinance loan Amount is $105,000 How did you arrive at this number?

David Olson · Answer

@Nghi Le How would I pull money out without a cash-out refi? Lets say I have a property worth $100k. Bank allows a loan of 75k (75%ARV) and I owe the hard money lender $65k. I would need to do a cash-out refi to get the other $10k correct? If not a cash-out, then wouldn't the bank only lend me the $65k as a rate term to pay of the HML?

This will be my first property.

Brian Garrett · Answer

@David Olson The 6 month seasoning starts when you close on the property. Also commercial/portfolio loans are not just for commercial properties. That is just the name of the loan product but they lend on single family and 2-4 unit multifamily as well and will also loan to LLC’s whereas Fannie/Freddie will not. Just remember that commercial/portfolio loans will have slightly less favorable rates and terms than conventional Fannie/Freddie loans. Hope this helps!

Eric James · Answer

If I'm not mistaken, you may be able to avoid the 6 months seasoning on a conventional mortgage if you purchase with cash.

David Olson · Answer

@Justin Fox I will definitely send a PM and thanks for jumping in the post!!

@Brian Garrett I think that is where I am confused. If it is a Fannie/Freddie loan there is no getting around the 6 month seasoning whereas a commercial/portfolio loan might allow it but depends upon the bank. I thought these types of loans were for commercial investments only.Also, would you happen to know how the seasoning works? Is it 6 months from the day I purchase the property with my HML or 6 months after the rehab is complete? Or is it 6 months with a tenant before I can cash-out refi?

David Olson · Answer

@John Leavelle thanks for responding!! I have the responses to your questions below. To the best of my current knowledge that is.1) No this does not include holding costs. That’s one thing I wish I could find, was a BRRRR calculator that included all the holding costs not just the loan payments. However, When I click on the “Rehab Period” Tab the following numbers are provided:

$5,151.40 HOLDING COSTS

$40,244.40 TOTAL CASH OUTLAY

$979.18 INTEREST

$73.00 MONTHLY INSURANCE

$32,100.00 REPAIRS

4 months REHAB TIME

$198.67MONTHLY TAXES

2) The Acquisition Loan Amount is 70% of the ARV which I have pegged at 140,000. The HML I am using is giving me 70% ARV and there is no % down requirement. The surplus, I believe, is the Loan Amount (98,000) minus the Purchase Price (70,000). I believe the surplus is technically the funds available for the rehab but I could be wrong.

3) Best I can calculate the Total Cash Needed of $10,033.00 is this: Total Project Cost ( $105,093) – Loan Amount ($98,000) + Loan Points and Fees ($2,940.00).

4) To be honest with you I have no idea how the BRRRR Calculator comes up with a Total Cash Invested of $6,033. This calculator frustrates me sometimes but I’m trying to figure it out.

Is the "R" in the BRRR Calc a cash-out refi or just refi?

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