Confused on BRRRR if I use Hard Money

[Jason Smith]

Sorry if this question has been asked before, but I’m s little confused. Hopefully you all can help. 

If I use Hard money to purchase and rehab the property, considering the HML gave me 70% ARV, how will I get any cash back when I Refi and pay the HML back. After I rehab then go to bank to Refi the bank will only give me 70%. So I use that to pay my original HML. After that wouldn't I just be back at square one with no cash for the next deal.

I understand I will then have a property. But , the way I understood BRRRR is having to have your own capital then getting that back plus more when I Refi? Am I missing something here?

Thanks in advance. 

[Taylor White]

Hey @Steven Sturman, you just have to factor the interest into your calculations to determine your purchase price. I like to divide my refi amount (75% ARV) by the interest rate. You'll need to convert your 12% interest rate to 1.12 for your calculation. For example...

ARV: $160,000
Refi amount @75% LTV: (.75 x 160,000) = $120,000
Repairs: $20,000
Hard money loan for purchase + repairs: 120,000/1.12 = 107,142

Max purchase amount: 107,142(HML loan) - 20,000(repairs budget) = $87,142

So you would purchase this home for $87,142 put $20,000 into it for repairs, rent it out, and refinance, which will get you $120,000. now you have to pay back your HML with interest, which will be the principal (107,142) + interest (107,142 x .12 = 12,857) which equals....$120,000

Don't forget that even these numbers are over-simplified, as you'll need to also consider other fees your HML might charge, holding costs while you are doing the renovations, and potential closing costs on the refi (unless your bank is willing to roll those into your loan.) I hope this helps!