The 3RD “R” in BRRRR

[Francisco Sanchez]

I am looking into purchasing a fixer in Sioux Falls Sd but am confused on how the third "R" in the BRRRR: Refinance.

Would lenders allow me to cash out 100% of the value?

Does the way I buy the property make it easier or harder during the Refi process (buying as an investment property vs primary residence or second home)

Thanks.

[Sam Smith]

It usually goes like this:

1. (B) Buy a property for $100k. As in investment property, a bank would probably loan you 75% of that, which means you would put $25K down.

2. (R) Rehab the property. Spend time and money to fix up the property.

3. (R) Rent out the property. Get a renter who would pay you money to stay in the property.

4. (R) Refinance the property. Typically six months after the renter moves in you would get a bank to take a look at the property and re-evaluate the value. If it was only worth $100k when you bought it, but then you fixed it up and got it rented and can show the cash flow, perhaps the bank would agree that the property is worth $135k now. Since refinancing is just getting rid of your old mortgage and replacing it with a new mortgage, the same initial rules apply. You still need to have 25% equity. You can think of your equity as what's left over after subtracting the home's value by the amount of loan you have against the house. So, with the new house value of $135k, and the loan you took out at the beginning of $75k, you currently have $60k of equity. But the bank only requires you to keep 25% of the home's new value in the house as equity, which is calculate at 25% of 135k. This is $33.8k. So, by refinancing you can get a check from the bank for $26.2k. Of course, the bank will still charge you refinance fees, probably around $3k. So, you really get a check for $23.2k. 

And this would be a great deal! You would put in $25k to own a property, fix it up, get a renter so that the property cash flows, then rework the loan with the bank so that they give you almost all the money back that you initially put in!

Of course, keep in mind that there are costs to fixing up the property, costs to travel to view the property, and when you refinance your monthly mortgage payment will go up a little bit due to the higher loan amount, but overall this strategy is an excellent one. Many real estate fiefdoms have been built this way.

Congrats for pursuing this and asking your questions!