A question about BRRRR

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A question about BRRRR

Warren Bright
Cape Town, Western Cape · Member since 2015 · 61 posts · 13 votes

Hi everyone.

So I am trying to understand this BRRRR strategy a bit more, and in doing so stumbled across a question that I have which I hope you can help me answer.

To set up a little scenario:

  • You purchase a property at $100,000
  • Deposit is at $40,000
  • You require a loan of $60,000

To make things simple I am not going to include transfer costs etc...

Lets say you have waited 5 years and your new value of the property is sitting at $125,000.

You then look to refinance at 70% LTV and get a new loan of $87,500 based off current value of the home.

And now my question:

This lump some of money that you receive, is it used to pay off your previous loan of $60,000, leaving you with only $27,500?

or

Do you leave your previous loan and now essentially have two loans to pay off. (If this is the case my query follows). How are you able to keep BRRRR'ing if you have multiple loans and only earning one set salary. Surely you wont be able to qualify for all those loans?

I am just a bit confused and would love an explanation.

Greatly appreciated!

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Nazz Wang
Investor · Maui, HI · Member since 2012 · 232 posts · 96 votes
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Warren, so now you'd better find a place to invest that 27500 that will give you higher return then your mortgage interest, right?

You only took out 60000 for the original property, the extra 27500 is for some other property, right? So, don't let that money burn a hole in your pocket and don't spend it on a tropical vacation. Invest it wisely.

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  • Kevin Trumbull
    System Administrator / Investor · Eugene, OR · Member since 2015 · 144 posts · 29 votes
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    I believe when you do a cash out refi all current lienholders must be paid first.  You can think of 'cash out' as 'net cash after all lienholders have been paid'.

    1Reply
  • Nazz Wang
    Investor · Maui, HI · Member since 2012 · 232 posts · 96 votes
    11y

    you are replacing your existing mortgage with a new mortgage when you are refinancing, doesn't matter if you cash out or not. Lenders always prefer to be in first lien position, meaning, if you don't pay your mortgage, they have your house. escrow uses the total an interview in the new mortgages, pays off your previous mortgage balance, takes out misc fees, and pays you th difference.

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  • Nazz Wang
    Investor · Maui, HI · Member since 2012 · 232 posts · 96 votes
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    When you are cashing out, you can only cash out your equity, which equals to 

    What the property is worth now - your current loan balance = equity.

    So you will never be able to cash on money you don't have on paper.

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  • Warren Bright
    OP
    Cape Town, Western Cape · Member since 2015 · 61 posts · 13 votes
    11y
    Originally posted by @Nazz Wang:

    you are replacing your existing mortgage with a new mortgage when you are refinancing, doesn't matter if you cash out or not. Lenders always prefer to be in first lien position, meaning, if you don't pay your mortgage, they have your house. escrow uses the total an interview in the new mortgages, pays off your previous mortgage balance, takes out misc fees, and pays you th difference.

     Thanks for the response!

    Okay so bare with me here please... If you then refin and get a new $87,500 loan (of which some would cover your old loan) your mortgage repayment is a lot higher because you are paying off this new value vs paying off only $60,000? How is this viable?

    1Reply
  • Emmanuel Reyna
    Navarre, FL · Member since 2015 · 9 posts · 3 votes
    11y

    I think it leaves you with the 27,500

    0Reply
  • Warren Bright
    OP
    Cape Town, Western Cape · Member since 2015 · 61 posts · 13 votes
    11y
    Originally posted by @Kevin Trumbull:

    I believe when you do a cash out refi all current lienholders must be paid first.  You can think of 'cash out' as 'net cash after all lienholders have been paid'.

     Thanks Kevin :)

    0Reply
  • Nazz Wang
    Investor · Maui, HI · Member since 2012 · 232 posts · 96 votes
    11y

    Warren, so now you'd better find a place to invest that 27500 that will give you higher return then your mortgage interest, right?

    You only took out 60000 for the original property, the extra 27500 is for some other property, right? So, don't let that money burn a hole in your pocket and don't spend it on a tropical vacation. Invest it wisely.

    2Reply
  • Brian Holt
    Mifflinburg, PA · Member since 2015 · 65 posts · 12 votes
    11y

    It's only viable if the property cash flows enough to at least cover the new payment, or you are rolling those additional funds into another property where combined cash flows will cover this debt and any additional debt required. Unless of course it is an equity play and you are willing to cover any shortfall out of pocket because you are planning for significant appreciation, forced or otherwise.

    1Reply
  • Warren Bright
    OP
    Cape Town, Western Cape · Member since 2015 · 61 posts · 13 votes
    11y
    Originally posted by @Nazz Wang:

    Warren, so now you'd better find a place to invest that 27500 that will give you higher return then your mortgage interest, right?

    You only took out 60000 for the original property, the extra 27500 is for some other property, right? So, don't let that money burn a hole in your pocket and don't spend it on a tropical vacation. Invest it wisely.

     Nice and simple, thanks!

    0Reply
  • Warren Bright
    OP
    Cape Town, Western Cape · Member since 2015 · 61 posts · 13 votes
    11y
    Originally posted by @Brian Holt:

    It's only viable if the property cash flows enough to at least cover the new payment, or you are rolling those additional funds into another property where combined cash flows will cover this debt and any additional debt required. Unless of course it is an equity play and you are willing to cover any shortfall out of pocket because you are planning for significant appreciation, forced or otherwise.

     Thank you! So many great things about Real Estate, and I am loving the learning journey.

    0Reply
  • Matt LennanderPro Member
    Rental Property Investor · Saint Paul, MN · Member since 2015 · 36 posts · 6 votes
    11y

    I mean you could always take a nice weekend trip for $500 and still have $27,000 to invest in a new property ;-)

    I agree with Brian, but I never count on market appreciation. Forced appreciation is great when you're able to make it happen. Cashflow is always a good strategy. 

    0Reply
  • Kevin Trumbull
    System Administrator / Investor · Eugene, OR · Member since 2015 · 144 posts · 29 votes
    11y

    Yes, that's the key, you need to think about your long term strategy, so when working the BRRRR method, you need to make sure your property will cash flow when you have the long term 75% ARV mortgage at the end, which people sometimes don't plan for.

    The main benefit to the BRRRR method is you are in for little to no cash, but you have to make sure it will cash flow at the end... meaning you need to make sure you have a really good deal going in.

    1Reply
  • Warren Bright
    OP
    Cape Town, Western Cape · Member since 2015 · 61 posts · 13 votes
    11y
    Originally posted by @Matt Lennander:

    I mean you could always take a nice weekend trip for $500 and still have $27,000 to invest in a new property ;-)

    I agree with Brian, but I never count on market appreciation. Forced appreciation is great when you're able to make it happen. Cashflow is always a good strategy. 

     Going on a holiday would be lovely!

    0Reply
  • Warren Bright
    OP
    Cape Town, Western Cape · Member since 2015 · 61 posts · 13 votes
    11y
    Originally posted by @Kevin Trumbull:

    Yes, that's the key, you need to think about your long term strategy, so when working the BRRRR method, you need to make sure your property will cash flow when you have the long term 75% ARV mortgage at the end, which people sometimes don't plan for.

    The main benefit to the BRRRR method is you are in for little to no cash, but you have to make sure it will cash flow at the end... meaning you need to make sure you have a really good deal going in.

     The only problem I foresee for myself is the fact that because I am still a student, I do not have a constant stream of income - thus turning banks away... Which means I would not be able to refinance because in their eyes I would not be able to cover my repayments, seeing as rent does not count as a form of income to them.

    0Reply
  • Kevin Trumbull
    System Administrator / Investor · Eugene, OR · Member since 2015 · 144 posts · 29 votes
    11y

    Great, I see the gears turning. So part of BRRRR is the make sure you can actually execute the Refinance step. :) Before you jump in to a deal, make sure you find the mortgage company you want to work with on the cash out refi, get pre-approved, and get some type of confirmation from them that they'll cash you out at the end.

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    11y

    I think your missing the point with BRRR. Typically you buy an undervalued property that needs renovation then fix it up and refinance. An example of this is I bought a property for $25k, did $15k of renovations so I am in it for $40k. I rented it out for $600:month and it is appraised at $60k. I will refinance it to get my money back out of the deal (I could take more to use for more properties), but in the end I am cash flowing positive $ and have no money out of pocket.

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  • Warren Bright
    OP
    Cape Town, Western Cape · Member since 2015 · 61 posts · 13 votes
    11y
    Originally posted by @Kevin Trumbull:

    Great, I see the gears turning. So part of BRRRR is the make sure you can actually execute the Refinance step. :) Before you jump in to a deal, make sure you find the mortgage company you want to work with on the cash out refi, get pre-approved, and get some type of confirmation from them that they'll cash you out at the end.

     This was a big help!

    0Reply
  • Warren Bright
    OP
    Cape Town, Western Cape · Member since 2015 · 61 posts · 13 votes
    11y
    Originally posted by @Chris Seveney:

    I think your missing the point with BRRR. Typically you buy an undervalued property that needs renovation then fix it up and refinance. An example of this is I bought a property for $25k, did $15k of renovations so I am in it for $40k. I rented it out for $600:month and it is appraised at $60k. I will refinance it to get my money back out of the deal (I could take more to use for more properties), but in the end I am cash flowing positive $ and have no money out of pocket.

     It's all about buying the property for as cheaply as possible!

    Thanks for your advice:)

    0Reply
  • Kevin Trumbull
    System Administrator / Investor · Eugene, OR · Member since 2015 · 144 posts · 29 votes
    11y

    One take away from @Chris Seveney post is the BRRRR strategy is really a short term thing, like you buy your deal, rehab it, rent it out, then usually do your cash out refi within 6 to 12 months, then go do it again.

    Waiting 5 years for appreciation isn't really the BRRRR strategy. It's about forcing appreciation through rehab, not waiting for it. This is probably already clicking, but Chris made a good point so I wanted to reinforce it.

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