Questions about BRRRRR method

[Ross Sims]

Hey BP world!

Reaching out to gain some clarity to on the BRRRR method and house flipping in general. Where my confusion comes in is in the debt to income portion of these deals.

Let's say I buy my first home around $80,000 (foreclosed) and put $10,000 into it and then I rent it and go to refinance it. Let's just say that it appraises with comps around $130,000. I've read that most banks will cash you out for the value of up to 70% of the home, so $91,000 in this case. Assuming I put $8000 down on the home that would mean I get cash out at ($91,000-$72,000) = $19,000.

So really I'm back to what I started with...roughly a $9000 down payment and $10000 for renovations. To me it seems like I'm not making money. But I guess it's the fact that I know own a home and someone is paying the mortgage and I am having some cashflow from it. 

But when I go to purchase my next property, how does the debt to income ration work? Since the house I bought is providing a small positive cashflow, does it basically negate the mortgages affect on my debt to income ratio? I'm sorry if that doesn't make sense. I can clarify anything if it is confusing. 

And how do you handle the risk of taking on more mortgages and let's say that all my tenants left so that would leave me with 3 or so mortgages to pay. What if my salary isn't high enough to cover that?

[Nicholas Lohr]

@Brian Garrett sure. 

so I bought the property for 205,000. with 25% down which ended up being about 55,000 out of pocket with all closing costs. So now I have a loan for 155,000 and equity of about 50,000.  I was able to get a 30-year fixed loan on the deal. 

I then rehabbed the property over 3 months and that price for that was 53,000. So now I'm up to 108,000 (55,000 + 53,000) for down payment and rehab.  Add in my holding costs as I still have to pay mortgage, utilities etc while I'm doing the rehab and the total all in was up to about 114,000. 

So after renting out the property and holding it for 6 months collecting rents which is the time frame that some banks require the property appraised at 350,000.  For the refi the bank will loan 70% of the appraised value which is 350,000 * .7 =  245,000.   That leaves me with 30% in equity which is  105,000 (350,000 - 245,000 = 105,000), which is great since I originally only had 50,000!  I then take the 245,000 that they loan me and pay off the original loan of 155,000 which leaves me with 90,000 for my next deal.  I had to pay some closing costs on this refi too. Im leaving a few smaller numbers out of this.

So I didn't get ALL the money out in the end actually.  I put in 114,000 and only ended up getting out 90,000.  But I feel ok about that because I do still cash flow over 1k per month on the property after the refi deal and I have that newly created 105k in equity.