Understanding BRRRR method

[Nicholas Weckstein]

I was just reading a post on here about the BRRRR method. It got me thinking. I need to understand how it works better. I know what it stands for and I get the process but I could use some clarification. So you buy a property at say 45k ARV is 100k The rehab is going to cost 30k Hard money lender lends on a 75% LTV So it would mean you need 25k out of pocket for a down payment if the ARV is 100k. Plus closing costs. You finish the rehab. You cash out refi 75% and take your 75k. After paying back the hard money lender 40k purchase price, and 35k rehab....your left with 0$ and a property with a mortgage. What am I missing lol. Also what about the issue with DTI. At some point your DTI would be o high to continue refinancing. I guess that's when you just sell for a profit and just flip until your doing it with all your cash ?

[Steve K.]

@Nicholas Weckstein , BRRRR works when your costs (acquisition + rehab) are 75% of the ARV (or less) and the ultimate loan is 75% LTV of that ARV.

In your example, you have $25k cash down payment, you finance $50k for the $75k total cost of acquire/rehab. Upon refinance, at $100k ARV (new appraisal), the bank gives you max $75k mortgage. It's enough to pay off the HML, and return your $25k down payment (precious capital) back to you. You're left with 75% leverage, and $25k equity in the home (which is your rehab profit).

You have $25k capital back in your pocket (to repeat). You have a cash-flowing rental property that feels like it is 100% financed.....but really the 25% required equity in it is your "rehab profit".

You can repeat until you have 4 or 10 conforming loans (max FannieMae/FredieMac) and/or until DTI limit is reached, wherein you likely get to count 75% of rental income on your portfolio. After that, you use the commercial loan and/or portfolio loans that have more relaxed underwriting standards.