BRRRR Method Financing??

[Seth Robertson]

Hi BP, 

I recently watched another one of the BP webinars hosted by Brandon Turner. I'm a little confused on how the BRRRR uses "short term" and "long term" money

My understanding is that you can use short term money from lines of credit, a hard money lender, etc... to initially purchase the home and cost of repairs. The next step is to rent the home out and refinance the home with a bank or profile lender for a fixed  mortgage. 

My question is: If these short term funds are supposed to be paid off in 12 - 18 months, how do you pay back the high interest short term money within the 18 months after refinancing? Should the rental income alone pay off the debts within this time frame? or is there something i'm missing?

Thanks,

[Joe Vastola]

Hi Seth,

Short term money would be the original 12-18 month loan (likely from a hard money lender) while you buy and fix up the property while the long term money would be the loan after you have rehabbed and refinanced the property. In this strategy, after you rehab the property and go to refinance most banks will give you 75% of the new value of the home which should be enough to cover the original loan. So here is an example:

House Cost: 60k

Repairs: 20k

Down Payment: 12k

Short Term Loan Amount: 68k (Cost + Repairs - Down Payment)

After Repair Value: 100k

From here, the bank would generally be willing to give you a new mortgage of 75% LTV so that would come out to 75k which should allow you to pay off the original short term loan.