Thinking through the logistics of BRRRR

[Pat Dansdill]

Hello all,

I would like to use the BRRRR strategy on a property, but don't fully understand the details-any help is appreciated!

1-Am I wrong in assuming you can buy a physically distressed property with only the down payment in cash, and then finance the rest with a lender?

2-Following the above scenario: If you are able to finance the remaining amount with a lender, and then refinance the property after you rehab/rent it out, there lies the possibility of losing on interest points, right?

For example-if I bought a property today, with a down payment, and financed the rest with a 5% interest rate, then refinanced in 6 months (after I rehabbed, rented it out, and it was appraised for a higher amount) when the interest has been potentially raised to 5.25%, I lose out on a lot of money with the higher interest rates...correct?

I'm not sure if there's more I need to learn, or if that is simply part of what happens in a BRRRR deal, and it's better than the alternative of doing nothing.

Thanks,
Pat Dansdill

[Jason Munger]

The interest rate is always a gamble.  It could go down too.  The purpose of the refinance is to get your cash out of the deal to move onto the next one.

Let's use your example. The distressed property is $100k and you have $20k in cash and finance the $80k. With 20% down you aren't paying PMI (good!).

Then after you fix up the property it's worth $150k. You could refinance the house and get a $100k mortgage, pay off the original loan, get your $20k down payment back and your repair costs and STILL have have a loan for less than 80% of the property value so you aren't paying PMI. You have free cash to go make another deal.

I have over simplified things but you get the idea.  Even if the interest rate did go up to 5.25%, I would more than make up for it by being able to buy another property, versus only buying one.  In theory, as long as you make your numbers work and buy right, you can continue this process indefinitely or until a bank won't give you another loan.  But cash on hand won't be the issue.