BRRRR with conventional loan

[Edward Bowlby]

Say you bought a home with a conventional loan for 100k with 5% down. The ARV is 180k and originally the rehab costs were 45k but now they are 65k due to unforeseen issues. The total monthly payments are $762. I am living in the home while rehabbing as well as renting 2 other rooms for $500 a month. What is the best route to take? I know if I refinance the deal I will be "leaving money in the deal" because of the higher rehab costs, but the house is 4beds 2 bath and could potentially be 5 bedrooms which can rent for $1700 a month. Should I refinance the loan with a 180k appraisal and get 75%? If I do get the $135k from the refinance what would the monthly payments be on the new loan? Will I be able to pay off the original conventional loan? One question I have with the BRRRR strategy is once you have the new refinance loan, what type of money is it and how do you calculate the new monthly payment?

[Andrew Webber]

@Edward Bowlby

So it looks like you have invested into the property: $5,000 for the down payment, $65,000 for rehab (after the higher than expected cost). Your total cash investment has been $70,000.

Your initial loan was for $95,000 so right now you have a loan on 52% of the ARV. In theory, you can Refinance and pull out cash up to 75% of the value of the home which means you could now pull out 23% of the ARV or $41,400. The numbers would have worked out perfectly had you not spent more on the Rehab step than you expected. If you pulled out the $41,400 then your total "loan" on the property would be $135,000 and typically a good rule of thumb is $600 monthly for each $100,000 of loan (if you like being conservative) so your monthly payment would likely be around $810, but it seems like you might have PMI with your current mortgage being higher than the $600 per $100,000 rule and it only being 5% down.

If you can start over with $41,400 and buy a new property immediately that would be how BRRR typically works but it seems like you might need to save up a little bit more or have someone partner with you on the extra needed money. I love the renting per bedroom you have going on as that typically means a higher income than renting the house to one family/person.

If you could repeat with your exact current numbers, and you could control your rehab to only $45,000 then you would be able to invest again soon. You would just need another $5,000 for a new downpayment of 5% on a $100,000 property, and then $3,600 to round your renovation budget up to $45,000. That's only $8,600 which with your current rent-free self and income from your property can likely happen in 6 months or a year if you want to have a cushion in case a similar thing happens. 

Some people would do it without a cushion and just finance the rehab on a credit card that doesn't ask you to pay it back for a year.