Help with Brrrr method

[India Brown]

Can someone explain the brrrr method or paint a clear picture on how it works?

[Jimmy Suszynski]

When you purchase with "cash" it can mean you are using hard money, private money, personal loan, secured loan, actual cash, etc. It just means you're not using a traditional 15 or 30-year mortgage (or other traditional financing used to purchase real estate). 

If the process takes 6 months, you make whatever debt-servicing payments you need to during that period of time. An example I am going through now:

- I am using $35,000 private money that I am going to pay back when I refinance the property in 6-8 months. I will be paying back $38,500 (10%, interest-only, tacked on to the end)

- I am using a secured loan on my own money for the rehab. It is amortized over 5 years so the payments are $370 per month.

- Taxes & insurance will be approximately $120 per month.

Now, when I refinance, I will have a mortgage payment of around $280/month, plus taxes/insurance (insurance is less because the property will be occupied). Overall, my monthly debt payments went down in this scenario.

If you use all of your own cash or private money that doesn't require monthly payments, you'll go from no payment to some payment so your monthly payments will increase significantly.

You can also BRRRR a property that you purchase with a traditional loan if you can get the house for a great price, add value and refinance for 70% LTV you will end up having a larger mortgage than when you started so the payment will increase.

An example of this would be:

- Find a property off-market from a motivated seller. They're asking $100k, you offer $70k and they accept. The value of the property is $110k so you already have equity. It's a large 2 bed, 1 bath so you add value by putting in a 3rd bedroom and 2nd bath and upping the curb appeal. The market appreciates and the ARV is now $150k and you're all-in for $110k. You can refinance for the full amount and pull your money back out. The original payment on the $70k loan was about $350/month, the new mortgage payment on the $110k loan is over $500/month.

As you can see, it always depends on the specific situation. Typically, moving from one mortgage to another will increase your payment whereas refinancing to pay off more expensive money will reduce your monthly payment.