BRRRR Calculating Help Please!

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
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BRRRR Calculating Help Please!

Candace Ly
New to Real Estate · Philadelphia, PA · Member since 2021 · 10 posts · 7 votes

Hello BP! I only just started my RE journey and have been listening to podcasts and reading. I am still pretty confused on how the BRRRR method works when it gets down to the nitty-gritty. If I purchase a property, rehab, and then refinance, won't the mortgage be higher and my monthly payments are higher? If the bank gets me a 75% LTV, I wouldn't have any more equity and will have a loan amount for the full 75% of my property's ARV value?? Could someone break down a hypothetical situation for me with numbers (see below)?

I don't have enough cash on hand to purchase a property in full, but I do have family members that could lend me the full amount/construction costs. I am also unsure how private money agreements are typically handled. Does the lender make money off of interest or at the end of the refi I give them a portion of profit? 

  • Purchase price: $100,000
  • Renovation cost: $50,000
  • Cash borrowed from lender: $150,000
  • Gets appraised for: $300,000
  • Refinance for 75% of LTV: $225,000
  • Monthly mortgage: ???
  • Equity: ???
  • Profit: $75,000(??) but not really since I would have been paying the lender interest?

If someone can explain to me clearly, I would really appreciate the help!! I'm struggling to understand the calculations. 

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Michael K GallagherBusiness Member
Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes
4y

@Candace Ly in your example above is that you are all into a deal for $150K, or thats your pre-refinance number, if this is all cash, if its hard money, if its a private loan, it doesn't matter its just acquisition plus rehab cost is the all in cost. If your project appraises after the rehab for $300K, and you take out a 75% LTV mortgage on the property for $225K, then you pay off the private lender of $150K, and you are left with the $75K of debt that you are able to go do another deal with. Now you are paying for a loan on that $75K but the idea is that the return you are getting from rent on that 75K will be more than the interest you are paying on the debt.

The equity you have in the deal is still 25% because you took out 75% of the overall value or equity of the home.  Your monthly payment on that mortgage would be based on the loan you got from your lender, and the taxes/insurance in that area.  But the Idea being that the cashflow from the rent on the unit pays for that loan.  

If you want additional breakdowns I'd suggest the BRRRR book or even there are some great youtube videos on the subject on the BP channel.

[email protected]614-362-2231
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  • Michael K GallagherBusiness Member
    Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes
    4y

    @Candace Ly in your example above is that you are all into a deal for $150K, or thats your pre-refinance number, if this is all cash, if its hard money, if its a private loan, it doesn't matter its just acquisition plus rehab cost is the all in cost. If your project appraises after the rehab for $300K, and you take out a 75% LTV mortgage on the property for $225K, then you pay off the private lender of $150K, and you are left with the $75K of debt that you are able to go do another deal with. Now you are paying for a loan on that $75K but the idea is that the return you are getting from rent on that 75K will be more than the interest you are paying on the debt.

    The equity you have in the deal is still 25% because you took out 75% of the overall value or equity of the home.  Your monthly payment on that mortgage would be based on the loan you got from your lender, and the taxes/insurance in that area.  But the Idea being that the cashflow from the rent on the unit pays for that loan.  

    If you want additional breakdowns I'd suggest the BRRRR book or even there are some great youtube videos on the subject on the BP channel.

    [email protected]614-362-2231
    4Reply
  • Mike Mosby
    Real Estate Investor · Atlanta, GA · Member since 2014 · 19 posts · 8 votes
    4y

    Lots of great questions.  Your monthly mortgage payment will be based on 300,000.  So put that into any mortgage calculator, include the taxes and insurance for your property to figure out your payment.

    You will have 75K in equity.

    Your profit will be the difference of 225k minus (purchase price (100k) + reno (50K) + closing cost (TBD) + holding cost (TBD)).  At closing you will walk a way with a check based on that calculation.  You will owe the bank 255K for a property worth 300K which will be your equity.

    Hope that helps a bit. You will have a lot more questions so keep them coming! I recommend you check out the BRRR Calculator to help with the numbers: https://www.biggerpockets.com/...

    3Reply
  • Candace Ly
    OP
    New to Real Estate · Philadelphia, PA · Member since 2021 · 10 posts · 7 votes
    4y

    Thank you @Mike Mosby and @Michael K Gallagher for responding! I do plan on reading the BRRRR sometime soon, just haven't gotten there yet. Not sure if I'm misreading everything, but Michael G. said one thing but Mike M. said another.

    From my understanding, Michael G. is saying my refinance loan amount will only be $75k but Mike M. is stating the loan amount is the full $300k. 

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  • Jibu V.
    Investor · Philadelphia, PA · Member since 2014 · 134 posts · 49 votes
    4y

    If you're refinancing at 75% of LTV, then your refinance loan will be $225K, assuming you pay for closing costs out of pocket (which will be a few thousand depending on your market). Assuming you still cash flow positive after this refinance, this would be considered a BRRRR with infinite returns. You would have nothing into the deal at the end (i.e. the equivalent of a free property), and in fact, have about $75K back to you at closing that you can use on another deal. Your equity is $75k, which is the difference between the value of the asset ($300k) and the liability ($225k).

    In terms of profit, most people look at BRRRR from the cash flow perspective. You typically want minimum cash flow of $100, ideally at least $200, per unit. That is after expenses, including reserving for vacancies, maintenance, and property management.

    Keep in mind that just because you can rehab and refinance all of your cash out, it doesn't mean it's a good BRRRR deal. If you have negative cash flow in the end because your rental income falls below your expenses, then a flip might be a better play for that deal.

    1Reply
  • Mike Mosby
    Real Estate Investor · Atlanta, GA · Member since 2014 · 19 posts · 8 votes
    4y

    When you refinance, you do it at an apprised value of 300k. So the bank lends you 75% of that which is 225k.  Since you paid 150k for the property, you have 75k in profit in your pocket. And because you picked confusing numbers, you also have 75k in equity left in the property (225k-300k).  

    @michael G may have a typo-he means profit, not debt.  You still owe the bank 225k and are making payments on that. 

    If I lend you 150k to buy a house.  Then Michael G lends you 225k for that same house. You can pay me back my 150k, you get to keep 75k but you still owe Michael G 225k. 

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  • Tim Herman
    Member since 2018 · 2k+ posts · 1k+ votes
    4y

    @Candace Ly your cash flow will actually increase. Assume 12% interest on the hard money interest only loan. You borrow the whole 150k. That is a payment of $1500 per month. After your 6 month seasoning period you refinance 225k @ 4%. Your new payment will be $1074.  Almost $500 of more cash flow plus an additional 75k to invest in a new property. Unlikely that a 50k rehab will give you 150k equity but you never know.

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