Need someone to explain the refinance part of the BRRRR

[Bill DeLuca]

I cant grasp the refinance and cash out portion of this strategy. I need someone I can call, I cant comprehend it any other way.

Home under contract to purchase for $110,000

Put down 20% ($22,000)

Get a loan for $88,000 to cover the full purchase price.

Then put in another $15,000 of improvements to get it “rent ready”.

• Sales Price: $110,000
• Down Payment: $22,000
• Loan Amount: $88,000
• Closing Costs: $3,000
• Carrying Costs: $1,300
• Rehab Cost: $15,000
• Potential After Repair Value (ARV): $150,000

Property appraises at $150k now what? 

[Greg Huegel]

@Bill DeLuca,

Randy explained this process perfectly. The main reason people move forward with the BRRRR method is to minimize the amount of cash required to acquire a property and refinance using their new equity in the property based on the after repair value. Upon refinancing great deals, typically your equity in the property is enough to cover the initial down payment, rehab budget, and any closing costs associated with both loans (short-term purchase and long-term refinance). To allow for this, most lenders have a loan-to-after-repair-value (LTARV) cap of 70 or 75% for the short-term rehab loan, if financing was used for the acquisition. Investors often obtain a short-term loan when doing the BRRRR method because your down payment will significantly decrease (20% versus 10% with most lenders). The seasoning period and max LTV depends on the lender you go through for the refinance. Some lenders can offer refinances on properties starting at 3 months but most will have a seasoning requirement of 6 months or more to obtain max leverage, as Randy stated.

For your scenario, see below for how your cash out proceeds would be calculated (not including your cash already in the deal): 
Cash out proceeds @ 75% LTV = (ARV * 0.75) - payoff - refinance closing costs - interest reserve escrow (first 3 months of mortgage payments)

Cash out proceeds @ 75% LTV = ($150k * 0.75) - $88k - $4,500 (estimated conservatively @ 4%) - $2,925 (estimated monthly mortgage payment of $975) = $17,075 (using estimated figures)

Once this figure is determined, then you can subtract the cash you put into the deal to see your true return for the deal. $17,075 - $15k - $3k - $1,300 = -$2,225. I included closing costs but keep in mind those are unavoidable for real estate transactions. I did not include the original down payment because more often than not in today's market, these deals are typically found through off-market deals or wholesaling.

If the second figure is positive, especially once you include your original down payment for the acquisition, you know if it is a good deal or not. This varies from investor to investor, for what they are comfortable with. Once the property is refinanced into a rental, if the property is cash flowing really well, it still may make sense because you would have paid yourself back in a short period of time. The reason Randy said it doesn't make sense to BRRRR this property is because the last R is repeat and if you are not net positive in cash following the refinance, it is harder to repeat and scale quickly.

Hopefully this helps!

Greg