Can someone please explain the refinance part to me in a BRRR?

Question

can someone please explain to me how the refinance part works? So when you find a bank to refinance your original loan, how will you pay back your new loan? That part makes no sense to me. Please can someone explain this to me?

Zach Wain · Answer

@Mashal Choudhry - Buy, Rehab, Rent out the property, Refinance (cash out), Repeat (buy a new home).

The theory is that if you bought a home for $200k with a $160k loan, and rehab'd the property, the value is now $250k.  Then you do a cash out refinance and get 75%-80% loan to value on $250k, so a new loan of $200,000.  The new loan of $200k pays off your old loan of $160k and you get the proceeds (minus closing costs) and you take that money and reinvest into new homes.

This method was amazing the past decade.  But, it is getting more difficult right now.

1) Values are not increasing at the same levels.  That helped a lot of investors out, when they rehabbed the home gained value but the market also jumped by 10% in that year so it made their values grow faster

2) Cash out refinances on conventional loans got more expensive and restrictive.  75% max loan to value on a rental property cash out refi.

3) Rates are up, which is not a show stopper but it makes things more challenging to cash flow.

BRRRR is still an option, but I think investors need to be more dialed in then ever.

Matthew Drouin · Answer

@Mashal Choudhry

Don’t feel bad.  I didn’t get it at first either!

I think a couple people here explained it quite well.

Essentially, if your property increases in cash flow and it appreciates in value, a bank will give you an even bigger loan on the property.  Some times the property can appreciate enough where a new loan can pay off the old loan and be big enough to allow you to “pull cash” out of the property.  So you are able to buy more property without having lack of cash being a burden.  You can recycle your downpayment money over and over again.

When someone mentioned that BRRRR is getting tougher these days, you asked “well what should I do?”

Here’s my suggestion.  You don’t need to worry about the refinance part of BRRRR until after you’ve bought a property.

So figure out how to Buy first.

The only rule you need to follow is that the property needs to be in a good location.  Not a “meh” location.  A good location where people with good incomes, good credit and long term stable employment want to live.

Once you’ve don’t that you’re going to have broken through the first barrier that most people who are just real estate wannabes never do!

Zach Wain · Answer

I think its still a viable model, but I think it will take a savy investor to do well right now.

I think buying a new primary home every 12 months if the best way to grow a real estate portfolio.  You convert the old primary into a rental home.  It gets you the lowest market rates and the least amount of downpayment.  But that does not work for everyone.

Jonathan R McLaughlin · Answer

Lets say you bought a 100K place with 20K down, the rest (80K) being supplied by a bank, which you pay back monthly.

You then spend 20K making it really nice and several similar houses around it sell for 200K!

You have spent a total of 40K.

You contact another bank and they appraise the property as being worth 160K. They are willing to write you a loan for 120K, which you will use to pay off the old mortgage while you pay off the new mortgage monthly.

So you owe 80 and you spent 40 for a total of 120K you are responsible for. Since the bank is willing to loan you 160K you would be able to take 40K in cash. You own the new property, which presumably generates enough to pay the mortgage debt and give you some income. Win-win-win

Does that make sense? I deliberately left out how hard it is to do this, the fees and  transaction costs associated with it, income requirements etc. But this is the general idea behind BRRR.

Buy something, increase perceived value, borrow money based on the new value to get all (or most) of your cash out of the deal and buy something else with that money

Sergei Gremeniuk · Answer

Just make sure your new loan still comes in with lower payments than what you can rent the house for, and don't be naïve thinking that the market will let you have a $200k house for $100k + $20 rehab.

Brayden Hrycko · Answer

Hey @Mashal Choudhry,

At closing, your new loan pays off the existing loan and now you make payments to the new servicer/lender that owns that loan. Title will set up an escrow account for you that impounds your taxes, insurance and mortgage payment.

John Chong · Answer

Your new loan amount will pay off your existing mortgage. If you have equity you'll be able to do a cash out refi.

Jonathan R McLaughlin · Answer

@Mashal Choudhry yes that’s correct

Can someone please explain the refinance part to me in a BRRR?

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