Question about the BRRRR Method Cash-out Refinance - First Rental Property

[Kyle Clover]

Hi everyone, 

I'm in the process of attempting to find my 1st rental for the BRRRR strategy and I wanted to make sure my math was right regarding the process.

For example,

If I purchase a property for 150K with a 30K rehab, this would make my total investment 180K. I would then initially obtain financing through a hard money lender who wants 20% down on a 180K loan, so I've currently invested 36K into the BRRRR (20% down of 180K hard money loan).

When I go to refinance out of the BRRRR through a traditional lender, I can obtain a loan with 75% ARV of the property? In the example above, would the ARV of the completed BRRR have to be 240K, so 75% of the ARV of the property would equal 180K? That way I could put a loan on the property for a total of 180K through a traditional lender, pay off my hard money lender, and recoup my initial 36K invested into the property. This would be my break even and I could then use the 36K to repeat the process on another property.

Thanks for your help everyone. I have been saving for a while so I want to make sure I understand the math so this first BRRRR is done right!

[Mathew Pezon]

Hi Kyle, that's correct at a high level. Keeping in mind you'll have interest payments to the bridge lender, closing costs to buy the property (most times hard money lenders charge points), and then refinance costs. The $36k cash out refi could get reduced to $25k or lower depending on all the closing costs. So in this example you wouldn't recycle all of the funds when factoring in the other costs. Another risk is if the property doesn't appraise for $240k but for $230k, it could further reduce your money recycling. How to offset the risks? Buy the property at a lower price. Good luck!