Having Trouble with the BRRRR Method and Spreadsheet

[Phil Petite]

Hello Everyone!

I have two rentals in Memphis. Both are 3BRs, and they both have Section 8 tenants in place. One home is being rented for $1100/month and the other is getting $1250/month. Both homes were purchased in cash, so I do not have any debt on either property.

I'd love to do a cash-out refi on either home in order to buy another rental, but I am not sure if I'm missing something with the BRRRR method and would appreciate some guidance.

Current Rentals' ARV: $125k for both (slightly conservative # here)

Purchase Price for 3rd/new rental: $100K

Rehab Needed: $2.5k (tenant currently in place, just needs punch list items taken care of)

Gross Rental Income: $1500/month

I guess what I'm having difficulty with is how much I'll be able to receive back from the re-fi that I can use towards the purchase of this 3rd property. I calculate that 75% of the ARV on a home worth $125k is around $93k, but this is where I get a bit lost in the process.

Any advice/guidance would be amazing!! Thank you in advance!!!

[Nate Herndon]

Hi @Phil Petite, that's a really good question. The cash that you will receive from your cash-out refinance is going to be pretty straightforward - if the property appraises for $125,000, and you opt for a 75% LTV cash-out, the total loan will be $93,750. Since you do not have a payoff, you will only have closing costs to be deducted from that $93,750 figure.

If we want to use round numbers and say that all lender, title, insurance, and taxes total $7500 in closing costs, then you would receive $93,750 - $7500 = $86,250 at closing.

The clients that I work with on refinances in Memphis are all cash-flowing really well, so I love the idea of picking up another property there. The financing that would be available for purchases will be 80% LTC. For both the refinance and the purchase, the terms would be 30-year fixed and prepayment penalties ranging from 5 years to none at all (depending on the program utilized).

Here's a quick peek at my DSCR calculator - you would only need to hit a 1.00 DSCR in order to pick up 75% LTV.