BRRRR Refinance Question

[Chris Cogan]

Hi Everyone,

My wife and I are looking about getting our first BRRRR property this year. My biggest concern I have with this strategy is that we won't qualify for refinance once we get past one or two properties. I read about people that have BRRRR 50+ houses but I don't understand how that's possible in terms of DTI. Am I alone in this thinking and what can I do to make sure I can refinance?

[Whitney Hutten]

@Chris Cogan Happy to help!  Here's a guide on how to survive the BRRRR refi :)

As far as the math, here is how it works (I'll use simple numbers, but the principle holds):

1. You purchase a home below value for $55K from a distressed seller (here's what I mean).  You put $20K into for a cosmetic rehab and the property appraises for $100K now.  You have $75K total into it. (I didn't get into how to purchase it, but you can look over this guide here and "choose your own adventure")

2. You now take the property to the bank. The bank will give you 75% of the new value ($100K) on the property. They will also look at the income of the property. Say the property rents for $1000, the bank will give you $750 of that (75%) to cover the expenses...and your expenses (PITI + HOA) are only $600, NOW you have $150/mth added to your INCOME statement for your next loan (even though you are really pocketing more). YES!!!

This can work the other way too...Say the property rents for $1000, the expenses are $800, now $50 ($750-$800) goes against your DTI... BOOO!!! Lenders might start shutting you down if your DTI gets too high or reserves too low.

3.  The new loan distributes $75K back to you ($100K * 75%). If you hit a home run, your downpayment might only be your forced equity in the project.  Again WIN!  OR maybe you have to leave a few grand to make the project work (watch out returns!)

Then... You go do this again... again... again.  Each time adding INCOME.

PM me with Q's!