I was listening to the episode of the Bigger Pockets podcast that talks about the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) investment strategy and remember that they suggested that people who do not have $90k in cash lying around could use a hard money loan to fund their first deal, then reuse that money to buy more houses.
What confused me is if you borrow $90k from a hard money lender, then rehab it so that the house is now worth $120k, then refinance for $90k with a traditional bank, don't you now owe the entire $90k sum plus interest back to the hard money lender? Now how do you fund your next deal? You now have a house with cash flow (hopefully), but now I'm stuck back at a spot where I don't have $90k to invest in my next house. Am I misunderstanding somewhere?
If someone could clarify that'd be awesome! Thanks y'all!
I haven't listened to that podcast, but I think I can see where your confusion lies.
First, most HML won't give you 100% of the acquisition cost from what I understand. Secondly, the BRRRR method works when you can bring more value to the property than your renovation costs. Thirdly, it also works better if you can refi for less than 20% LTV.
In your example above, you aren't reusing your own money, but you are reusing "other people's money." Its a beautiful leverage execution. From your example, you just used somebody else's money to get you a $120k property with rental cash flow. Yes, in reality there are interest payments and you need to pay for the reno (albeit potentially in sweat equity). But, I personally find your example a little "tight" if you want to build your own equity. To me, the BRRRR technique merges the best of short and long term investing. You gain the jump in value from the rehab like a short term flip, but take advantage of the rental income and the associated deductions and tax benefits of being a passive investment.
So, you are just about breaking even in this example except you walk away with a rented $120k property generating rental cash flow (and you are square with the HML). Isn't that kinda neat?