The Refinance in BRRRR

[Benjamin Papet]

Hello BP, 

I'm new to real estate investing and was hoping to get some clarification on the BRRRR method, specifically the Refinance part. I'm assuming we are talking about a cash out refinance correct? What is the most efficient way to do that?

For the sake of me understanding it here's a hypothetical BRRRR (please correct or comment if any of this is wrong or inefficient):

I buy a property for $100k, I put 20% down and apply for an $80k loan. 

I put $30k into rehab (I now have $50K invested in the property)

I order an appraisal after rehab is complete and it comes back at $150k

I rent the property and then refinance it at a 75% LTV ratio, which equals to $112.5k ($150k x 75%)

I then repeat the process. 

If all of this is accurate what is the smartest thing to do with the refinance money: Pay off the loan and own the property free and clear and use the money left to buy another property OR use the whole $112.5k to buy a bigger property (i.e duplex, triplex...)

Thank you for any comment, feedback you may have!

[Mark Gauger]

Hi @Benjamin Papet. I think you're getting lost in your own numbers a little bit. I'll walk through the steps of your own example a little more.

1) Purchase a house for $100k with a $20k down payment and $80k mortgage. (20k out of pocket, 80k mortgage)

2) Spend $30k on rehab. (Now 50k out of pocket, 80k mortgage)

3) Rent house and initiate refinance, house appraises at $150k.

4) Complete refinance at 75% loan to value with a new mortgage for $112.5k. $80k from the new mortgage goes to pay off the first mortgage leaving $32.5k as cash back to your pocket. You still have $17.5k cash left into the property out of your total $50k outlay.

The "infinite ROI" you'll see people mention with BRRRR where you get all your cash back can only occur if you increase the spread in some way. For example if your Purchase Price + Rehab = ~70% of the After Repaired Value (ARV). In the above example if it only required $10k in rehab to achieve the $150k ARV you would have been able to fully cash out. Or with $30k rehab but a $80k purchase price to achieve a $150k ARV.

All these examples are of course quite simplified. You would have transaction costs and lending fees to factor in as well. Also, don't define whether an investment is "good" by whether or not you can BRRRR and get all your cash back. It is just a strategy and being able to execute it does not necessarily mean you got a good deal.