BRRRR Questions and clarity

[Tarek Emam]

Just need some clarity on the BRRRR model.

Purchse price: $300,000

Rehab: $100,000

All in: $400,000

Appraisal:$650,000

Equity: $250,000

For this example, lets say I put down 20% of the purchase price ($60,000) as a down payment. And now the remaining amount on the loan is $240,000.

And i took out another loan for my rehab price quote at $100,000. So now I essentially owe $340,000 in total ($240,000 for the loan amount of the house) and ($100,000 for my rehab loan)

Now since my equity is only $250,000 and I owe a total of $340,000 back in loans, The BRRRR method wouldent work here correct? If this is correct can someone please let me know when the BRRRR method would work in a situation. Thank you!

[David M.]

@Tarek Emam

I think you've got the numbers all wrong, or I don't think of it that way...  First of all, not sure how you are doing two loans.  If its secured by the property, it would have to appraise sufficiently to support two loans and the second loan would be a more costly second position lien..  You can work out your financing, or learn about that...

If you purchase for $300k with $60k down, then your loan is $240k and cash is $60k.  If you put in another $100k of rehab somehow with a loan, then you have $340k in loans and $60k in cash.  I don't think in terms of "all-in" (I only know it as a card game term, but I don't play).  But, you have only spent now $60k of your own money.  The rest is borrowed.

Now, you say it appraises for $650k.  That means you have $310k (650-340) in equity in the property now.

If you cash out refi at 30% down, the loan is $455k.  Since you have $340k in existing loans (lets skip trying to calc and principal payments), that means you cash out with $115k in cash. 

In summary, you start out with using $60k in cash and two loans (somehow) totaling $340k.  You end up with $115k cash in your pocket, a property appraising at $650k encumbered by $455k.

I think your issue is the mechanics of the real estate transactions / financing.