Confused about financing BRRRR

[Kevin Mcilnay]

So I'm a little confused about how BRRRR works with financing. I understand that the preference is to buy and rehab with your own money, but obviously that isn't realistic for the majority of people. SO, if put a little of my own money down, then finance the rest with a hard money/ private lender, how do I ensure I'm able to pull enough cash out of that house to pay off the investor plus financing and still have enough left over to roll over into your the deal? I'm assuming it's all in working the numbers prior to the purchase, but I feel like this part is getting skipped over in a lot of the podcasts. Or maybe I'm just misunderstanding something. Anything you can share would be a great help! Thanks.

[Michael Kinsella]

Hi Kevin,

The difference needs to be great enough between the rehab cost and the value increase from the rehab.

Example 1:

Purchase: 100k

Rehab cost: 60k

ARV: 170k

In this example, you spent 60k on the rehab, but you only increased the value of the property (assuming you bought the property for its as-is value) by 70k. This isn't a very large difference (only 10k).

Example 2:

Purchase: 100k

Rehab cost: 50k

ARV: 200k

In this example, you spent 50k on the rehab, and you improved the property by 100k. This is a much larger difference (50k).

The take-out lender, or the lender you will use for the cash-out refinance, will ideally give you a loan based on the ARV of the property after a given seasoning period.

Let's use the final following example to wrap everything up...

Purchase price: 100k

Rehab cost: 50k

ARV: 200k

Initial hard money loan: 135k (this is 90% of the purchase + rehab cost)

Take-out loan after seasoning period: 150k (this is 75% LTV based on the ARV of 200k)

135k of the take-out loan will go towards paying off the initial hard money loan, and the remaining 15k would represent cash-out proceeds.

Hope this helps!

Michael