All Forum Posts by: Trent Willey

Yeah, it can definitely be a tricky subject. I'm brand new too, and just ramping up my education to get started on my first deal. I believe where you're getting mixed up is with the way the purchase should be done. BRRRR almost always is done by paying for the property and rehab 100 percent with cash. Thus, there doesn't exist a loan at the beginning of the process. Let's say I find a home that will appraise for 160k after it's fixed up. I get a good deal on it and buy it for 70k, with cash. I then spend 50k, with cash, rehabbing it because it needs a lot of work. My all-in cost is 120k. I get a renter and then get it appraised for 160k, and now I'm making my first ever arrangement with a lender. I want a cash out refinance and they give me 75 percent LTV, which is 120k. This happens to be how much cash I spent. I now have my cash back, and the property cash flow can cover the monthly payments of the refinance, cap ex, and any other expenses for managing the property. If I chose a good property,this cash flow will be positive. But I didn't need a cash flow to cover two loans because I paid for the house and rehab with cash.

As a side note, if my rehab work was less, say 30k, I would have still gotten the property appraised for 150k (theoretically) and I would have ended up with a cash out refinance actually giving me 20k more cash than I even started with. Alternatively, if the appraisal came back lower than I expected, I might have ended up with somewhat less cash than I had to start.

Hey Trent, 
Great question - I've wondered the same about how the refinancing works too. Just want to simplify your scenario:

1. Purchase at $100k with 20% down = $20,000 Investment

2. Pull a Mortgage for $80,000 at 4% int which equals approx $630/mo expense

3. Spend $10,000 to add $50,000 in Value to the property (Total upfront capital invested: $30,000)

4. Estimated monthly expenses: $1006 vs Estimated Revenue: $1000 = Negative CF

5. Refinance at appraised value of $150,000 with 80% LTV gives you $120,000 worth of equity

6. Existing mortgage of $80,000 nets negative CF ... so how does $120,000 mortgage improve the circumstances?

I think with a BRRR strategy the point is to put that money you've generated (from wise construction and appreciation decisions) to work elsewhere. You've essentially generated $40,000 with $30,000 which has multiplied your original investment by 1.3. The sacrifice is that you now increase your debt which means your payments will rise... but the trade off is that now you can buy a second piece of real estate with that money and keep the cycle going.

I'd be curious to hear from a lender/broker how the refinancing adds up too. Is it also assumed it takes on the interest rate of the existing mortgage? What if mortgage rates have changed by the time you refi? Can you only refinance at the end of the term of the mortgage? (P.s. I am Canadian so we may have different rules)

Yeah, it can definitely be a tricky subject. I'm brand new too, and just ramping up my education to get started on my first deal. I believe where you're getting mixed up is with the way the purchase should be done. BRRRR almost always is done by paying for the property and rehab 100 percent with cash. Thus, there doesn't exist a loan at the beginning of the process. Let's say I find a home that will appraise for 160k after it's fixed up. I get a good deal on it and buy it for 70k, with cash. I then spend 50k, with cash, rehabbing it because it needs a lot of work. My all-in cost is 120k. I get a renter and then get it appraised for 160k, and now I'm making my first ever arrangement with a lender. I want a cash out refinance and they give me 75 percent LTV, which is 120k. This happens to be how much cash I spent. I now have my cash back, and the property cash flow can cover the monthly payments of the refinance, cap ex, and any other expenses for managing the property. If I chose a good property,this cash flow will be positive. But I didn't need a cash flow to cover two loans because I paid for the house and rehab with cash.

As a side note, if my rehab work was less, say 30k, I would have still gotten the property appraised for 150k (theoretically) and I would have ended up with a cash out refinance actually giving me 20k more cash than I even started with. Alternatively, if the appraisal came back lower than I expected, I might have ended up with somewhat less cash than I had to start.