BRRRR Investing Basics; Step 4: Refi

Okay- up until this particular “R,” you’ve been all like; “sure, this is good info, but it’s pretty obvious.” I get it. But this third R, this is where the rubber meets the road. We have experienced investors reaching out to us consistently that still get caught up on this step.  The refinance is intimately tied to the first two steps of the process- buy and rehab.

Let’s briefly get back to the “buy” post. There was a simple formula that I posted as a guideline for the math of a BRRRR deal. The actual numbers are imaginary, but understanding the ratios is essential to the process:

Finished value of property (ARV)= $100k

Cost to purchase: $50k

Rehab expenses: $25k

Profit (Equity=Value-expenses): $25k

If you can achieve those ratios on any deal, you can “repeat” the process infinitely, using the same down payment over and over. That’s it, easy peasy.

There are challenges to this and compounding factors; debt to income ratios, required reserves, banks discounting your rents, etc.

Here’s the key to remember. A bank is going to require that you have approximately 25% down for every property you own. Semantics are key here- I didn’t say “cash.” That 25% can be equity, and you can create that equity through improving the value of the house. If you can improve the value of the property by 25%, the bank will give you your down payment back. Now you have your pile of cash to repeat the process.

Questions? Fill out the comment form below and we will answer any questions you have. As always, feel free to give us a call or send a PM if you’d like to chat about the concept.