The first step to using the BRRRR method is to find a property that is priced well below market value. This way you are buying equity right from the beginning, which is one type of “payday”.
Buying under market value though is very important at the time you decide to refinance an investment property; remember the bank will usually refinance at 80 percent of the new value. So when you buy a property at full retail value and then attempt to refinance it, you won’t receive as much of your money back.
However, if you can get a great deal though, you’ll likely get most/all (or even more!) of your funds back than you spent to on your buy and renovations.
Here is an example:
- Buy a house for $300,000 that needs $20,000 in repairs.
- The house will now be worth $400,000 once those repairs are made.
- When you refinance the house you can get a mortgage for $320,000 (80% LTV).
- The new mortgage pays off the first loan you got when buying the house PLUS all the repairs.
*Disclaimer: When you mortgage a property there will be closing costs like appraisals, lender fees, title fees, and closing fees. You might not get ALL of your money back in this example, but it would be pretty darn close.
However, If you did not get as good deal of a deal on your initial buy, the method works, but not quite as well.
Here is an example:
- Buy a house for $335,000 that needs $20,000 in repairs.
- The house would worth $400,000 once those repairs are made.
- When you refinance the house you can get a mortgage for $320,000.
- The new loan covers some of the costs but you still leave $35,000 reno funds (without including down payment or the closing costs either.)
Now, OF COURSE the latter example is still vastly better than the average buyer’s “strategy”. But with strong negotiations and targeting undervalued assets you can recycle your funds over and over and over and over and over and over and over and over and over and over.
Reach out to find out more about the BRRRR strategy and our approach.