BRRRR Refinance: How to Set Up Your Loans
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The BRRRR refinance is where you make or break your profit. Here’s how to do it right.
Buying a BRRRR with a traditional loan is limiting. Refinancing a BRRRR with a traditional loan is freeing. Let’s see how these BRRRR loans shake out once we get to the refinance stage.
Firstly, there are two types of refinances.
A cash-out refinance turns the equity in the house into cash. A rate-and-term refinance is more like trading your old loan for a new one. Cash-out loans are usually 5-10% less than a rate-and-term.
BRRRR Refinance with a Traditional Loan
Let’s take the example of an under-market house for sale for $300,000, but worth $400,000. We’ll compare the refinances if we used traditional vs investor-friendly BRRRR loans to buy the property.
Our BRRRR property is worth $400,000. With the traditional loan, we could buy for $300,000. We’d have a loan for $240,000.
In this case, we have to do a cash-out. We’re already out $60,000 from the down payment, so we want the most we possibly can get back in our pockets.
For a cash-out refinance, you’ll likely be limited to a 70% LTV on the value of the home which is, in this case, $400,000. This means we’ll get a new loan for $280,000.
That still doesn’t cover the $300,000 total we paid for the house, so we’re still losing $20,000 on the deal.
Refinancing with an Investor-Friendly Loan
But the point of BRRRR loans is that you can complete the project with zero money down.
So now let’s look at how the investor-friendly loan set us up for the refinance.
With this hard money loan, we bought the house for $300,000 and now have a loan for $300,000. So far, we’ve put $0 of our own money into the property.
We’ll be able to use a rate-and-term refinance. We don’t need to get cash for ourselves – we just need to pay off our first lender.
Let’s say you’re still able to get a 75% LTV on the value of $400,000. Our refinance comes out to exactly $300,000, perfectly covering our loan.
This is how investor-friendly BRRRR loans let you invest in real estate with zero down!
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