“Refinance” is the fourth step in BRRRR. But maybe we should start BRRRR with it…
Resting your cash flow on the shoulders of a loan you don’t even know you can get.
Spending time and money on a fix-up that might not even pay off.
Buying at a high interest rate with no guarantee of a refinance.
This is what you’re doing when you jump into a BRRRR before figuring out your long-term loan. This is why you need to start BRRRR with refinancing.
How to Start BRRRR with Refinancing
The refinance is where you make your money in a BRRRR. Refinancing determines the cash flow, your money out-of-pocket, and the financial success of the project.
If everything hinges on the refinance, why would you wait until the fourth step of the process to start figuring it out?
You need to mentally move the third R, “Refinance,” up to the beginning of the process, before you even buy.
BRRRR Refinancing Questions to Answer
There are certain questions you should know the answers to before you put money down on an undermarket property.
You can get the cheapest house out there, with the highest ARV… But if you aren’t able to get a decent refinance for it, you’ll still lose money.
Here are some questions you should be able to answer at the beginning to ensure you don’t do BRRRR wrong:
- What loan-to-value (LTV) does the bank require?
- When you go to refinance, will you have to bring in money? How much?
- Will it cost more money than you have? Or more than you want to spend on this project?
- Will you do a rate-and-term or cash-out refinance?
- What will be your cash flow on the property?
- What’s the minimum cash flow you need? What about the minimum the bank needs?
- Does the bank require investment experience to lend you a refinance loan?
- Does the bank have reserves requirements? (This is usually around six months’ worth of payments the bank requires you to have in savings or a mutual fund).
If you don’t know the answer to these questions up front, you end up like a lot of buyers who get BRRRR wrong and lose money.
You get to the refinance part of the process and learn you don’t have enough money to bring in. Or you find the cash flow is bad. This is why you should start BRRRR with refinancing.
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