let’s talk: BRRRR- the 3rd R…
Good Afternoon!
This week was big for us. Almost TWO YEARS after we purchased Project Philly – we were able to finally pull our cash out of it! We are on the 3rd R of the infamous BRRRR method. Buy, Rehab, Rent, Refinance, Repeat. So let’s talk about what that entails.
So, as we do, let’s talk Real Estate, let’s talk BRRRR- the 3rd R…
It is important to know that this wasn’t just any refinance. This was a cash out refinance.
So, what is a cash out refinance?
“A cash-out refinance replaces your existing mortgage with a new home loan for more than you owe on your house. The difference goes to you in cash and you can spend it on home improvements, debt consolidation or other financial needs. You must have equity built up in your house to use a cash-out refinance.” (www.nerdwallet.com)
Here is how investors typically use it. They buy a property with unconventional funds (i.e. cash, private money, personal loan, hard money, etc). The investor then renovates this property, increasing its value. Once the property is fully renovated they typically either sell OR take it to a bank to obtain a conventional or commercial mortgage and pull their cash out.
We funded the purchase and renovation of our property by taking out personal loans. We did this because a bank would never have financed our property in the state we purchased it in. So we took out some personal loans, purchased the property in “cash”, and used the rest of the personal loan to finance the renovations. After the renovations were complete, our property value went from $135,000 to $470,000.
Now that we knew our property value had increased – we had two options to explore:
(1) Sell
(2) Rent and pull the cash out
So, what did we do?
We tried both! Honestly, we put this bad boy on the market for SALE and for LEASE. We ended up leasing it in about 3 weeks and continued to market it for sale. Our thought process was, let’s try to keep it now that it is leased out, but if we get an amazing offer before the cash out refinance closes, we will sell. Turns out we never got that amazing offer but we did get a pretty good cash out deal. We were able to pull our cash out of this property at a commercial rate of 4.5% with a 25 year amort schedule. Essentially the bank appraised the property at a certain value, and gave us back 70% of the new value of that property in cash, in return for our new mortgage.
So, what do we plan to do with that cash?
We will use that cash to pay off the personal loans we had taken out in order to make this project happen in the first place. And whatever is leftover will be used to start a new project!
Thus completing that 3rd R of the BRRRR method.
Buy, Rehab, Rent, Refinance, Repeat.
It has taken us way longer than expected for so many reasons; we shopped around, chose the wrong lenders, commercial loans can take awhile and then COVID… but nonetheless we are so excited to cross this REFINANCE off our list! Next up?! It is time to REPEAT this whole thing…I will keep you posted on what we decide to take on next. In the meantime, are any of you on here BRRR-ing?! Tell us YOUR experience.
Happy Wednesday! & Stay Healthy!
Erin
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