30 Aug How to Generate Optional Surplus Money on Your BRRRR Cash-out Refinance!
If I told you that you could have a fully rented, maintenance-free property with $50,000 of equity, $2,000 a month in rent coming in and a $1,000 mortgage payment, and all you had to do was take over the mortgage loan, would you do it? In other words, what if you were offered a house with equity and positive cash flow, and you didn’t have to pay any of your own money to get it?
The BRRRR (Buy, Renovate, Rent, Refinance, Repeat) Method accelerates your real estate wealth-building. If you handle a BRRRR deal well, in about six months you can receive your entire cash outlay back. If you handle a BRRRR deal really well, you could receive all of your money back plus a surplus that is tax-free!
Imagine that you have $150,000. You buy a fixer-upper for $120,000. You spend $5,000 on closing and carrying costs. You spend $25,000 on renovations. Therefore, you have $150,000 into the deal. You rent the house for $1,900 per month. Six months later, you apply for a 75 percent loan-to-value cash-out refinance at a fixed interest rate of 6 percent. The appraiser says that your rental house is worth $200,000. Your bank lends you $150,000. In other words, they give you back your original $150,000! On top of that, you own a renovated house that probably won’t have any big maintenance costs in the near future. You have $50,000 in equity. Your monthly mortgage payment plus taxes and insurance is $1,100. Since you are receiving $1,900 in rent, your cash flow is $800 a month!
So, you invested $150,000 in a rental house. Half a year later, you got back your $150,000. You created $50,000 in equity plus $9,600 a year in income. Why wouldn’t you do it again?! (Hence the “Repeat” part of BRRRR.)
Now, what if you received more than your original $150,000? Imagine if the rental house appraised for $250,000. Then your bank would lend you up to $187,500. You could receive your original $150,000 back plus as much as $27,500 in surplus money. That $27,500 is a loan, so it is not taxable. Your cash flow would be a little less. Imagine if your monthly mortgage payment plus taxes and insurance is $1,300. You would net $600 a month in cash flow. Next time you do a deal, you would have $187,500 instead of $150,000 to play with!
Here is an actual deal we did in 2022:
$138,000.00 Purchase price (It was listed for $165,000, had multiple offers, and we had by far the lowest offer.)
+ $1,423.40 Closing costs
+ $947.86 Homeowner’s insurance for 1 year
+ $30,019.93 Renovation expenses and carrying costs
– $9,000.00 Five months of rent at $1,800 a month
= $161,391.19 Cash in the deal
Six months later, this home appraised for $265,000. Our bank said that they would lend up to $198,750 (75 percent of the appraised value). We opted to maximize our discount points to obtain the lowest interest rate on the 30-year loan.
$198,750.00 Loan
– $9,775.49 Closing costs and loan fees
= $188,974.51 Loan proceeds ($161,391.19 returned to us plus $27,588.32 in surplus funds)
So we have a beautiful house rented at $1,800 a month and producing $400 per month in positive cash flow. We received our original investment of $161,391.19 plus an extra $27,588.32 in tax-free money! What did we do? We bought another fixer-upper house 30 minutes later! [2024 update: The rent is now $2,060 a month, and the cash flow is $646 a month!]
You see, BRRRR is like flipping except you get to keep the house and you get to keep the money. (Flippers who turn a profit have to pay taxes on their gains, and of course, they don’t own the house anymore.)
How do you generate surplus money? You need to find and negotiate a great deal. Then your renovation needs to create value without going over budget. Rent the property for as much as the market will bear. (We market to pet owners, who usually pay a premium for a rental that allows pets.) A quality renovation and a high monthly rent should impress the appraiser enough that he or she will see plenty of value to appraise the property as high as possible. We give the appraiser comparable sales that we believe support the value. We also give him or her a detailed list of renovations so it is clear how we improved the property.
And hey, if you don’t want as big a loan, then you don’t have to borrow the full amount. If you borrow a little less, your debt will be lower yet your cash flow will be higher. You win either way! Read more of our blogs to find out how to keep winning.
Check out our video on the BRRRR Method, which includes an actual example!
Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania. He became a full-time real estate investor in 2004 after serving in the U.S. Navy. Tai has made colossal mistakes in investing (and learned some things along the way). He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics. Send an email to tai@investandtransform.com.
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