Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
Ok, I've done a lot of reading here on BP and I have some sort of mental block because the refi part is just not sinking in to me. It seems like I'm just robbing Peter to pay Paul?
Can someone explain this to me like I'm a second grader?
If I buy a duplex for $60k ($12k down and $48k financed) and I put $20k into it and it appraises for $115k, that's obviously a good thing. My total investment is $80k. Using 70% LTV, I could theoretically get $80,500 back. So if I refinance, it seems to me, I'm up $500. I'm refinancing $80,500 to pay off my original $80k, which sounds dumb.
Obviously folks are using it and it's working, it's just not sinking through my thick skull on how it works. Can someone help and explain it so I can comprehend?
Real Estate Investor · New York City, NY · Member since 2015 · 21 posts · 9 votes
9y
Hi CJ,
Essentially this is a strategy that you use for rental properties. The idea behind it is to obtain a property and fix it up to obtain a higher rent. When you then refinance it, what you are doing is taking your money back out of it and now your tenants are paying your new mortgage plus ideally leaving you with some positive cash flow. After the refinance you now have your money back (the $12K) to go and put it towards another property. And now you also have extra equity on the property (ARV - Refinance amount).
Real Estate Investor · New York City, NY · Member since 2015 · 21 posts · 9 votes
9y
Hi CJ,
Essentially this is a strategy that you use for rental properties. The idea behind it is to obtain a property and fix it up to obtain a higher rent. When you then refinance it, what you are doing is taking your money back out of it and now your tenants are paying your new mortgage plus ideally leaving you with some positive cash flow. After the refinance you now have your money back (the $12K) to go and put it towards another property. And now you also have extra equity on the property (ARV - Refinance amount).
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
But I'm borrowing money to pay money back...that does not make sense to me. Again, I understand the overall idea, but the specifics don't make sense to me....if that makes sense. :)
Tucson, AZ · Member since 2014 · 134 posts · 43 votes
9y
Okay the concept works great if you use your own money to buy and fix because you can then use that same money over and over again.Because you are buying properties that have lots of room to add value
So when you refi you get your whole investment back to use again and sure you will have a mortgage but if you bought right you have the asset, but your tenants are paying the mortgage and putting some money in your pocket monthly.
Plus the 20% equity you created by fixing it up.
If you repeat it enough you end up with lots of equity and monthly income.
Lender · Cleveland, OH · Member since 2016 · 33 posts · 23 votes
9y
I will say this i see both sides but there has to be some ground rules. We all most agree its leverage. With leverage there's risk 2008 anyone? The refinancing and "pulling" money works till tenants don't pay. Or even worse we all didn't get fix 30 year rates on all our investment properties. Then what??? Questions to ask....What is the leverage point in your portfolio that can be covered with 50% vac for a year? What ever you borrow you should be able to pay back in the worst case you can think of times two.
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
Leverage was my next bit of research. Don't quite understand that concept either. I really am serious, if someone can break it down (and the refinance part) like you would for a 2nd grader, I'd appreciate it. :). Maybe I'll wake up tomorrow and it'll sink in, but I'm just not getting it.
Rental Property Investor · Jersey City, NJ · Member since 2016 · 6 posts · 1 vote
9y
The main idea of this strategy is that you get all or most of your money back (down payment + rehab cost) doing a cash out refinance based on the appraised value of the property. You would still have 25-30% of equity in the property. Then you can use the cash received to repeat the process purchasing the next property. The goal is to have least amount of your money in the deal.
Investor · Millport, NY · Member since 2011 · 39 posts · 12 votes
9y
The idea is that of the investment of $80,000 that you made, the 12K down payment and the 20K rehab cost came out of your pocket. If you refinance, you pull the 32K back out to use on your next investment, and use the income produced from renting your duplex to service the mortgage, cover expenses, and create a fund for future capital expenses. Because the loan is based on 70% LTV, you have equity in the property and are hopefully not over-leveraged.
But I don't see how I'm gaining any ground on the loan. Seems like I'm perpetually kicking the can down the road.
That's a good analogy. Meanwhile, that can is gathering "free" GOLD along the way!
I'll put it this way: if the bank would just agree to lend you the WHOLE $80k in the first place because they can see that it's really worth $120k - why wouldn't you take them up on their Offer?
And when you found another similar deal, why wouldn't you take them up on their Offer - again?
Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
9y
The best part about the BRRRR strategy is that you're making money in a few different ways while investing $0 (or close to $0) of your own money.
1) the tenants are paying down your mortgage. Every month your equity goes up.
2) you're getting hopefully a few hundred $$ each month in cash flow
3) you're likely going to have appreciation over the years (though most investors here consider that just icing on the cake and don't plan for it)
4) you've already increased the equity in the house after your renovations (as if it were a flip), but without the short-term tax consequences.
Since you get all/most of your investment back, your % profit over the years is very high.
Tucson, AZ · Member since 2014 · 134 posts · 43 votes
9y
Yes kinda seems like that but don't forget it's not you making the payment it's your tenants and your getting cash every month. And in a perfect world you'll get appreciation.
You end up with let's say six 4-plex all cash flowing.
You can then play monopoly sell everything and trade up to an apartment complex that cash flows even more and on and on you go.
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
So basically, I borrow money from bank A to finance the duplex. Once I've got tenants and the dust has settled, I go to bank B and get a loan to pay bank A back, but I've got the equity from the money borrowed from bank A originally and the work put into the duplex? So I use the new equity to finance the next deal?
So basically, I borrow money from bank A to finance the duplex. Once I've got tenants and the dust has settled, I go to bank B and get a loan to pay bank A back, but I've got the equity from the money borrowed from bank A originally and the work put into the duplex? So I use the new equity to finance the next deal?
Whether you use bank B to pay off bank A, or go back to bank A to pay off bank A, the point is: their new (seasoned) loan is based on their allowed percentage of THEIR new appraisal.
You're not getting the "equity" from the money borrowed from Bank A. (You already have that).
- You're getting your CASH back to finance the next deal (deposit)! Cheers...
Bedford, TX · Member since 2016 · 79 posts · 24 votes
9y
CJ, Think of it this way. You put 12K down and 20k to remodel. Right? so you're 32K invested. Now you can rent out the house and do nothing and in 30 years the house is free and clear and you pocket all the monthly rent.
OR
you borrow 32K off house you just bought and use it to buy another house for 20% down (12K) and put in another 20k to fix it. Now you rent this out and in 30 years you have 2 houses paid and clear. Right?
what happens if you do this again and again and again and in 30 years you have 30 houses paid and clear off that initial 32K?
Yes, you will have 30 loans but it only cost you 32K to get all the houses. Not a bad deal right?
CJ, Think of it this way. You put 12K down and 20k to remodel. Right? so you're 32K invested. Now you can rent out the house and do nothing and in 30 years the house is free and clear and you pocket all the monthly rent.
OR
you borrow 32K off house you just bought and use it to buy another house for 20% down (12K) and put in another 20k to fix it. Now you rent this out and in 30 years you have 2 houses paid and clear. Right?
what happens if you do this again and again and again and in 30 years you have 30 houses paid and clear off that initial 32K?
Yes, you will have 30 loans but it only cost you 32K to get all the houses. Not a bad deal right?
That's the power of leverage.
Thanks for this. simple....also after reading these two articles it makes even more sense: