I feel like I've just run a scam.

16 Replies

So a little backstory first: Ten years ago I moved back to upstate NY looking to buy a starter house for myself. The original plan was to get a duplex and house-hack but the realtor talked me into getting a single family for $37K and rent out the rooms. My girlfriend (now wife) moved in a few months later and we never rented any rooms but we did rehab the house in a major way (added a bathroom, new wiring, new insulation, roof, etc.) We moved out and started renting the whole place out to some grad students and since we had already done so much work it started cash flowing well right away.

Here we are two years into that house being a rental and it occurs to me that I can do a cash-out refinance. I now also have another rental with a partner and another on the way. We go through the paperwork and this afternoon the bank just handed us a check for $58,000 for BUYING MY OWN HOUSE FROM MYSELF! It still seems impossible that this is legal. How can this much money appear from nowhere? We are looking into at least two more purchases with the money from the cash-out. I may not have hit my powerball numbers but this feels almost as good.

Way to go.  Reminds me of the quote: "Money is plentiful for those who understand the simple laws which govern its acquisition".  George S. Clason author The Richest Man in Babylon.  Read it for fun.

Congratulations! You have discovered the three ways buy-and-hold investors make money. 

Equity Harvesting (slow but nice in the right circumstances)

Cashflow (while renting) - 2x costs.

Financial leverage - More Cashflow and multiplying Equity dispersion across assets that produce a higher return then the alternative. 

The only caution I have, is that you understand not to take more LTV and constrict your cashflow. Remember: Harvests - long cycle time, cash flow = monthly ROI.

The only saving grace against a concern was that you mentioned you have 3 more rentals in the wings waiting for the newly acquired equity.

Equity my friend, is nothing more than presumed buyer value realized in todays dollars. 

In this case the "buyer" is you. Hello Equity"farming"! Nice work. 

@Brian Barfoot   Well the banks I guess have short memories.. the bank now has 100% risk on the asset you have none .. short of credit issue.

I see this going on all across the industry.. right back into some of the models that created all the havoc... LOL.

but take what your giving no scam there.. lender not very smart maybe.?

Thanks all. It's good to be a part of a group who understand how much fun this is and don't just give me that "must be nice..." look.

@Charles Kannair I think I understand your worry: Taking too much cash-out money will increase the monthly expenses and affect cash flow. Our refi rate is 2% below the original "paper-saver" mortgage (documentation free, remember those?) so we will be shaving some money there. I've been charging under market rents on the house and have already warned the tenants that the rent will creep up over the next few years. They still feel like they are getting a bargain because the cost of living is so low in this area. Even if I stay $100/bed below the next door neighbors I'll come out ahead and the tenants will think they're ripping me off.

@Jay Hinrichs I appreciate your concern. We still have 30% equity on assessed value and I've had offers from local investors that support the assessment. I feel good that our exit strategy is still solid if it ever comes to that. Lender is a broker (I'll write a new post on brokers and their pro/con list soon.) I think I've just reaped the rewards of living in a construction site for a few years. I basically ran an epically slow flip.

@Brian Barfoot

Nice work! Did you look into Heloc vs. Cash-out? If so, what made you go with cash out?

I ended up in an accidental slow flip as well. I wouldn't label it "epic slow" like yours, but if I didn't have a baby on the way, I could see how it would have turned into an ESRRRR**.

**(Epic Slow Rehab Rent Refinance Repeat... @Brandon Turner can I also mint new and ridiculous acronyms for strategies?)

I just signed closing papers last night for my cash out to cover private money rehab costs ONLY. I chose my minimum 60% LTV cash out for the concerns that @Jay Hinrichs pointed out and then will have ~40k to use out of a heloc.

Brian, maybe its a matter of cash flow/portfolio potential? That is, in your area, you can cover two rehabs/rentals with your 58k. Whereas in my farm in Chicago suburbs I would cover only one. Meaning the equity gain of your two rehabs more expeditiously brings your overall portfolio leverage to a comfortable/conservative position. Thoughts?

@Brian Barfoot it did not just appear from anywhere - YOU added value by making the improvements and the market conditions supported it.

Now just remember that market conditions can change and as long as you are prepared for it you should be fine.

@Landon Thomas I did look into a HELOC and actually had one on this property for a few years to cover some renovations. I made the choice because the rates are so low right now and any lines of credit I found were variable. Since I plan on holding this property at least until the kids are done with college (~20 years) it made sense to me to get the cash-out. As I said, I can adjust the rents on the tenants to cover my extra costs without disturbing the relationship very much. I've been taking care of the rehab costs myself and plan to continue doing this as long as I can so I don't have to worry about satisfying investors.

My market is very inexpensive and to address @Percy N. 's concern, this market doesn't change. I know it's foolish to think that it can't but we have had steady population (+/- 1% per year for decades) and are rarely affected by the market swings that seem to drive the rest of the country crazy. I feel good that we are being fairly conservative and will still be able to keep this ball rolling for a long time. 

Congrats @Brian Barfoot !  Sounds like you earned it ( not scammed it) with your epically slow live-in flip.  Those are tough!

Could you speak to the pain points and costs of the cash-out refi process, please?  Was it easy-peasy and free?  Was it like getting teeth pulled to qualify?  Costed $5k when the dust settled?  Costed nothing?  Thanks!

@Brian Barfoot

That's Great congrats on your refi! It sounds like you are well on your way to growing your empire by utilizing the power of leverage. It can be a great way to boost your ROI numbers, invest in other properties and mitigate some risk at the same time.

I also live in CNY and am curious about how your loan process went. I have some small multi-family properties that I have been possibly looking to refi as well and was wondering what your experience was like. You mentioned this was on a single FAM, were you able to obtain a conventional 30 year or did you opt for more of a commercial type product? I am always looking for new investor friendly lenders in the area so if you have any recommendations that would be very helpful

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