BRRR - How to Cash Out / Refi
Investor · Chicago, IL · Member since 2017 · 16 posts · 3 votes
Hi All,
I mostly understand each step of the BRRR strategy with the exception of the refinance piece. I am wondering, when you refi and pull cash out are people doing that via a line of credit or a home equity loan of the original loan? Are you keeping an 80/20 ratio to avoid PMI and therefore only pulling out the equity you have above that? Are there other options I am missing?
I have 3 units that have a lot of equity and would love to start leveraging it for down payment on additional units instead of saving up each time going forward. My only concern is that if I use a line of credit of home equity loan the interest rates are pretty high and I doubt the numbers would make sense when combine with the other loan needed.
Any suggestions would be appreciated!
Kyle
@Fyzl Atmar Great answer and information. Thanks for sharing!
@Kyle Weckman Some other options are through either a conforming loan or HML. Hard money will be quick and easy but high rates and normally a 12-24 month term. Conforming is great for rentals IF you have the proper loan docs (which are a lot more) and the time to wait to close from 45-90 days. Those terms are normally between 3-30 years and have rates a little lower in the 4-5% region. Not as low as residential as investment properties are considered commercial. 70% LTV is pretty average but 75% minus current loan and fees does exist.
Amazing @Fyzl Atmar! Let's see if I can layout a practical example to clarify.
Let's use these numbers:
Purchased for 300K and its now worth 400K. which means I have 25% LTV or 100K in equity.
Just to clarify - If I do a HELOC I would need to use the following calculations for the mortgage expense (as an example) when using looking at my next property: 5-20% (down payment) of 100K at say 6% interest on the HELOC and my other 80% at say 4% on the 30 year fixed. Correct? HELOC + Stadard Mortgage = Mortgage expense.
How would the conventional or FHA cash out work? Let's say my original loan is 300K, if I have 75% LTC / 100K in equity, can I take out that entire 100K? I would assume my new loan on that property would be 400K now? but doesn't that mean the LTV is zero then?
Love this forum!
I think you are a little confused. Many times us lenders throw around mortgage terms that we use everyday, and don't explain things in ways that non-mortgage pros would easily understand.
On your scenario, if your current loan amount is $300K, your current LTV (loan-to-value) would 75% ($300K divided by $400K). I assume this is an investment property. If so, you would not have enough equity for a cash out refinance or a heloc, because the max LTV on cash out is 75% for single family and 70% for 2-4 units. And I don't know of any banks in IL that do 2nd position helocs on an investment property, let alone at 75 CLTV (the C stands for combined). But you said you purchased for $300K, so I don't know how much you put down, or what your current loan amount is.
You would be best served having a conversation with a mortgage guy who understands investors and your goals, and build a long term relationship so they can help guide you. For example, because I am an investor myself, I have a unique ability to help other investors with their financing strategy. I look 2,3,4 moves ahead to set you up properly so you don't get stuck. Feel free to reach out if you have any follow up questions, I'm right in your backyard.
Glad to see you on here and getting value from the forums!
A "cash out re finance" is simply getting a loan on your property, and taking the extra equity in the form of cash. As everyone has said, depending on the loan product, it's 70 - 75% Loan To Value (That means 20 - 25% of the appraised value has to stay in the house as a down payment. Anything over that is your cash). The 80/20 is not to avoid PMI, but is rather a requirement by the banks.
You also mentioned a HELOC which would be the only other option (that I know of) to turn your equity into cash. There are no other options you are missing. HELOCs have a pretty good interest rate, not sure what you mean there. The beauty of a HELOC is that you don't have to pay interest on anything unless you decided to draw on the line of credit. You can be a "cash buyer" then refinance to put a typical loan on the new property, and pay off the HELOC from that new loan.
I did not know you can't use a HELOC on an investment property, so it looks like your only option on those three units would be a cash out re-fi. To calculate how much cash you could actually use, we would need to know your loan balance. You can do it yourself with two steps:
1. $400k (present value) x 75% = $300k
2. $300k - Loan amount = Cash you can take out
My assumption is you put about 20% down when you purchased the triplex, so you'd have $60k you could cash out.
This all makes complete sense and is answering lots of my questions! One last piece of the puzzle… the "repeat" part of BRRR!
Let’s continue with the simple assumptions:
1. $400k (present value) x 75% = $300k
2. $300k – $240K loan value = 60K Cash out!
Let’s say I have a 4% 30 year loan on the $260K with a payment of $1,000 a month. If I go to a $300K that is obviously going to raise the payment, correct? Let’s just use $100 for simplicity sake.
When I go to calculate my BRRR numbers on the next place, wouldn't I need to add that $100 to my expense vs. income calculation on the next property? I am getting that it get me cash quick for a down payment, but it's still costing some $$$. Thoughts?
Bingo on your cash out calculation.
You would just adjust your numbers on the current property, not add to the next one. This takes a little bit of foresight and strategy about not just your acquisition, but also the end game. You need to estimate what the end result looks like before you even buy it and make sure your numbers work. That's why working with the right lender is important. You want to make sure you have your eye on the future, not just the present. That's how many investors get stuck.