For example, say you buy an $80k home with $20k down and spend $15k in renos. It goes up to $125k after a year of "seasoning", which is an increase of $45k. In newbie terms, what is the process of using that $45k increase to pay down the original mortgage balance? The reason I want to do this is so I can get higher cash flow from the properties.
Real Estate Agent · Greenville, SC · Member since 2016 · 52 posts · 43 votes
6y
you're thinking about this wrong. you unfortunatley don't get to lower the mortgage amount.... So your new value of the house is now 125k, your orignal loan is 60k you now have have 65k in equity, (vs the 20k you had previous). So think of refiancing as re-purchasing the home at a higher cost. so now if you refinance a bank will require you to keep 25% equity, some require 30% in the deal. So refiance the home, leave 25% in (roughly 31k) and the bank writes you a check now 34k. your new loan amount is 94k...(montly payment goes up) BUT you can now take that 34k (tax free!) and deploy that into another deal and repeat the process. so now in theory you own a property for basically 1k out of pocket (minus closing fee's for the refiance)
The advantage of the brrrr strategy is that you can recycle the same capital into the next deal. In rare cases you can even create new inexpensive capital. Both rely on the creation of new equity through renovation.
The numbers in your example most likely wouldn't work as a brrrr deal as you would not be able to refinance out your initial 35k investment without over leveraging. In today's market conditions I would be very careful going over 75% ltv without a solid business plan.
The power of brrrr comes from the repeat where you roll your recycled or new capital into the next deal. If you where to pay down debt with new debt from the refinance you just have more debt on the same investment. Not more cash flow. You want to snowball your refinance capital because this money is cheaper than hard money, or other outside investor capital. There is a great book on brrrr investing available in the bigger pocket book store
Real Estate Agent · Greenville, SC · Member since 2016 · 52 posts · 43 votes
6y
you're thinking about this wrong. you unfortunatley don't get to lower the mortgage amount.... So your new value of the house is now 125k, your orignal loan is 60k you now have have 65k in equity, (vs the 20k you had previous). So think of refiancing as re-purchasing the home at a higher cost. so now if you refinance a bank will require you to keep 25% equity, some require 30% in the deal. So refiance the home, leave 25% in (roughly 31k) and the bank writes you a check now 34k. your new loan amount is 94k...(montly payment goes up) BUT you can now take that 34k (tax free!) and deploy that into another deal and repeat the process. so now in theory you own a property for basically 1k out of pocket (minus closing fee's for the refiance)
you're thinking about this wrong. you unfortunatley don't get to lower the mortgage amount.... So your new value of the house is now 125k, your orignal loan is 60k you now have have 65k in equity, (vs the 20k you had previous). So think of refiancing as re-purchasing the home at a higher cost. so now if you refinance a bank will require you to keep 25% equity, some require 30% in the deal. So refiance the home, leave 25% in (roughly 31k) and the bank writes you a check now 34k. your new loan amount is 94k...(montly payment goes up) BUT you can now take that 34k (tax free!) and deploy that into another deal and repeat the process. so now in theory you own a property for basically 1k out of pocket (minus closing fee's for the refiance)
Thanks, I understand it more now. It seems like a great method to build equity, but is there a way to turn that equity into higher cash flow? I feel that cash flow is more important to me than accumulating equity.
you're thinking about this wrong. you unfortunatley don't get to lower the mortgage amount.... So your new value of the house is now 125k, your orignal loan is 60k you now have have 65k in equity, (vs the 20k you had previous). So think of refiancing as re-purchasing the home at a higher cost. so now if you refinance a bank will require you to keep 25% equity, some require 30% in the deal. So refiance the home, leave 25% in (roughly 31k) and the bank writes you a check now 34k. your new loan amount is 94k...(montly payment goes up) BUT you can now take that 34k (tax free!) and deploy that into another deal and repeat the process. so now in theory you own a property for basically 1k out of pocket (minus closing fee's for the refiance)
Thanks, I understand it more now. It seems like a great method to build equity, but is there a way to turn that equity into higher cash flow? I feel that cash flow is more important to me than accumulating equity.
You can build higher cash flow overall if you use the $45k on another property not the subject..