Accountant · CA · Member since 2019 · 36 posts · 16 votes
I'm looking at a cash-out refi to use some equity to purchase another property. How should my calculations change though?
I run the cap rate calculations and found a $500k SFH with a good cap rate at 20% down. Let's say it's an even 6% cap rate. But in reality that down payment is part of the cash out refi, so if I apportion my refinanced mortgage payment to this new property, my cap rate falls to 2.5% and I'd be cash flowing just making a few thousand dollars in a year while net income would be in the tens of thousands still.
Should I be calculating differently, since nothing is coming out of pocket for me - as this would essentially be a 100% financed property?
Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
5y
@Bobby Lee Can you explain how it goes from a 6% cap to 2.5% cap? Cap rates do not take mortgages into consideration.
Cap rates are good for understanding the value of the property. Cash-on-cash return and monthly cash flow per unit may be a better metrics for you to make a decision.
If sounds like you will be able to pull all of your money out, so your cash-on-cash return is infinity (pretty good).
Use the BRRRR calculator on BiggerPockets. It will show you analysis before and after the refinance. Best of luck!
Rental Property Investor · Smyrna, GA · Member since 2018 · 974 posts · 645 votes
5y
Run it through the BRRRR calculator here on BP. You essentially are talking about an infinite return if you pull ALL your cash out via a cash-out refinance.
Rental Property Investor · Mc Lean, VA · Member since 2016 · 12 posts · 2 votes
5y
@Bobby Lee Fellow CPA/Investor here. Yes that's the upside of leveraging. Without the cash out refinance you wouldn't have the additional 2.5% cap rate. That's part of BRRR most don't mention: the additional payment due to the cash out refinance but that is part of the calculation. Good luck!
Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
5y
@Bobby Lee Can you explain how it goes from a 6% cap to 2.5% cap? Cap rates do not take mortgages into consideration.
Cap rates are good for understanding the value of the property. Cash-on-cash return and monthly cash flow per unit may be a better metrics for you to make a decision.
If sounds like you will be able to pull all of your money out, so your cash-on-cash return is infinity (pretty good).
Use the BRRRR calculator on BiggerPockets. It will show you analysis before and after the refinance. Best of luck!
Accountant · CA · Member since 2019 · 36 posts · 16 votes
5y
Thanks Jon. The refi mortgage payments should probably go to cash flow, not net income. That would mean cap rate wouldn't change but cash flow does. I'll take a look at the BRRRR calc.