I don't understand when people refi and "get their money back"

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I don't understand when people refi and "get their money back"

Scott L.
Harmony, PA · Member since 2015 · 52 posts · 9 votes

Please excuse my ignorance in this post, but I listen to podcast after podcast on my drive to work.

This morning I was listening to Bigger Pockets Podcast 210, about a younger couple starting out, purchased their first property a 4 plex and are house hacking.

The purchased it for like 400K, but down 45K and were cash flowing like 1K a month.

This is my question:  The guy on there said they then refinanced the mortgage 10 months after they bought the property and took out 50K, basically getting everything back that they put in it.  

I don't understand. People say that on the podcast none stop and I think its the theory around BRRR? But I don't get it? Aren't you then paying another loan on the amount you "take back out."

And if you use that money on something else isn't that just money you are paying an additional fee for?  I'm really confused about how all these people "get their money back out"

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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y

30 second example, using cash only:

Buy house for $100k. Put $25k into fixing it. Get it appraised for $160k. Get mortgage on house for $125k. You got your money back. The only equity left behind was the increase in value.

30 second example using mortgage:

Buy house for $100k with $20k down, $80k mortgage. Put $25k into fixing it. Get it appraised for $160k. Refinance mortgage to $125k. Pay off $80k mortgage and take back your $20k cash plus your $25k fixing it. The only equity left behind was the increase in value.

Capice?

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    30 second example, using cash only:

    Buy house for $100k. Put $25k into fixing it. Get it appraised for $160k. Get mortgage on house for $125k. You got your money back. The only equity left behind was the increase in value.

    30 second example using mortgage:

    Buy house for $100k with $20k down, $80k mortgage. Put $25k into fixing it. Get it appraised for $160k. Refinance mortgage to $125k. Pay off $80k mortgage and take back your $20k cash plus your $25k fixing it. The only equity left behind was the increase in value.

    Capice?

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  • Sam R.
    Investor · Bothell, WA · Member since 2015 · 88 posts · 55 votes
    9y

    Because they fixed up the property, the value increased and they are able to refinance with that new higher value. They bought it for 400k, but the value at refinance is now maybe 450k. They refinance it with a 400k loan. 350k pays off their original mortgage and they pocket the remaining 50k.

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  • Corey Staples
    Clovis, NM · Member since 2016 · 13 posts · 3 votes
    9y

    It took me the longest time to grasp the third R in the BRRRR concept. The part that I was missing was that you'd refinance the home at the newly appraised value. They never really get down to the nuts and bolts level when talked about on the podcast. Thanks for spelling it out, guys!

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  • Dana WhickerPro Member
    Investor · Fernandina Beach, FL · Member since 2014 · 557 posts · 374 votes
    9y

    @Sam R. Yeah you basically got it. The value can increase through buying right, using sweat equity, market goes up, neighborhood gets hot. 

    The most important concept is understanding your market and buying right. Usually distressed properties. Properties that need a lot of work, sellers that want quick cash, etc.

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  • Ryan Parnow
    Investor · Cedar Rapids, IA · Member since 2014 · 77 posts · 21 votes
    9y

    @Scott L. You are thinking about it correctly.  They are taking another (or a larger) mortgage out against the increased value.  

    0Reply
  • Dana WhickerPro Member
    Investor · Fernandina Beach, FL · Member since 2014 · 557 posts · 374 votes
    9y

    @Scott L. Go the Scott's mixed up. Sorry.

    0Reply
  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    9y

    @Scott L.

    You need to make sure that your property is still cash flowing after you refinance it.

    The new mortgage for the property will be a higher payment than the original mortgage, so it is important that the property still meets your criteria in terms of cash flow after you refinance.

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  • Scott L.
    OP
    Harmony, PA · Member since 2015 · 52 posts · 9 votes
    9y

    ok.  So they may get their money back out, but the mortgage payment will be higher.  Understood there.

    But is the 'money back' in the form or cash out at closing?

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  • Jay J.
    ., OH · Member since 2015 · 361 posts · 127 votes
    9y

    @Scott L. look at the example @JD Martin gave..

    "Buy house for $100k with $20k down, $80k mortgage. Put $25k into fixing it. Get it appraised for $160k. Refinance mortgage to $125k. Pay off $80k mortgage and take back your $20k cash plus your $25k fixing it. The only equity left behind was the increase in value."

    1. You paid (for the example) $20k out of pocket for the down payment.

    2. You carry a mortgage of $80k.

    2a. You then fix up the house, using $20k (of your cash)

    3. You then get it re-appraised at (hopefully) $150k, so you can get a $125k, mortgage.

    4. The refi pays off mortgage #1 ($80k) and pays you back the $20k (rehab $), and you still walk with the difference (in this case $80k+$20k=$100k, leaving $25k)

    I hope the clears it up!!

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Scott L.:

    ok.  So they may get their money back out, but the mortgage payment will be higher.  Understood there.

    But is the 'money back' in the form or cash out at closing?

     Yes, you're going to walk away with cash at the closing. If you had a mortgage for $80k on a $100k house (you put in $20k), and you spend $25k fixing it up, and it's now worth $160k, and you mortgage $125k, they are going to pay off the $80k mortgage and cut you a check for $45k. So you got all your money back. Yes, the mortgage is higher, but if you are renting it out it should rent for an improved amount of money - or, at the very least, rented high enough when you bought that even with the higher mortgage payment you have healthy cash flow. 

    Imagine it this way: a guy walks up to you on the street and says "Hey, fella, it's your lucky day - I have this house worth $160k. It has a $125k mortgage on it with a $1000 monthly payment, including taxes and insurance. I have it rented for $1600 per month. I am moving to Tibet to become a monk so I won't need this money anymore. It's all yours, for free! Just keep paying the mortgage and all the extra money is yours." 

    That's BRRRR.

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  • Jay J.
    ., OH · Member since 2015 · 361 posts · 127 votes
    9y

    The rub in the BRRRR concept is that you need to be able to 'build in' the equity for the property. (ie, the little bit of money you leave in the deal)

    Meaning, if you buy the $80k house and put another $20k rehab into it, you better get the appraisal you need (ie $160k) otherwise ;

    1. You don't get 'all your money back'

    2. You can get stuck paying PMI

    3. It can make the numbers for a rental not as good, if not a deal breaker.

    Also, for the new guy (girl) investor, not being able to 'cash out' fully could prevent you from closing on the next deal.. 

    ..as with anything, don't trust what you read on the internet. Do your own math!

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  • Benjamin Shaw
    Danbury, CT · Member since 2017 · 56 posts · 10 votes
    9y
    Originally posted by @Jay J.:

    @Scott L. look at the example @JD Martin gave..

    1. You paid (for the example) $20k out of pocket for the down payment.

    2. You carry a mortgage of $80k.

    2a. You then fix up the house, using $20k (of your cash)

    3. You then get it re-appraised at (hopefully) $150k, so you can get a $125k, mortgage.

    4. The refi pays off mortgage #1 ($80k) and pays you back the $20k (rehab $), and you still walk with the difference (in this case $80k+$20k=$100k, leaving $25k)

    Where does the $125k mortgage number come from?

    Also, so when you do this, you get the $20K rehab and the $25k difference, but aren't you still paying for it in the end in the morgage?

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  • Scott L.
    OP
    Harmony, PA · Member since 2015 · 52 posts · 9 votes
    9y

    ok.  The Tibet example helped. haha.

    I got it now.  I was looking at this all wrong and thinking these folks were all getting home equity loans to accomplish this.  

    BRRRR is a great concept now that I really understand it. My next question is, around we talking 3-4K in closing costs for a refi as well?

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Scott L.:

    ok.  The Tibet example helped. haha.

    I got it now.  I was looking at this all wrong and thinking these folks were all getting home equity loans to accomplish this.  

    BRRRR is a great concept now that I really understand it. My next question is, around we talking 3-4K in closing costs for a refi as well?

     More or less. If you have bought the property "right", this is just a cost of doing business. Let me give you an example from my own portfolio from a few years back:

    House A: purchased all cash, $37k. $12k in rehab costs. About a grand in closing costs (titlework, inspector). So I'm all in at $50k. Held it for a year or so. Refinanced (financed) it. Appraised at $80k. Closing costs about $4k. Pulled 75% of equity out of the house, which was $60k. $60k minus $4k closing costs = $57k cash to me. That's my $50k original expenses and $7k of the appreciation. House still cash flows nicely, and I have all of my money back to invest in another property (which was done, for cash). Yes, there's a mortgage on the house now but I have leveraged that original $50k in cash into two cash-flowing properties, one free & clear, one mortgaged. (This is my preferred mix, BTW - 50% leveraged, i.e. one house mortgaged, one house clear, two houses mortgaged, two houses clear. Holds back some equity for leaner times). 

    Play with the numbers any way you want. That's the basics. 

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Benjamin Shaw:
    Originally posted by @Jay J.:

    @Scott L. look at the example @JD Martin gave..

    1. You paid (for the example) $20k out of pocket for the down payment.

    2. You carry a mortgage of $80k.

    2a. You then fix up the house, using $20k (of your cash)

    3. You then get it re-appraised at (hopefully) $150k, so you can get a $125k, mortgage.

    4. The refi pays off mortgage #1 ($80k) and pays you back the $20k (rehab $), and you still walk with the difference (in this case $80k+$20k=$100k, leaving $25k)

    Where does the $125k mortgage number come from?

    Also, so when you do this, you get the $20K rehab and the $25k difference, but aren't you still paying for it in the end in the morgage?

     I don't understand your question. The $125k mortgage comes from you going to the bank and getting a mortgage. You had a house that had an $80k mortgage on it. You fixed it up. You had it appraised. It's worth a lot more money ($160k). The bank will let you cash out 75% of the equity of the house. You cash out $125k - that's your new mortgage. You pay off the original $80k mortgage and put your original money back in your pocket.

    Aren't you still paying for it in the end in the mortgage? Well of course you're paying for the house. Houses aren't free. If you are renting the house out (what we are talking about here), you cover the mortgage with the rent. If you did it right, you have a lot more rent than mortgage. 

    So again, I don't understand your question. The increased value of the house allowed you to take a bigger mortgage on the house, which is then paid off (just as it was before on the smaller mortgage) by your renters, and you have all your money back. What you're left with? See my Tibet example above. 

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  • Benjamin Shaw
    Danbury, CT · Member since 2017 · 56 posts · 10 votes
    9y
    Originally posted by @JD Martin:
    Originally posted by @Benjamin Shaw:
    Originally posted by @Jay J.:

    @Scott L. look at the example @JD Martin gave..

    1. You paid (for the example) $20k out of pocket for the down payment.

    2. You carry a mortgage of $80k.

    2a. You then fix up the house, using $20k (of your cash)

    3. You then get it re-appraised at (hopefully) $150k, so you can get a $125k, mortgage.

    4. The refi pays off mortgage #1 ($80k) and pays you back the $20k (rehab $), and you still walk with the difference (in this case $80k+$20k=$100k, leaving $25k)

    Where does the $125k mortgage number come from?

    Also, so when you do this, you get the $20K rehab and the $25k difference, but aren't you still paying for it in the end in the morgage?

     I don't understand your question. The $125k mortgage comes from you going to the bank and getting a mortgage. You had a house that had an $80k mortgage on it. You fixed it up. You had it appraised. It's worth a lot more money ($160k). The bank will let you cash out 75% of the equity of the house. You cash out $125k - that's your new mortgage. You pay off the original $80k mortgage and put your original money back in your pocket.

    Aren't you still paying for it in the end in the mortgage? Well of course you're paying for the house. Houses aren't free. If you are renting the house out (what we are talking about here), you cover the mortgage with the rent. If you did it right, you have a lot more rent than mortgage. 

    So again, I don't understand your question. The increased value of the house allowed you to take a bigger mortgage on the house, which is then paid off (just as it was before on the smaller mortgage) by your renters, and you have all your money back. What you're left with? See my Tibet example above. 

     I did not know about the 75% equity cash out on the mortgage. I see that this is where the $125k number comes from.

    As far as my other question "Don't you pay for it in the end" The posts above were making it seem like when you refinance it's free money you get from the difference, but really you are still paying for it by taking out a larger mortgage. Right?

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Benjamin Shaw:
    Originally posted by @JD Martin:
    Originally posted by @Benjamin Shaw:
    Originally posted by @Jay J.:

    @Scott L. look at the example @JD Martin gave..

    1. You paid (for the example) $20k out of pocket for the down payment.

    2. You carry a mortgage of $80k.

    2a. You then fix up the house, using $20k (of your cash)

    3. You then get it re-appraised at (hopefully) $150k, so you can get a $125k, mortgage.

    4. The refi pays off mortgage #1 ($80k) and pays you back the $20k (rehab $), and you still walk with the difference (in this case $80k+$20k=$100k, leaving $25k)

    Where does the $125k mortgage number come from?

    Also, so when you do this, you get the $20K rehab and the $25k difference, but aren't you still paying for it in the end in the morgage?

     I don't understand your question. The $125k mortgage comes from you going to the bank and getting a mortgage. You had a house that had an $80k mortgage on it. You fixed it up. You had it appraised. It's worth a lot more money ($160k). The bank will let you cash out 75% of the equity of the house. You cash out $125k - that's your new mortgage. You pay off the original $80k mortgage and put your original money back in your pocket.

    Aren't you still paying for it in the end in the mortgage? Well of course you're paying for the house. Houses aren't free. If you are renting the house out (what we are talking about here), you cover the mortgage with the rent. If you did it right, you have a lot more rent than mortgage. 

    So again, I don't understand your question. The increased value of the house allowed you to take a bigger mortgage on the house, which is then paid off (just as it was before on the smaller mortgage) by your renters, and you have all your money back. What you're left with? See my Tibet example above. 

     I did not know about the 75% equity cash out on the mortgage. I see that this is where the $125k number comes from.

    As far as my other question "Don't you pay for it in the end" The posts above were making it seem like when you refinance it's free money you get from the difference, but really you are still paying for it by taking out a larger mortgage. Right?

     Ha! Nothing's free, that's for sure. Yes, you are taking your equity in the form of a mortgage. If you are smart, your tenants are paying the mortgage back for you. 

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  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    @Benjamin Shaw another item to consider is that the rent for a renovated $160 property is much higher than for an unrenovated $100 property; so, you have that additional rent to cover the additional mortgage. In reality, the investor underwrites the final ARV, rents, final mortgage, double closing costs, etc. prior to purchasing the property; so, it's all factored in up front.

    Attached is another BRRRR post with very similar assumptions as the example above. https://www.biggerpockets.com/forums/61/topics/387729-brrrr-strategy-question

    2Reply
  • Korie Apgar
    Real Estate Investor · Coopersburg, PA · Member since 2017 · 120 posts · 61 votes
    9y

    @Benjamin Shaw

    Hi, Yes, you're still paying for the money you pulled out in cash in the form of a higher mortgage payment but who's paying for it?  You or your tenants?  Also, rates are so low that you likely won't see a huge jump in your mortgage payment.  You'll have to do the math yourself and have people check you on it.  Not your brother, or neighbor, get advice here, but always do your due diligence!  Your money will lose value sitting as dead equity in a property so get that money back out and reuse it.  Repeat!!  Over and over.   If you don't buy low enough you're screwed.   Know the processes and your numbers.  Good Luck!

    1Reply
  • Justin B.
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    9y

    It's a great concept I've used many times.  I didn't read all the responses so forgive me if I repeated anything.  In your example, that $50k may have only cost them another ~$250/month in mortgage payments.  Now they are making $750/month cash flow.  Again, using general numbers here.

    They take that $50k and do it again.  Once they refi that one, they now have $1,500/month cash flow and $0 invested over 2 properties.  I'll let you do the math on the rinse and repeat strategy going forward.  It's basically a "no money down" type concept.  They did tie up their money for 10 months so it wasn't truly no money down, but now they have $0 in it and can rinse and repeat as time goes on.

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  • John Dombrowski
    RE Investor · San Diego, CA · Member since 2015 · 119 posts · 18 votes
    9y

    what type of loans are we talking about when we go to refi? Being that these are going to be used for rentals, don't we have to sit on them for a while before we can get a low interest conventional loan?

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  • Anna R.
    Specialist · AZ NM IL TX CA · Member since 2016 · 15 posts · 1 vote
    9y

    When you do cash out refinancing this just means you are getting refinanced loan for $450K.  50K is being sent to you as a check once the loan refinances.  But at the end you are still left with $450K loan you need to pay off. It might give you a benefit of quick cash on hand to pay off loans with higher interest rates, lower mortgage interest rate or may help with eliminating the mortgage insurance.

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @John Dombrowski:

    what type of loans are we talking about when we go to refi? Being that these are going to be used for rentals, don't we have to sit on them for a while before we can get a low interest conventional loan?

     6 months seasoning if you want to pull out based on appraised value, instant if you paid cash and just want most of your cash back. Since most properties are going to take you 60-90 days to rehab anyway, by the time you get it rehabbed and rented you are just about at your 6 month mark. 

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  • John Dombrowski
    RE Investor · San Diego, CA · Member since 2015 · 119 posts · 18 votes
    9y

    @JD Martin,

    OK thanks I think I understand but can you still get a conventional loan if this a rental?

    0Reply
  • Matt John
    Investor · Bentonville, AR · Member since 2016 · 32 posts · 22 votes
    9y

    Here's a real situation from my area. Ryan has $0 but knows the right people and finds a house for 60k that will cost 10k to reno and be worth 100k after reno is complete. He borrows 71k from a private money lender. 60k for the purchase, 10k for the reno, 1k for the closing costs. His general contractor renovates in 3 weeks and he rents out within a week. After receiving his first rent check he re-finances the house for 75k. 71k goes to the private lender, 3k goes to the second closing, and he walks away with $1k in his pocket (which he didn't pay income tax on) and 25% equity on a 100k home that cash flows $200 per month.

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