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

Private Lending & Conventional Mortgage Advice
9yFollow

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"

5Reply
155 views

Most Popular Reply

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?

Podcast Guest on Show #243
Skyline Properties
View Page
27Reply
See this reply in the discussion

52 Replies

Jump to latestLatest
  • Derrick Aragon
    Investor · Portland, OR · Member since 2016 · 213 posts · 60 votes
    9y

    Every bank has a seasoning period. Sounds like you guys are talking about SFR so you probably will have the same seasoning period for most banks.. I have had to season for 1 year before, some are 6 months. You will probably pay a higher closing cost like .5-1 point higher loan fee for cash out but you can roll that into the loan.

    you either take your money out or as much as you can and get less cashflow or you keep your money in and get higher cash flow through the lower first mortgage. 

    you will want to go into a conventional loan so no pmi... BRRR idea is great for newbies so they can buy owner occupied home and put min down payment 3-5% fix it up and build enough equity you can pull your initial investment or convert to a conventional loan and be 80/20 no pmi so you get the additional revenue. When going to an investment property you will probably pay more in interest so you have to see if the new payment allows you to still cash flow.. or you are still owner occupied and will still get the good rate except you have no pmi..

    If you have renters in the property some banks will only allow you to realize 75% of the rental income as your personal income and you will have to qualify for the loan. There are a lot of banks that have different rules and guidelines. 

    BRRR is executed by knowing the ins and outs of your financing mapping this out with a broker or your bank so you know exactly what to expect on the buy and the refi. The second is being able to know the market and knowing what you need to do to get your property to appraise for the higher amount. Just increasing the rents will not do it you have to make your property compare to higher sold property in your area. It helps if you are in an appreciating market.

    0Reply
  • Todd F.
    Investor · Riverside, CA · Member since 2014 · 239 posts · 177 votes
    9y
    This is a very helpful thread, thanks all for the info and help!
    0Reply
  • Yinna Wang
    Real Estate Professional · South Orange, NJ · Member since 2017 · 49 posts · 10 votes
    9y

    @mattjohn That sounds like a very clean deal, except what about 1 month holding costs, and the private money lender probably also wants an interest return on his money. Was this a deal you did? Wish that existed here in nj/ny! 

    Also, 75% is used a lot here as the amount a bank would allow you to refi for, but is this actually related to the 70% rule? 

    0Reply
  • Yinna Wang
    Real Estate Professional · South Orange, NJ · Member since 2017 · 49 posts · 10 votes
    9y

    SO...question, with an FHA 203k, the reno costs are rolled into the loan. And the reno costs are estimated and approved by the FHA folks. Your final loan is determined by the ARV, so there is no chance of it getting appraised at higher than what you put in. How would this work as a BRRRR?

    0Reply
  • Teresa DelaMater
    Pearland, TX · Member since 2016 · 30 posts · 12 votes
    9y
    Yinna Wang , this is where finding a great deal to begin with comes in. The loan amount of the 203K doesn't have to be the same as the ARV.
    0Reply
  • Lawrence Hasit
    Virginia Beach, VA · Member since 2015 · 5 posts · 1 vote
    9y

    Do you get taxed on the money you pull out when you refi?

    0Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    9y
    Originally posted by @John Dombrowski:

    @JD Martin,

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

     Yes John you can up to 10 with fannie mae and up to 6 total financed properties with freddie mac, both of which are still considered conventional financing.

    If you hit the ceiling you can use portfolio money programs to remove your properties off your name and into a LLC thereby "freeing," up your 10 and 6 financed properties to be ready for another round of rinse and repeat.

    1Reply
  • Nicholas Patrick
    Cincinnati, OH · Member since 2015 · 81 posts · 24 votes
    9y

    @Scott L. The 45k that they put into the deal as a down payment turns into equity. If they force appreciation by fixing the property up, it becomes worth more at market value. Giving the investor more equity. They must have gotten an appraisal done on the property. After that, a new mortgage is taken out based on appraisal value.  Then after paying off the old mortgage, the person gets to keep the money left over. I have recently come to understand this myself. I refer to it as a cash out refinance. Many people use this strategy to pay off credit card bills, or pay for college tuition. As an investor, we almost always use the money to finance other deals. I'm hoping I explained this accurately, but like i said i just learned this myself.

    0Reply
  • Sheila F.
    Investor · Statesville, NC · Member since 2015 · 113 posts · 58 votes
    9y
    I feel your pain Scott! LOL. In a nutshell, it's all about your goals. For a long time I didn't understand why people did that. After many years of doing this I learned something. It's basically leveraging. Taking out the money that they put into it. I personally don't use that approach, because I would much rather have 14 solid properties than 28 that are leveraged. It all comes down to your long-term goals. What are your goals. Some people like to take money out, do what they call leverage a property, and then use that money to purchase another property. Each property creating some cash flow is the equivalent of using the same money over and over. Keep listening, and keep reading. But keep in the forefront of your mind, what are your goals? That's the big question, and then use the grocery store affect. As you listen to podcasts and read articles it's like going down the isle of a grocery store, take what you need and leave the rest for someone else! LOL that's an old zig ziglar analogy!! You're on the right track, keep doing what you're doing! 🙌
    2Reply
  • J. MartinPro Member
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    9y

    Velocity of money..

    If you're return on equity is higher than the loan rate, borrowing often makes more sense ;)

    1Reply
  • Matt John
    Investor · Bentonville, AR · Member since 2016 · 32 posts · 22 votes
    9y
    Yinna Wang It's another investor in my town. Last time I spoke with him he was 14 months into RE investing and had done this process 8 times with almost exactly the same percentages, but ARVs ranging between 70-100k. He may have had to put in a couple grand for 1-4 months on some, but he did some where he structured the original loan to cover all expenses. Derrick Aragon Some investor friendly banks don't require a seasoning period. Just keep looking until you find one. On his first 8 deals, Ryan said the longest he held the original loan was 4 months, but usually it was only a month.
    0Reply
  • Tiana O.
    Real Estate Consultant · Washington, DC · Member since 2017 · 34 posts · 27 votes
    9y
    Originally posted by @Jay J.:

    @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!!

    If you buy a property using a mortgage, and then renovate it, and rent it out. How long do you have to wait before your bank is willing to refinance for the ARV? The minimum time I've heard is 6 months. Has anyone heard anything different? Have you all ran across banks with different seasoning requirements? For example, I've heard some of the bigger banks may require longer seasoning requirements, in comparison to some of the smaller local ones.

    0Reply
  • Jay J.
    ., OH · Member since 2015 · 361 posts · 127 votes
    9y

    @Tiana O.

    I've read 6 month also, but I think as a general rule 1 year is 'safe'..

    I'm sure there are other situations that can decrease that time frame, but generally speaking 1 year is a good number to use. 

    0Reply
  • Account Closed
    New to Real Estate · Sacramento, CA · Member since 2015 · 31 posts · 13 votes
    9y

    For a newbie like me, this thread was so informative!

    0Reply
  • Derrick Aragon
    Investor · Portland, OR · Member since 2016 · 213 posts · 60 votes
    9y

    @Matt John I agree, every bank is different and depending on the loan type. It is the "perm" bank you have to work out to refinance your invested capital or equity out. 

    0Reply
  • Dana WhickerPro Member
    Investor · Fernandina Beach, FL · Member since 2014 · 557 posts · 374 votes
    9y
    Originally posted by @Lawrence Hasit:

    Do you get taxed on the money you pull out when you refi?

    No, it's a loan. It has to be paid back. Getting the loan itself is not income.

    If you're doing this right your tenants pay it back btw.

    0Reply
  • Evan Bell
    Real Estate Agent · San Diego, CA · Member since 2015 · 293 posts · 109 votes
    9y
    Let's say you don't have that great of a W-2 income, is the BRRRR strategy still a viable path to take? How much of being able to refi and then purchase a new property is based on the W-2 income vs. income you may have coming in from other rentals? How does the BRRRR strategy work if you are using an LLC to secure the properties/loans instead of your personal name?
    0Reply
  • Carl C.
    Investor · New York City, NY · Member since 2014 · 289 posts · 374 votes
    9y

    The

    0Reply
  • Darius Striglers
    Real Estate Investor · Boca Raton, FL · Member since 2016 · 9 posts · 2 votes
    9y

    Great thread, this cleared things up for me!

    0Reply
  • Jamie Engledow
    Boca Raton, FL · Member since 2015 · 249 posts · 52 votes
    9y

    you are correct that the loan is increasiing and they not have to pay doen principle and interest on a higher amount.  But in doing the refinance, it has allowed them to tke out equity in the property as an additional loan, facilitating the purchase of further properties.

    0Reply
  • Joseph Hennis
    Fairfield, CA · Member since 2017 · 98 posts · 84 votes
    9y

    One thing to consider, you refinance, and YES THE PAYMENT GOES UP... HOWEVER, (just wanted to emphasize this) if you are following the "repeat" part of it, you will soon have new cash flow coming in to pay against the higher mortgage... For instance...

    75k purchase, 25k repairs. ARV is 135k, rent at 500/mo. refinance at 100k, Now your payment is $500/mo, which is negative cash flowing. buy another property, same deal.. You now have 2 properties 1k/mo in rent, with only one payment of $500/mo.

    I used poorly cash flowing properties on purpose as an example. You should shoot for better deals.

    0Reply
  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    9y
    Lots of good examples here so I won't beat that horse. I just want to make something clear for a few people...YOU aren't paying the debt off...your TENANTS are. Don't focus on the debt aside from making sure that the property can safely cover it. When executed correctly and successfully, the BRRRR strategy essentially provides you with "free" cash-flowing assets. They're free, because the process has been completed the money you invested is back in your pocket to use for the next deal.
    0Reply
  • Joseph Williams
    Rental Property Investor · Richmond, VA · Member since 2017 · 9 posts · 0 votes
    9y

    When you refi do you still have to put the 20% down for a conventional loan? 

    I purchased a house for 144K and the current mortgage payoff is 114K. I believe it would appraise for 175K, would the numbers work for me to refi at 175K, paying off the 114K loan and taking my 61K elsewhere? 

    My question is do I have to put 20% down on the new 175K loan? so would by 61K be subject to     - 35K downpayment and turn my walk away cash into 26K?

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y

    @Scott L. you are right that there are closing costs of several thousand dollars, plus your cash flow on the property decreases. You are paying a premium to take your money now, rather than let it accumulate over time as cash flow.  

    I prefer to avoid the refinancing costs and I just let the cash flow accumulate in my account, then use that cash for down payments.

    With BRRRR, you get a higher return on investment, but it comes with a higher risk due to higher leverage. In an expanding real estate market everything is great. Rents and property value increase, so you are fine. The problem is if the market sees a correction and you are no longer able to service your debt load. Nobody thinks it can happen to them, but many have been financially destroyed because of this.

    0Reply
  • Allan Fisher
    Rental Property Investor · Chula Vista, CA · Member since 2016 · 17 posts · 15 votes
    9y

    @John Dombrowski Yeah, you can get a conventional on a rental. I closed on a property in Memphis TN on 11/18/16 and immediately started the refinance process. It was rent ready on 12/7/16 and I got a renter in around 01/12/17. My refinance closed on 01/27/17. I was able to do a cash out refinance for 75% LTV on a conventional loan. So all in all, it took about 2.5 months from the day I closed on the house to the day my refinance went through.

    2Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free