BRRRR: When your cash out is too much.

10 Replies

Hello BP!! My name's Phil I'm new. Thanks in advance for checking out my post. 

So yes, I'm reading about BRRRR and had a question during refi stage.

I understand that the main idea is putting in money into an investment, then taking it back out to go invest in another property. This happens after rehab and you were all-in at 75% ARV. Then you get a refi and the bank gives you back your 75%. What happens if you go all-in at less than 75%? This is because you buy very low compared to the market. I'm sure this can happen because it says it does in the book. And it's great.

However, you want to take out all that extra cash, but now the monthly payment on your cash out refi is too big for your rental income to cover. Let me break it down.

  Recently sold home that I saw on Zillow:

sold at $46,000

+rehab $24,000 (I made this up)

All in at $70,000

ARV: $340,000 (this is the Zestimate)

all in at 21%

Refi for 75% = $255,000 (daaaaannnnngg)

but now your payment on that refi is $1600/mo. but rentometer says the area rents for $1500 and you confirm it.

What do the real investors do? Do they just take back their $70K and leave the rest in equity or do they say "oh well this is no good. I'm just going to look somewhere else?"

I know I made up some numbers, but hopefully you get my question. And I know I could've searched harder for this answer on the forums, but I really wanted to say hi. 

Anyways, thanks for checking out my post.


Let's do some math. If the rentometer says the market rent is $1500 per month, and the payment on your refi is $1600, you are already $100 a month in the hole. Then add in the other expenses and see what the annual total is. Let's say that the total expenses are $5000 per year plus the $1200 per year you are short on the rental income. That adds up to $6200 per year. However, you now have $255,000 cash in the bank which you are essentially paying 2.4% interest ($6200 /$255000). 

The question now becomes, Can you invest that $255,000 and earn a higher rate of return than 2.4%? If the answer is yes, it is definitely worth considering. If you can earn an 8% return or better, it is a no brainer. 

something is not right.. houses that have 350k arv do not sell for 40k and only need 25k in rehab.. 

your example is not realistic in the least bit.

can this happen yes once in a career maybe and or if someone was giving you the property.. but in the free market no way.

@Dennis Cosgrave ah yes, That makes sense. I forgot about roi. I wouldn't want to be in a hole in the first place, so maybe it would be better to flip?  

When looking for an area to BRRRR using 1% rent/price, do you use purchase price or ARV? In this case, ARV no?

@Jay Hinrichs  

I just saw some recently sold numbers on Zillow and just had a question. 

Thanks guys for the input though!

@Philip Calixto I see what your trying to say however, in your example like Jay said, that would never realistically happen. And if it did- let me know in what market haha. 

When you have a higher appraisal that you thought (good problem to have) you can just leave more equity in the deal (banks like that). Your terms will most likely be more favorable at 60-65% LTV vs the typical 70-75% LTV. By leaving more equity in the deal your Monthly P&I will be lower to get you closer to that '1%' rule.

@Philip Calixto

I have a very simple solution for all your woes. Go out and find that $46K property that could be fixed for $24K and sold for $340K. Then call me up and I'll take it off your hands. Won't have to worry yourself to tears about it at all. Investors gotta help each other out...this is how I give back.

As stated by others it is about what the total gain that loan is providing. It is fine running one house slightly negative if you can purchase others that are producing full rent with the mortgage you gained from the first. If taking the full LTV out versus the lesser (i.e. initial investment) is going to put you in a better position such as allowing you to buy 2 houses instead of 1 then it may be the better option.

I have not been anywhere close the extreme your describing but usually my all in costs are 25-40% LTV and my bank is willing to give me 80%. I am able to gain instant business capital (i.e. usually $10k to 20k per deal) while still cashflowing $100-$300 on 15 year loan terms.

Again no where near what you are implying but here was my last deal:

Purchase + Rehab: $24,000

Appraisal: $70,000

Loan: $50,000

Debt: $410/month on 15 year note

Rent: $875/month

Gross Cashflow (Rent - PITI): $370

Net Cashflow (Rent-PITI-Vac/CapEx): $195

I gained $26,000 in business capital and if I can somehow manage to pull similar pricing I have essentially just turned 1 house into 3. As well I am still managing about $150-$200/month cashflow on a 15 year loan which is atypical to what most are doing at the moment.

I have (2) more very similar in the works at the moment. Right now my biggest fear is how much to leverage as all CORF seem to require personal guarantors. 

You refi to get money out for your next property.  You can get up to 75% back out, but you don't have to go that high.  In general I don't want to pull so much equity out that the property goes into a negative cash flow situation.  Take enough out to handle the next property, and maybe a bit more to buy yourself a doodad.  But you want to build up cash flow so you can get out of the "rat race"  

As @Dennis Cosgrave mentions, its OK to make the property negative cash flow if you can make more investing that cash than it's costing you.  But be sure to include all costs associated with the property: vacancies, rehabs, and long term issues like HVAC, roofs, etc.

Zillow sometimes makes mistakes and reports refi's as sales. I have seen this on a number of occasions. That probably explains your $46K house that has a $340 ARV. Someone took out a HELOC likely.