BRRR Part "Refinance" - Need some help

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So help me in the last part of BRRR.

Understand BUY

Understand REHAB

Understand RENT

Don't understand completely CASH OUT REFINANCE.

I'm trying to understand: Do I actually get cash in my hand which belongs to me and can keep OR do I get cash I need to pay back like a loan. Or both of it.

What exactly is the difference between 'refinance' and 'cash out refinance'.

In my case I buy the first property with cash. I don't finance (I do this to push the price down to get close to the 70% rule). After I REHAB, RENT I'd like to have cash again (since all is gone in the first house) to buy a second house.

Additional to cash for a down payment I need a loan (since the cash might not be enough). By right I can get a loan based on my income. Why do I need the house as a security?

I might be in a total wrong path here.

@Pat Leri the "Refinance part assumes you used financing in the first place. If you paid all cash then I guess you could just say you are "financing " instead of Re-Financing" you property.  But that is just a mater of semantics.

The difference between a "refinancing" and a "cash out refinancing" is when you refinance you are only replacing the original loan amount. A cash out refinancing  means you are taking out more than the original loan.

Example: You get a loan for $60k to buy and rehab a house. You are into the property for $75k total; $40k for purchase, $30k in renovations, and $5k. You had to come up with $15k cash to make the deal work.  The idea is to do a "Cash Back Refinance" so you can pay back the short term loan and get your original cash back. 

If you need to put money into every deal you will run out of money pretty quickly. By refinancing for enough to get your original cash back, then you can do it over and over.

Here is the catch. The house has to have increased in value enough so that the Loan to value is enough to get all the money back. Also after renovation you may need to wait 6 months or even a year to get "Cash Back"
It won't work perfectly on every deal. But it can be a big help in building your portfolio. 

Hi @Pat Leri

I have completed two BRRRR deals.

Yes you do actually get the cash in your hands and also yes it is in the form of a loan. Look at it as hypothetically selling the house to yourself at the new property value (ARV) after you have completed the renos.

Lets use your buying in cash example. Let's say you buy a house for 100k cash. Then you renovate it and put 50k into the renovations. At this point you are into the deal for 150K. Now since you have forced up the value of the property lets say the new value is now 200k. You have now added 50k in equity to the property.

A lender now uses that appraisal of 200k to put a new mortgage on the property. Most lenders want you to hold 20% in a rental property on a refinance. That means in this example the lender will have you keep $40,000 in the property. You will then get access to 80% of the property's value in the form of a loan into your bank account. In this example you would get access to $160,000. You owe interest on this $160,000 at whatever interest rate your lender gets for you on this new loan.

So when they say act as if you are selling the property to yourself. Imagine your first self (the purchaser) bought the property for 100k cash and you sold it to your future self (the buyer) for the new value of 200k. Your future self put 40k down and took a 160k mortgage on it.

The above example doesn't include all the fees associated with the process.

A cash out refinance and refinance are mostly used to refer to the same thing. However a refinance actually means breaking the mortgage or doing a mortgage renewal to get a better interest rate whereas a cash out refi means you actually take money out of the deal to use.

I hope this helps clarify the BRRRR method.

Hi, @Jason Shackleton and @Ned Carey  thanks so much for your explanations. Yes, it's clear now.

I'm buying a house with all cash I have to reduce the price (to have the biggest possible gap between the purchase price and ARV), then I'm planning to do the cash-out refinance to purchase another property and use the income from the first to pay of the mortgage of the second. Then I would refinance house number two at some point and take that cash out to purchase a third and pay it off from the cash flow of the 2nd. That's what the BRRRR is all about, right?

Does anything speak against ALL cash in into ONE property for the first deal?

@Pat Leri  
     "That's what the BRRRR is all about, right?"  -  yes you have it right

      "Does anything speak against ALL cash in into ONE property for the first deal?"

There is nothing wrong with doing that if you are in a position to. That can save a lot of financing costs. But please recognize there is risk in Real estate. Cost overruns are common. You should have a reserve of more than you think you'll need if you are using all cash.