brrr.. refi amount??

26 Replies

almost finished with my first brrr property.  i own it outright, and when it's finished it will appraise at close to $135-150k.   would you take out the max amount when refinancing, or play it more safe??  my initial thought is to only cash out 50-60k to keep my loan to a minimum, and hopefully pay it off quicker.  however, if i cash out more money, then i'd have more cash to immediately invest.  thoughts on one way vs the other??  thanks for the input.

adam

I'd say that depends on your risk tolerance.  What are the market rents are and the mortgage rates?  Do you need the cash flow now, or do you want to minimize the taxable income?  Do you want to lock in the presumably low interest rates now (if rates continue to climb, this could be the cheapest money you can find)?  If you are working with banks for loans, they like to see 6 months reserves, based on the mortgage payments you have.  These are the things that I think need to go into the decision.

Originally posted by @Jack Forester :

I'd say that depends on your risk tolerance.  What are the market rents are and the mortgage rates?  Do you need the cash flow now, or do you want to minimize the taxable income?  Do you want to lock in the presumably low interest rates now (if rates continue to climb, this could be the cheapest money you can find)?  If you are working with banks for loans, they like to see 6 months reserves, based on the mortgage payments you have.  These are the things that I think need to go into the decision.

thanks, for the reply.  that's a great point that i did not consider.  borrowing money is cheaper now than it will prob be in the future.  the house will rent for about $900 /month.  i have other savings set aside, but i go back and forth on how much equity i should pull out of the house when i refi.  i definately want it to cash flow at all times.

Take out as much as possible to buy another deal instead of having dead equity sitting in the property.

@Gareth Jackson

@Stan Sugarman

@Michael Noto

@Brian Garrett

thanks for the input.  some people say dead equity is a bad thing to leave sitting around...  others say leverage as little as possible, and cash flow as much as possible.   i am more conservative, and do not want to owe a huge amount if not necessary.  always looking for different advice from others who have a lot more experience than i do though.

thanks,

adam

One of the Atlanta area gurus  always preached borrowing as much as possible in the years leading up to 2007 crash. For 4 years his properties were being auctioned off at foreclosure Tuesday in Dekalb. He lost everything he built in a lifetime of real estate investing due to negative cash flow. Worst case on maximizing cash flow is you miss out on a few deals but the flip side is leverage maximizes your losses in the downturn if you cannot afford to service the debt load.

Originally posted by @Stan Sugarman :

One of the Atlanta area gurus  always preached borrowing as much as possible in the years leading up to 2007 crash. For 4 years his properties were being auctioned off at foreclosure Tuesday in Dekalb. He lost everything he built in a lifetime of real estate investing due to negative cash flow. Worst case on maximizing cash flow is you miss out on a few deals but the flip side is leverage maximizes your losses in the downturn if you cannot afford to service the debt load.

i agree with you 100%.  I sold real estate full time starting back in 2004-2005, and i remember the market just coming to a complete stop.  i want to be able to sleep at night knowing that i can handle /manage what i currently have.  i think there is prob a good middle ground somewhere in between both sides.  

I would figure out what criteria you are interested in owning real estate at, in that type of neighborhood. If you would buy a good quality rent ready house for 130k then lever it up like its 130k.. If the retail properties are far too expensive to cash flow (sounds like that may be the case if it rents for 900, then be a bit more conservative.) In my market, I like the ARV to match the 1% rule, and typically think borrowing up to about that is a good mix of being conservative, and getting some cash flow. If the ARV is actually higher than the 1% rule then it is not bad to have that extra equity, but the more that is borrowed against the harder it could be if the market softens.

@Tyler Weaver    

thanks.  the house is in a quickly gentrifying neighborhood close to downtown greenville, but it's not there quite yet.  the house when finished should bring close to $200 per foot in today's market.  to me there is no way that it should be worth that, but that's another discussion.  obv the market will soften /slow down at some point, and i'd rather owe 75k on it than 100k.  

thanks, 

adam

Take out as much as possible. Should be about 75%

rates are lowest they will be for the foreseeable future

dead equity has a terrible roi

you WILL need liquidity to grow further.

If you need to pay the loan off, you'll have it.

there is no benefit to leaving the cash in the house. Taking the most out gives you options, leaving cash in there is just money you'll have to borrow later anyway OR WORST, you won't grow enough to need it.

@Alexander Felice

i understand what you're saying, especially in a market that has been trending up for quite a while.  what about when the market slows down or stops?  i'd rather have equity in my properties, instead of having everything leveraged to the max.  seems like you're possibly setting yourself up for disaster if you max out your properties.  my 2 cents.

adam

I will take your house in trade towards 2 or 3 of mine and finance the difference to make sure your cash flow is better. We can improve your position by increasing cash flow, more tax shelter, risk is sread out, no bank fees, doesn't show on credit, and you used ALL your equity. Why create that equity with your cash and hard work and then leave ANY of it stagnant? If you go to cash, the tax man comes with his hand out. If you refi with bank, they may wanna see it rented first. It takes time and management to get one rented. There is one thing you spend that you will never get back....time. And TIME will smother your IRR. On the other hand, move fast and your IRR will explode. Plus, after tax IRR is your real measure! Trading takes away the tax and shortens time in each deal. I made an offer yesterday. If it gets accepted, I'll be trading that one as fast as possible into something that generates cash flow by the time we close.

If the house only rents for $900/month, then as a rental it is only worth about $90,000 max. I would not get a loan for more than $70,000 if you want decent cash flow. Even at $70k when you figure in all expenses including a $150-$200/mo reserve, you won't have much left over. A bad tenant or 2 will ruin your cash flow for years.

The point of BRRR is to rehab to generate equity. The equity doesn't do much good if its sitting in the property, appreciation is a bonus and its speculative.

I would look at the rental market and determine market rent. I would use that as my guide. I would want to have positive cash-flow even if the rental market softened and I had to cut the rent modestly.

The goal would be to refi out AT LEAST as much as you invested into the property so that you can go to another project.

Originally posted by @Kevin Sobilo :

The point of BRRR is to rehab to generate equity. The equity doesn't do much good if its sitting in the property, appreciation is a bonus and its speculative.

I would look at the rental market and determine market rent. I would use that as my guide. I would want to have positive cash-flow even if the rental market softened and I had to cut the rent modestly.

The goal would be to refi out AT LEAST as much as you invested into the property so that you can go to another project.

I will have about 50k tied up in the property including purchase price, but i can refi quite a bit more than that.  I have to disagree with all you guys who say to pull out the full 75-80 ltv.   Someone earlier made a good point.  Refi the amount that makes sense based on what rent you can collect.  This house will rent for $900 per month.

thanks though for the reply.  it seems like if you talk to 10 investors, half of them will swear by one method, and the other half swear by a different approach.  

adam

I believe in the Millionaire Real Estate Investor the book said of all the millionaire real estate investors that were interviewed the overwhelming majority preferred to keep at least 20% - 30% of equity in each deal to protect against downturns as opposed of being leveraged to the hilt. I would agree with this.

I don't agree that equity in a house is "dead money" - it prevents you from paying interest on that amount if you borrowed on it and if the market ever does turn south it will be the investors with plenty of equity that will be in the best position to benefit as they can leverage that equity into more deals. The over-leveraged investors will be unable to get traditional financing and will be in much worse shape.

To all of those who think that pulling out as much equity as possible is a good idea just think of what happened during the last run up in real estate prices. The issue of a single family homes is that prices are based on market demand amd emotions not on cash flow like commercial real estate. 

 I would never consider leveraging more than 80% of the value you would purchase a property at. For instance if you’re one of the people that think the 1 percent rule is a good idea, Then base your loan amount on that too. This property rent is at $900 per month, so the value to an investor is $90,000. That means that this property owner should not leverage their property over $72,000.  

If you are buying rental real estate, then follow the fundamentals that make your property a good investment.

Hello, i'm in the process of doing a cash out refi. Its a home equity loan. Idk about the terms though. They are offering me an ARM 5/1 20year. Interest rate for 6.6% right now, and can go up as high as 12% at year 8.

Any advice on this ? should i take it or run. I think most lenders on these type of loans might do the same and i dont want to take a huge credit inquiry hit.