Please Assist me in Understanding a "Cash-Out" Re-Fi...?

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Please Assist me in Understanding a "Cash-Out" Re-Fi...?

Brandon SturgillBusiness Member
Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes

Can you please confirm my understanding of this strategy is accurate...so, I buy a cash flow property in the following manner:

Purchase Price: $100k (including all entrance costs aside from down pmt...)

Personal Cash $25k (down pmt. on 75%LTV loan)

Mortgage $75k

Amortization 30 yrs.

Interest Rate 5%

Monthly Payment $700

Rehab Costs $12k

Total Personal Cash on Deal $37k

ARV $130k (after rehab and 6 mos. seasoning)

then...

Re-Fi (estimates not including closing, current principal balance, etc...)

Mortgage $130k 

Amortization 30 yrs

Interest Rate 4.5%

Monthly Payment $800

Loan Balance $75k 

Cash at Closing $55k (mortgage - balance)

So, in this example I would be able to repay myself for the initial investment ($37k) and clear the difference to re-invest, etc...and the mortgage would hopefully be low enough to still cash flow?

This strategy seems to have infinitely different twists...things like varying rehab costs, origination fees, interest rates, amortization schedules, etc. And if the rent payment is not sufficient to cover the mortgage and have a reserve, I could lose money on a deal like this...

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Franklin Romine
Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
12y

@Brandon Sturgill The best/most profitable cash out refinance will come when you pay cash for a problem, rehab, rent and refinance.  The value you create will give you the opportunity to pullout most of all your cash if you find the right problem and create the most value in repairs.


Frank

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    12y

    If the ARV is $130k you won't be able to get a mortgage for $130k. That'd be 100% LTV.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    12y

    @Brandon Sturgill In your example, if the ARV after rehab was 130k, and you could get 75% LTV/ARV when you refi, then you would get a refi loan of 97,500 max. That would pay off your existing 75k mortgage and leave you with about 20k+ in cash. So you'd be out of pocket around 15k.

    0Reply
  • Dana Chen
    Developer · Jacksonville, FL · Member since 2014 · 28 posts · 15 votes
    12y

    @Brandon Sturgill if your ARV is 130k and you find a lender to give you 80% LTV after 6 months seasoning (many lenders require 12 months in order to go to 80%), then your mortgage could only be for 104k.

    130k - ARV

    104k - Mortgage at 80%
    - 4k - closing costs/fees/per diem and so on (will vary depending on your state)
    - 75k - mortgage balance
    = 25k cash out (which would cover some of the 37k you have invested into the home)

    With a 104k mortgage at 4.5%, you would have a P&I payment of $527 so whether you will cash flow on that property will depend on your taxes, insurance, HOA and any other variables you might have. You won't be able to completely get your 37k out of the house though if the ARV is only 130k.

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  • Rick Baggenstoss
    Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
    12y

    @Brandon Sturgill In addition to the good comments above, you should think of using this strategy more when you've:

    - Made a cash purchase (yours and/or Hard Money) maybe because you had to do so to win the house or it couldn't be financed due to the condition

    - much longer hold and greater appreciation of the property -- Add value over time, bought low, and appreciates.  

    It also works in the scenario you painted, but it's pretty time consuming, more risk, and the transaction costs are significant.

    Rick

    1Reply
  • Sandra Roddy
    Investor · Arlington, VA · Member since 2012 · 84 posts · 27 votes
    12y

    Lending laws have changed.  Check with the lender first since seasoning is now a HUGE factor.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    12y

    @Brandon Sturgill What @Rick Baggenstoss said.

    Joe Villeneuve
    REcapSystem
    A2REIC

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  • Paul S.
    Investor · Valparaiso, FL · Member since 2014 · 374 posts · 76 votes
    12y

    @Rick Baggenstoss  would I be correct to assume that if a cash deal was made then that would negate the "seasoning" period?

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  • Brandon SturgillBusiness Member
    OP
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    12y

    @Joe Villeneuve  @Rick Baggenstoss @Kyle J. Thanks for the sound advice, gentlemen.

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  • Brandon SturgillBusiness Member
    OP
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    12y

    @Dana Chen  @Kyle J. @Sandra Roddy @Paul S. Thanks for taking the time to respond. Very helpful.

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  • Richard C.
    Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
    12y
    Originally posted by @Paul S.:

    @Rick Baggenstoss  would I be correct to assume that if a cash deal was made then that would negate the "seasoning" period?

     No.

    Not the seasoning period required for a post-rehab appraisal to be used, rather than the purchase price.

    0Reply
  • Rick Baggenstoss
    Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
    12y

    @Paul S. .... And seasoning is to mitigate a fraudulent renter/lease.  If a tenant pays $1000 for 12 - 24 months, then $1000 is probably market rent.  If they pay $1000 for 2 months, then property sits vacant for 10 months then the house may not be worth $1000/mo.

    1Reply
  • Paul S.
    Investor · Valparaiso, FL · Member since 2014 · 374 posts · 76 votes
    12y

    @Rick Baggenstoss  thanks for the clarification. 

    Paul

    0Reply
  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    12y

    @Brandon Sturgill The best/most profitable cash out refinance will come when you pay cash for a problem, rehab, rent and refinance.  The value you create will give you the opportunity to pullout most of all your cash if you find the right problem and create the most value in repairs.


    Frank

    2Reply
  • Brandon SturgillBusiness Member
    OP
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    12y

    @Franklin Romine 

    Thanks for the guidance

    937-979-7000
    Realize Multifamily Group11 Review
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  • Fabian Rivas
    Las Vegas, NV · Member since 2014 · 14 posts · 4 votes
    12y

    Thanks for asking this question @Brandon Sturgill 

    I had the same one. The comments were very informative.

    1Reply
  • Brandon SturgillBusiness Member
    OP
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    12y

    @Fabian Rivas  No worries, Fabian. Glad we could both benefit from this...many more questions to come.

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    Realize Multifamily Group11 Review
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