How you get money back from refinancing

Question

Hello,

I just finished the BP article on the BRRRR process. I am not understanding the part of refinancing the home equity loan into a conventional loan. How does that result in money back if you are refinancing a loan? I know it's probably a simple answer but I'd appreciate the feedback.

Thanks

Jason Wray · Answer

Using an FHA mortgage for example: You buy a home with 3.5% down that may need some work or renovations.  After the renovations are done you must have (6) months of title seasoning/ownership in order to use a new appraisal to evaluate the "New ARV".  If you purchase it for $75K and put $20K into the renovations your $95K into that property.

If the appraisal comes back at $150K based on the new ARV you can now refinance and transiton the loan into a conventioanl loan and take out up to 80% LTV cash out of the new value.  That new loan would be $120K allowing you to pay off the FHA loan of $75K, and take out $45K in cash out to help recoup your capital plus additional cash.  You will have also removed the FHA mortgage insurance allowing more money going towards the principal part of the payment.

You now have a conventional loan which allows you to use FHA again and you have your cash back in hand  for the down payment/repairs.  The renovations may also allow for higher rents due to curb appeal and updated kitchen, bath, etc...

You also may hear equity loan if there was or is a HELOC or line of credit the cash out refinance just pays that LOC off to start over.

Antonio Raimondi · Answer

Thank you guys!

Kevin Woodard · Answer

To piggy back off of what @Jason Wray provided. Your $1 in renovation can equal more than $1 in after repair value, you need to complete strategic rehab and value add work.

So long as you can maintain your total project cost (initial purchase, rehab cost, and closing costs) below a percentage of after repair value, the excess goes back to you.

The percentage will depend on the loan you refinance with but anywhere from 70%-80% is typically what you can find.