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BRRRR - Buy, Rehab, Rent, Refinance, Repeat

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Dolphurs Hayes
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Cash out refinance under LLC

Dolphurs Hayes
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Posted Nov 20 2022, 18:43

Hey I am currently getting closer to closing my first BRRR deal but I wanted advice on how ppl went about the cash out refinance step. Is it tougher to cash out refinance when the title is in LLC? Any tips on how to secure a bank loan under a LLC?

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V.G Jason
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Replied Nov 25 2022, 17:51
Quote from @Erik Estrada:
Quote from @V.G Jason:
Quote from @Erik Estrada:
Quote from @V.G Jason:
Quote from @Erik Estrada:

 In that case then it wouldn't make any sense. If your goal is to pay off the mortgage early, you would refinance to lower the rate and pay down the principal faster. If however, you plan on leveraging and using the property as a base to buy more, then it could make sense. 

Ok, if i was looking to leverage and using the property as a base to buy more how would it make sense then too? I don't accrue any equity to re-leverage it. I gain a basis differential in 10 years(I would hope lol). But that's minimal. Curious how, cause right now the only solution  I see for it is a simple interest vs. cash flow arb but you better sell within 10 years.

The main benefit is the lower payment. At 8.65% on a P&I 30 yr fixed DSCR, the payment makes it harder to qualify for them. In some instances you have to reduce the LTV to make the deal work.


Yeah, just a raw payment reduction but you lose equity in time. In effect though, it's very counter productive. It may only make sense if you do a monster downpayment, and hope the basis differential in 10 years actually defeats the interest rate arb.

And back to the other point, "If your goal is to pay off the mortgage early, you would refinance to lower the rate and pay down the principal faster."

 
By refinancing you're just entering another 30-year window so how are you paying it off earlier, you paid 10 years now you're paying another 30? You'd lower your payment some sure, but you're still taking actually longer to pay it off.

Also that’s keeping the assumption that you are keeping the loan at 8.65% for 10 years, which wouldn’t make sense if rates were to decline earlier than that. 


Agreed. If I had a DSCR for 30 years at 8.65% and year 3-6 it is now 5%, I would re finance. 

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Allan C.
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Replied Nov 25 2022, 19:33

@V.G Jason I/O is a great strategy for maximizing return on equity. It's no different than the refi till you die believers where you keep stripping equity to buy more assets, except you avoid the inefficiencies of constantly refinancing.

It also works for high appreciation markets where you don’t expect to hold the asset forever. It can also work for buy and hold investors in growth mode.

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Kevin Woodard
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Replied Nov 25 2022, 19:45

Interest only makes sense in a scenario when you need more loan now and your rent rate isn't meeting the DSCR requirement.

If the goal is to own the properties free and clear, obviously I/O won't align. However if your appraisal came in a bit low and you went over your budget, maybe you go for the 80% LTV 5/1 ARM. You just have to play the numbers.

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Replied Nov 26 2022, 07:16
Quote from @Allan C.:

@V.G Jason I/O is a great strategy for maximizing return on equity. It's no different than the refi till you die believers where you keep stripping equity to buy more assets, except you avoid the inefficiencies of constantly refinancing.

It also works for high appreciation markets where you don’t expect to hold the asset forever. It can also work for buy and hold investors in growth mode.

How does it maximize return on equity, when you gain no equity?

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Allan C.
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Replied Nov 26 2022, 09:39
Quote from @V.G Jason:
Quote from @Allan C.:

@V.G Jason I/O is a great strategy for maximizing return on equity. It's no different than the refi till you die believers where you keep stripping equity to buy more assets, except you avoid the inefficiencies of constantly refinancing.

It also works for high appreciation markets where you don’t expect to hold the asset forever. It can also work for buy and hold investors in growth mode.

How does it maximize return on equity, when you gain no equity?
Equity is a function of several factors - down payment, principal pay down, appreciation, etc.  Return is also a function of several factors - cash flow from operations, return of cash from sale, return of cash from refi, etc.

By definition, you maximize returns by increasing the spread between the numerator and denominator. You can decrease the denominator by minimizing down payment, minimizing principal pay down or stripping equity through refi. Increasing the numerator is more obvious. As an investor one of your goals is to maximize the return on your investment/equity.  It's not the only goal, but a big one for most folks on this forum.  

You'll need to define what your goals and strategies are.

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V.G Jason
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Replied Nov 26 2022, 10:15
Quote from @Allan C.:
Quote from @V.G Jason:
Quote from @Allan C.:

@V.G Jason I/O is a great strategy for maximizing return on equity. It's no different than the refi till you die believers where you keep stripping equity to buy more assets, except you avoid the inefficiencies of constantly refinancing.

It also works for high appreciation markets where you don’t expect to hold the asset forever. It can also work for buy and hold investors in growth mode.

How does it maximize return on equity, when you gain no equity?
Equity is a function of several factors - down payment, principal pay down, appreciation, etc.  Return is also a function of several factors - cash flow from operations, return of cash from sale, return of cash from refi, etc.

By definition, you maximize returns by increasing the spread between the numerator and denominator. You can decrease the denominator by minimizing down payment, minimizing principal pay down or stripping equity through refi. Increasing the numerator is more obvious. As an investor one of your goals is to maximize the return on your investment/equity.  It's not the only goal, but a big one for most folks on this forum.  

You'll need to define what your goals and strategies are.

My goals are vanilla; cash flow, appreciation, buy & hold long term. In high interest rate environments the % of interest in P&I is almost engulfing. So you're really shorting yourself principal payments(=equity) for very little to no gain, actually a net loss.

I think I used a hard example before, but am willing to again just to understand how IO is making any sense. I want more options in my toolbox, so I'm all ears.

Let's use a $400k house, $100k down(25%) so $300k loan(75%). Interest rates now are 9% & future rates in 10 years are say 5%.  House appreciates to $500k in 10 years(so IO option only own 25% still, fixed rate likely own +10% more so 35%).

Correct me if I'm wrong or if my math is way off, but these are your four options using just P&I no taxes & ins for simpler math.

Pay 10 years of IO @ 9%($2,250/mo) + 20 years fixed rate at 9% on 300k, no refi($2,700/mo)
Pay 10 years of IO @ 9%($2,250/mo)+ 30 years fixed rate at 5% on 375k(75%LTV), $25k cash aside if refi(2,000/mo)
Pay 10 years of fixed rate conv at 9% on 300k(2,400/mo) + 30 years of fixed rate at 5% on 325k(65% LTV), $75k cash aside if refi($1,750mo)
Pay 30 years of fixed rate conv at 9% on 300k($2,400/mo)

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Allan C.
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Replied Nov 26 2022, 13:06
Quote from @V.G Jason:
Quote from @Allan C.:
Quote from @V.G Jason:
Quote from @Allan C.:

@V.G Jason I/O is a great strategy for maximizing return on equity. It's no different than the refi till you die believers where you keep stripping equity to buy more assets, except you avoid the inefficiencies of constantly refinancing.

It also works for high appreciation markets where you don’t expect to hold the asset forever. It can also work for buy and hold investors in growth mode.

How does it maximize return on equity, when you gain no equity?
Equity is a function of several factors - down payment, principal pay down, appreciation, etc.  Return is also a function of several factors - cash flow from operations, return of cash from sale, return of cash from refi, etc.

By definition, you maximize returns by increasing the spread between the numerator and denominator. You can decrease the denominator by minimizing down payment, minimizing principal pay down or stripping equity through refi. Increasing the numerator is more obvious. As an investor one of your goals is to maximize the return on your investment/equity.  It's not the only goal, but a big one for most folks on this forum.  

You'll need to define what your goals and strategies are.

My goals are vanilla; cash flow, appreciation, buy & hold long term. In high interest rate environments the % of interest in P&I is almost engulfing. So you're really shorting yourself principal payments(=equity) for very little to no gain, actually a net loss.

I think I used a hard example before, but am willing to again just to understand how IO is making any sense. I want more options in my toolbox, so I'm all ears.

Let's use a $400k house, $100k down(25%) so $300k loan(75%). Interest rates now are 9% & future rates in 10 years are say 5%.  House appreciates to $500k in 10 years(so IO option only own 25% still, fixed rate likely own +10% more so 35%).

Correct me if I'm wrong or if my math is way off, but these are your four options using just P&I no taxes & ins for simpler math.

Pay 10 years of IO @ 9%($2,250/mo) + 20 years fixed rate at 9% on 300k, no refi($2,700/mo)
Pay 10 years of IO @ 9%($2,250/mo)+ 30 years fixed rate at 5% on 375k(75%LTV), $25k cash aside if refi(2,000/mo)
Pay 10 years of fixed rate conv at 9% on 300k(2,400/mo) + 30 years of fixed rate at 5% on 325k(65% LTV), $75k cash aside if refi($1,750mo)
Pay 30 years of fixed rate conv at 9% on 300k($2,400/mo)

Let's simplify this and just use 2 scenarios for a $100k property:  Scenario 1) you pay $100k all cash for a property and Scenario 2) you obtain a $75k loan with 30 year interest-only terms (no principal payment for 30 yrs). Let's also assume that your goal is to eventually own the property free and clear after 30 years. 

All else being equal, would you rather pay $100k cash up front or pay $25k now and then the additional $75k 30 yrs from now? 

Yes there are a lot more factors to consider, but the main point is most investors can capture higher yield than prevailing interest rates, thus maximize liquidity to capture more deals instead of paying down principal. It's similar concept as 30 yr vs 15 yr mortgages. Also think about it this way, even if inflation is 2%, paying $75k to own the property free and clear in 30 years is equivalent to paying $42k on a Net Present Value basis. Irrespective of the timeline by which you pay down principle, wouldn't you rather pay $42k instead of $75k on a NPV basis? The delta NPV is real money that can invest or use however else you'd like. 

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Replied Nov 26 2022, 14:17
Quote from @Allan C.:
Quote from @V.G Jason:
Quote from @Allan C.:
Quote from @V.G Jason:
Quote from @Allan C.:

@V.G Jason I/O is a great strategy for maximizing return on equity. It's no different than the refi till you die believers where you keep stripping equity to buy more assets, except you avoid the inefficiencies of constantly refinancing.

It also works for high appreciation markets where you don’t expect to hold the asset forever. It can also work for buy and hold investors in growth mode.

How does it maximize return on equity, when you gain no equity?
Equity is a function of several factors - down payment, principal pay down, appreciation, etc.  Return is also a function of several factors - cash flow from operations, return of cash from sale, return of cash from refi, etc.

By definition, you maximize returns by increasing the spread between the numerator and denominator. You can decrease the denominator by minimizing down payment, minimizing principal pay down or stripping equity through refi. Increasing the numerator is more obvious. As an investor one of your goals is to maximize the return on your investment/equity.  It's not the only goal, but a big one for most folks on this forum.  

You'll need to define what your goals and strategies are.

My goals are vanilla; cash flow, appreciation, buy & hold long term. In high interest rate environments the % of interest in P&I is almost engulfing. So you're really shorting yourself principal payments(=equity) for very little to no gain, actually a net loss.

I think I used a hard example before, but am willing to again just to understand how IO is making any sense. I want more options in my toolbox, so I'm all ears.

Let's use a $400k house, $100k down(25%) so $300k loan(75%). Interest rates now are 9% & future rates in 10 years are say 5%.  House appreciates to $500k in 10 years(so IO option only own 25% still, fixed rate likely own +10% more so 35%).

Correct me if I'm wrong or if my math is way off, but these are your four options using just P&I no taxes & ins for simpler math.

Pay 10 years of IO @ 9%($2,250/mo) + 20 years fixed rate at 9% on 300k, no refi($2,700/mo)
Pay 10 years of IO @ 9%($2,250/mo)+ 30 years fixed rate at 5% on 375k(75%LTV), $25k cash aside if refi(2,000/mo)
Pay 10 years of fixed rate conv at 9% on 300k(2,400/mo) + 30 years of fixed rate at 5% on 325k(65% LTV), $75k cash aside if refi($1,750mo)
Pay 30 years of fixed rate conv at 9% on 300k($2,400/mo)

Let's simplify this and just use 2 scenarios for a $100k property:  Scenario 1) you pay $100k all cash for a property and Scenario 2) you obtain a $75k loan with 30 year interest-only terms (no principal payment for 30 yrs). Let's also assume that your goal is to eventually own the property free and clear after 30 years. 

All else being equal, would you rather pay $100k cash up front or pay $25k now and then the additional $75k 30 yrs from now? 

Yes there are a lot more factors to consider, but the main point is most investors can capture higher yield than prevailing interest rates, thus maximize liquidity to capture more deals instead of paying down principal. It's similar concept as 30 yr vs 15 yr mortgages. Also think about it this way, even if inflation is 2%, paying $75k to own the property free and clear in 30 years is equivalent to paying $42k on a Net Present Value basis. Irrespective of the timeline by which you pay down principle, wouldn't you rather pay $42k instead of $75k on a NPV basis? The delta NPV is real money that can invest or use however else you'd like. 

 That logic makes a lot of sense. If you're able to capture the other deals, then yes, absolutely. But wouldn't you able be doing that with 25% down in any scenario? Same applies to the fixed rate loans. Still $25k now and the additional $75k 30 years from now, just different methods. One you gain more equity in the first 10 years, the other you don't?

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Basit Siddiqi
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Replied Nov 26 2022, 14:22

There is language that a SMLLC can get a conventional mortgage so it may be possible to refinance with the LLC.

If you can't get conventional financing, you should look into portfolio / DSCR loans.

Best of luck