My partner and I have successfully used the BRRRR method gaining us 5 doors in the last 5 years. However, last project (3BR-2BA, 1700 sq ft) has posed a dilemma. In short, we went over budget on the rehab and the proposed interest rate is ~8.75% if we move forward with refinancing. We used our own cash to buy (tax sale) and fully renovate as the property required going down to the studs. Our forecasted rental income of ~$2145/m and cash flow of ~$200/m was based on interest rates as high as 8%. Additionally, going a little over budget with a higher interest rate at 8.75% made us pause to reconsider other options. We are totally against paralysis in analysis so we need your help.
Could or should we consider delaying the refinance for at least another year, if we can likely get cash from other sources for the next rehab which is currently in the demo stage? What would be the implications, good or bad in regards to taxes, cash-on-cash return or anything else? Mind you, my partner and I have decided against personal financing at ~7.65% as we prefer not to risk our other assets.
Investor · Charlottesville Virginia · Member since 2021 · 348 posts · 346 votes
3y
Hello Amos,
I think you are not alone in running into these hurtles. I think that the main point that I would consider is the opportunity cost of leaving your cash in this deal. If you think that you would be able to use the cash from that refi to go and BRRRR one or two more properties this year then I would take the hit on the rate as long as you are close to breaking even on the cash flow side and/or can maintain being in a minor deficit for this time period, which it sounds like you can. If you are not planning to use the money for another property right away then I think you should just wait until rates come down a but because you aren't in a rush to get that capital out.
I am not an expert on taxes but I know that at least one downside to not refinancing is that you will not be able to write off your mortgage interest against the cash flow you are making from the house. If you refinanced and were not making any cash flow after expenses and were paying mortgage interest you would be showing a loss on paper which would be beneficial but I doubt that it is substantial enough that it should be the deciding factor.
Your cash on cash return would technically be higher if you don't refinance because you will be cash flowing and not at a loss but your return on equity will be really bad so the more important part here is the first part of my response: whether or not you will be able to utilize the capital immediately if you pull it out.
I hope this is helpful, feel free to reach out with follow up questions!
Investor · Charlottesville Virginia · Member since 2021 · 348 posts · 346 votes
3y
Hello Amos,
I think you are not alone in running into these hurtles. I think that the main point that I would consider is the opportunity cost of leaving your cash in this deal. If you think that you would be able to use the cash from that refi to go and BRRRR one or two more properties this year then I would take the hit on the rate as long as you are close to breaking even on the cash flow side and/or can maintain being in a minor deficit for this time period, which it sounds like you can. If you are not planning to use the money for another property right away then I think you should just wait until rates come down a but because you aren't in a rush to get that capital out.
I am not an expert on taxes but I know that at least one downside to not refinancing is that you will not be able to write off your mortgage interest against the cash flow you are making from the house. If you refinanced and were not making any cash flow after expenses and were paying mortgage interest you would be showing a loss on paper which would be beneficial but I doubt that it is substantial enough that it should be the deciding factor.
Your cash on cash return would technically be higher if you don't refinance because you will be cash flowing and not at a loss but your return on equity will be really bad so the more important part here is the first part of my response: whether or not you will be able to utilize the capital immediately if you pull it out.
I hope this is helpful, feel free to reach out with follow up questions!
Lender · Houston, TX · Member since 2023 · 235 posts · 255 votes
3y
@Amos Raymond It depends on your strategy. The goal of a BRRR is to leverage cash/equity to buy more properties. Yes, the 8.75% rate will impact your cash flows in the near term but long term you'll own more doors by refinancing and buying more properties. Depending on the prepayment period you should be able to refinance in a few years and improve cash flows.