Refinance question for BRRRR

[Joe Pirapakaran]

Wondering if anyone can provide some insight

So your done rehabbing your deal and ready to refinance 

lets just say, you owe your private money lender 140k thats purchase, rehab and interest 

the house appraises for 200k.  With a 80% cash out refinance your loan amount is 160k

Are you only writing a loan for the money you owe the lender ? (140k) or the full 80% of the ARV (160k)

what are there pros and cons of both  ? 

[Nicholas L.]

@Joe Pirapakaran

lenders have a maximum LTV they can give you, and almost no one does 80% right now - it's 70-75%

the higher the loan amount, the higher the monthly payment

the lender doesn't care how much you owe - you could owe $20K or $200K - if they do 70% LTV, you'll get $140K

[Joe Pirapakaran]

Quote from @Nicholas L.:

@Joe Pirapakaran

lenders have a maximum LTV they can give you, and almost no one does 80% right now - it's 70-75%

the higher the loan amount, the higher the monthly payment

the lender doesn't care how much you owe - you could owe $20K or $200K - if they do 70% LTV, you'll get $140K

 Hi Nick

Thank you for the info ! 

how about if you owed your private money lender 100k instead 

if your able to get 140k off the 70% LTV.

would you refinance for the full 140k or just the 100k you owe your private money lender ? 

could you take the 40k extra after paying back the private money lender and roll that into another deal thus needing to borrow less private money next time? 

or would you refinance for the 100k so you could cashflow more per month?

is one option better than the other or is it just personal preference ?

[Brittany Minocchi]

Most people take out as much equity as they can, up to 80% like you mentioned. There will be costs involved with the refi, so if you only take out enough to pay off the PML, you'll be paying the costs out of pocket instead of with the proceeds of your loan (assuming there's enough equity to do so). Pros - you have more money. Cons - you're paying interest on a higher amount and/or your rate will be higher with a higher LTV.

[David M.]

@Joe Pirapakaran

Higher or less leverage (i.e. more or less cashflow) is a decision dependent upon your goals and strategy.  if you are buying for appreciation, have reserves, perhaps younger, then go for max leverage so that you can funds to do more deals.

Perhaps you are "older," just found a good deal.  Maybe leave some of the money "in there" to have some more cash flow to live on or just to make it easier to hold onto the property so it doesn't constrain your finances.

There isn't really one "right" answer...

[River Sava]

Hey Joe -

Really depends on your strategy there isn't a straight forward answer here as others have commented. 

Loan would be based on ARV and typically at 75% LTV for a cash out if you are looking to pull as much equity out.

However, if you're debt outstanding is significant then a rate term refi might make more sense if you plan to hold onto it for a bit. 

[Andrew Postell]

@Joe Pirapakaran usually, we are refinancing for as much as we can. Also, usually we are trying to get 75% ARV on that initial acquisition loan. And usually we aren't doing a cash out loan when we refinance. Usually, we are refinancing at 75%-80% of the ARV...depending on what we can qualify for. In that "usual" scenario, that's when we come out of pocket the least. Oh...and also, use are usually structuring our purchase price to accommodate for that 75% loan we get. There's some math to it, it's simple math, but once we get that math down then we know how to offer on a property and structure the transaction. And the last "usually"...we "usually" aren't cashflowing on properties right now. That doesn't mean you shouldn't purchase them, but that's the right expectation to have.

Hope all of that makes sense.

[Steven Goldman]

Quote from @Joe Pirapakaran:

Wondering if anyone can provide some insight

So your done rehabbing your deal and ready to refinance 

lets just say, you owe your private money lender 140k thats purchase, rehab and interest 

the house appraises for 200k.  With a 80% cash out refinance your loan amount is 160k

Are you only writing a loan for the money you owe the lender ? (140k) or the full 80% of the ARV (160k)

what are there pros and cons of both  ? 

 Joe, as a starting point you are asking the right question. How do I execute out of my rehab.? You should know the answer before you begin. If the answer is not satisfactory you should not begin. If you strategy is to build a rental portfolio as fast as you can then, you want to refinance at the highest available leverage. (75%) That allows you to preserve your capital so you have down payment money for your next deal. If you have access to  large amounts of capital then you can set your refinance at a comfortable payment based on your desired return. Most people need as much of their initial investment back as is possible. Good luck!

[Carrie Matuga]

@Joe Pirapakaran I think it really depends on how the additional cash out affects your DSCR ratio and your cashflow. It's a balance and depends on your comfort with leverage and how that impacts the DSCR, which ultimately impacts your rate.

[Joe Davis]

Quote from @Joe Pirapakaran:

Wondering if anyone can provide some insight

So your done rehabbing your deal and ready to refinance 

lets just say, you owe your private money lender 140k thats purchase, rehab and interest 

the house appraises for 200k.  With a 80% cash out refinance your loan amount is 160k

Are you only writing a loan for the money you owe the lender ? (140k) or the full 80% of the ARV (160k)

what are there pros and cons of both  ? 

I always tell people, before they start thinking about what % they can leverage out the refinance for, ensure that this property will meet the DSCR threshold at the higher leverage amounts. too many people get caught up on whether they can get 70, 75 or 80% but then when the appraisal comes back and market rents show less than they thought - they are out of luck. You will only be able to pull out as much cash as the debt coverage ratio allows.

[Robin Simon]

Quote from @Joe Davis:

Quote from @Joe Pirapakaran:

Wondering if anyone can provide some insight

So your done rehabbing your deal and ready to refinance 

lets just say, you owe your private money lender 140k thats purchase, rehab and interest 

the house appraises for 200k.  With a 80% cash out refinance your loan amount is 160k

Are you only writing a loan for the money you owe the lender ? (140k) or the full 80% of the ARV (160k)

what are there pros and cons of both  ? 

I always tell people, before they start thinking about what % they can leverage out the refinance for, ensure that this property will meet the DSCR threshold at the higher leverage amounts. too many people get caught up on whether they can get 70, 75 or 80% but then when the appraisal comes back and market rents show less than they thought - they are out of luck. You will only be able to pull out as much cash as the debt coverage ratio allows.

 This is definitely a good point - people tend to get caught in the mindset of "MAX" cash-out proceeds no matter what, you can always reduce leverage (lender will pretty much not want lower leverage) to stay conservative and protect cash flow and cushion