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BRRRR - Buy, Rehab, Rent, Refinance, Repeat

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Carlos Quiros
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  • New to Real Estate
  • Los Angeles, Ca
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Refinance Question (New Investor)

Carlos Quiros
Pro Member
  • New to Real Estate
  • Los Angeles, Ca
Posted May 8 2024, 16:51

New investor here

I have 2 rental properties (duplex & triplex) that I bought at the highest interest rates (8%), they DO cash flow but now that rates have softened a bit my question is when do you all as investors decide to pull the trigger on refinances? A full point? 2 points?

Just looking for constructive feedback....

Carlos

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Jason Park
  • Lender
  • 5760 Northampton Blvd Ste 108 Virginia Beach, VA 23455
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Jason Park
  • Lender
  • 5760 Northampton Blvd Ste 108 Virginia Beach, VA 23455
Replied May 8 2024, 19:25
Quote from @Carlos Quiros:

New investor here

I have 2 rental properties (duplex & triplex) that I bought at the highest interest rates (8%), they DO cash flow but now that rates have softened a bit my question is when do you all as investors decide to pull the trigger on refinances? A full point? 2 points?

Just looking for constructive feedback....

Carlos


 Hey Carlos,

I guess it depends on your goals, how much it's appreciated, etc.. Just looking simply at rates may trap you in a way.. As my advice would be to look at what you want to achieve, is it higher cashflow? Cash out to invest in other properties? 

Has your properties appreciated a bunch where sitting on tons of equity just doesn't make sense? Remember, that it costs money to refi...if its a small amount of juice to squeeze, I would just run your numbers to take a look at what makes sense for you and your journey. 

Hope this helps!

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Brian Fung
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  • Lender
  • Hermosa Beach, CA
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Brian Fung
Lender
  • Lender
  • Hermosa Beach, CA
Replied May 8 2024, 20:29

Aloha Carlos, 

This is a question that a lot of investors (in my opinion) get wrong. They look at the interest rates and say, rates dropped X% so now it's time to refi. This doesn't make sense because there are so may costs to refinancing a property that, when you do the math, depending on how much your property is actually worth, the monthly improvement in cashflow does not substantiate the costs to refinance. 

@Jason Park hit the nail on the head in terms of "it depends on your goals". What I'd add onto that is that it depends on how much cash out you're going to get from refinancing and what you can reinvest those cash out proceeds into once you have them. If you're just looking to lower your payment, then take the total costs its going to take to refinance (at the very least 5k) and then divide that by the monthly cash flow improvement you'll have by getting lower rates. That's how many months its going to take you just to break even and for it to START being a good decision to refi. 

If you can't get cash out, consider the likelihood of your market appreciating further/bouncing back from where the market currently is, as well as whether you can do any value add to your properties to boost their values. In most cases, if you're trying to grow your portfolio, doing a cash out refinance without getting enough cash out to be able to reinvest to majorly help you with the down payment on your next deal is probably going to slow your growth and ability to scale. 

We're always happy to chat numbers with you to help you through these decisions. But either way, we wish you the best of luck! Aloha. 

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Erik Estrada
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Erik Estrada
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  • Lender
Replied May 9 2024, 04:04
Quote from @Carlos Quiros:

New investor here

I have 2 rental properties (duplex & triplex) that I bought at the highest interest rates (8%), they DO cash flow but now that rates have softened a bit my question is when do you all as investors decide to pull the trigger on refinances? A full point? 2 points?

Just looking for constructive feedback....

Carlos


 Hey Carlos, 

This answer will depend on your long term goals and current situation. Are there any prepayment penalties on your loan? Do you have a lot of equity built up? Is your goal to maximize cash flow or to paydown your mortgage quicker?

It sounds like your goal is to maximize cashflow. If this is the case I would hold off until you see a monthly payment difference worth pulling the trigger on. You also have to factor In your closing costs each time you refinance, and if the goal is to pay down your loan aggressively, you will be hitting reset each time you refinance. 

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Brittany Minocchi
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Brittany Minocchi
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  • Massillon, OH
Replied May 9 2024, 06:35

You've got some good answers here already - if cash flow is your goal, you'd need to weigh the cost of the refinance against the amount of time it would take you to recoup those costs once the cash flow has increased, and see if that makes sense. 

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Scott Allen
  • Real Estate Agent
  • Columbus, OH
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Scott Allen
  • Real Estate Agent
  • Columbus, OH
Replied May 9 2024, 10:25

@Carlos Quiros

It does cost money to refi so you have to account for that still. If you're cashflowing, sounds like you're doing good already. 

Personally, with one of the rates that I have on a different duplex - I would consider doing a refi if rates dropped 2 points because I know I'd be cashflow positive and could hit the LTV with updates that I've done to it over the past 6 months

Reafco - Columbus, OH  Logo

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Dustin Lauer
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Dustin Lauer
  • Lender
  • Orlando, FL
Replied May 9 2024, 13:13

I would say first to wait our your pre-payment penalties if applicable.  One of the best advantages of refinancing is taking cash out, so waiting longer will hopefully help you equity position.  Good responses on this thread.  Probably not "worth the squeeze" to refinance this early into the 2 deals.

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Jake Baker
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Jake Baker
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#1 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
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Replied May 12 2024, 15:05

@Carlos Quiros

Great questions. I prefer to refinance only to access the homes equity to redeploy into another investment. 

Loans are typically amortized meaning the percentage of interest paid compared to principle paydown is highest at the first month. 

My strategy lately - For my out of state BRRRRs, I have been adding 5 year prepayment penalties to lower my rate. This is a great way to lower the rate without spending money. This gets me a rate in the low/mid 7s. 

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Carlos Quiros
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  • Los Angeles, Ca
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Carlos Quiros
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  • New to Real Estate
  • Los Angeles, Ca
Replied May 14 2024, 23:12
Quote from @Jason Park:
This is very informative and as good as gold. Thank you for your insight, it gives me alot to think about.
Quote from @Carlos Quiros:

New investor here

I have 2 rental properties (duplex & triplex) that I bought at the highest interest rates (8%), they DO cash flow but now that rates have softened a bit my question is when do you all as investors decide to pull the trigger on refinances? A full point? 2 points?

Just looking for constructive feedback....

Carlos


 Hey Carlos,

I guess it depends on your goals, how much it's appreciated, etc.. Just looking simply at rates may trap you in a way.. As my advice would be to look at what you want to achieve, is it higher cashflow? Cash out to invest in other properties? 

Has your properties appreciated a bunch where sitting on tons of equity just doesn't make sense? Remember, that it costs money to refi...if its a small amount of juice to squeeze, I would just run your numbers to take a look at what makes sense for you and your journey. 

Hope this helps!


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Carlos Quiros
Pro Member
  • New to Real Estate
  • Los Angeles, Ca
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Carlos Quiros
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  • New to Real Estate
  • Los Angeles, Ca
Replied May 14 2024, 23:15
Quote from @Brian Fung:
Yeah this makes alot of sense. Running these numbers to see how long it's going to take to recoup that cash out is a good idea Brian. 

Thank you for the reply and providing your insight here.

Carlos

Aloha Carlos, 

This is a question that a lot of investors (in my opinion) get wrong. They look at the interest rates and say, rates dropped X% so now it's time to refi. This doesn't make sense because there are so may costs to refinancing a property that, when you do the math, depending on how much your property is actually worth, the monthly improvement in cashflow does not substantiate the costs to refinance. 

@Jason Park hit the nail on the head in terms of "it depends on your goals". What I'd add onto that is that it depends on how much cash out you're going to get from refinancing and what you can reinvest those cash out proceeds into once you have them. If you're just looking to lower your payment, then take the total costs its going to take to refinance (at the very least 5k) and then divide that by the monthly cash flow improvement you'll have by getting lower rates. That's how many months its going to take you just to break even and for it to START being a good decision to refi. 

If you can't get cash out, consider the likelihood of your market appreciating further/bouncing back from where the market currently is, as well as whether you can do any value add to your properties to boost their values. In most cases, if you're trying to grow your portfolio, doing a cash out refinance without getting enough cash out to be able to reinvest to majorly help you with the down payment on your next deal is probably going to slow your growth and ability to scale. 

We're always happy to chat numbers with you to help you through these decisions. But either way, we wish you the best of luck! Aloha. 


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Carlos Quiros
Pro Member
  • New to Real Estate
  • Los Angeles, Ca
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Carlos Quiros
Pro Member
  • New to Real Estate
  • Los Angeles, Ca
Replied May 14 2024, 23:16
Quote from @Erik Estrada:

There's no prepayment penalty but the equity has not built up quite large enough yet except maybe for one since I have been adding alot of value to it however the rates are about the same so it wouldn't make sense now for me to do that.

Quote from @Carlos Quiros:

New investor here

I have 2 rental properties (duplex & triplex) that I bought at the highest interest rates (8%), they DO cash flow but now that rates have softened a bit my question is when do you all as investors decide to pull the trigger on refinances? A full point? 2 points?

Just looking for constructive feedback....

Carlos


 Hey Carlos, 

This answer will depend on your long term goals and current situation. Are there any prepayment penalties on your loan? Do you have a lot of equity built up? Is your goal to maximize cash flow or to paydown your mortgage quicker?

It sounds like your goal is to maximize cashflow. If this is the case I would hold off until you see a monthly payment difference worth pulling the trigger on. You also have to factor In your closing costs each time you refinance, and if the goal is to pay down your loan aggressively, you will be hitting reset each time you refinance.