How does Refinancing Work?

Question

Hi All,

I had a question about the BRRRR strategy, specifically the refinancing part. If I were to buy a property with cash and pay for it all upfront, the next steps would be to the renovate and then rent it out. When I would get to the refinancing part, how does this work in my favor in terms of getting money out of this investment and moving onto another one? I know that if I were to use a loan, I could renegotiate the terms in the refinancing part; however, if I am buying with cash how does the refinancing benefit me and how can I pull money out from this investment so it is not tied up and that I can keep investing?

Erik Estrada · Answer

It honestly will depend on the ARV. If you are all in $200k into a property  and it is worth $350,000 after repairs, then you should be able to receive all of your initial cost on a refinance using the new appraised value.

Most DSCR lenders will go up to 75% LTV on the new appraised value with 90 days title seasoning. So in my example you should be able to get your $200k and an additional $50kish after accounting for all closing costs on the refinance. Assuming the new value after renovations appraises at $350k of course.

The benefit to buying cash and refinancing later is that you can close on a property quickly, which works in your favor in competitive markets. You also pay less in closing costs overall since you aren't paying lender fees on the purchase loan.

When you finance the purchase of the property you have to go through the whole underwriting process which can take 21-30 days. Additionally the lender might require 6 months of payments to be made on the loan before you can refinance again. There are lenders that do not have this requirement of course, but they are mainly hard money lenders or local portfolio style banks.

Mohammed Rahman · Answer

Good question—here's the simplest way to see it:

If you bought a property with all cash, renovated, and rented it out, refinancing lets you turn the value you created into cash again. The bank gives you a new mortgage loan based on the higher appraised value of the property after renovations. Since you already own it outright, the cash from this new loan goes straight into your pocket.

For example, if you bought it for $150k, fixed it up, and now it's worth $250k, you might refinance and pull out around $187,500 (75% of $250k). Now you've got your cash back (and then some), and you can use that money to jump right into another deal.

That’s the power of refinancing with BRRRR—it frees your money so you can keep investing without constantly needing new capital.

Mike Klarman · Answer

sent you a dm

Nicholas L. · Answer

@Kyle Lam

hypothetical example with simple numbers - you buy a house for 100K and fix it up for 50K.  assuming you use all cash - and setting aside closing and holding costs for now - you're in for 150K.  now, if you've boosted the ARV of the house via the rehab to 200K, you can do a cash out refinance, and put a long term mortgage on the property that is paid monthly.

you will get "cash out" (minus closing costs) at closing.  so, if you get 75% of the $200K, that's $150K, minus, say, $5K for closing = you get a check for $145K.

(note that there are seasoning periods with loans - shorter with DSCR loans, and longer with conventional.  if you don't know what this is, look it up.)

how it benefits you: you pay yourself back - you pay back the cash you spent with the cash from the brand new loan.

(but... it only works if you significantly boost the ARV of the property.  on that hypothetical 100K house - going to 120 or 150 or 180 generally doesn't cut it.  and, there are fees and costs at every stage - i didn't include them in my example, but you need to because they're significant.  closing costs on the buy and the refi for example will be hefty - thousands of dollars on each.  new investors often overlook these.  they should not.)

hope this helps

How does Refinancing Work?

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