Refinancing Under Value

4 Replies

Question. I have a four-plex that I pretty much stole, and that I currently own in cash. I paid $200,000 for the asset, invested about $50,000 on the rehab, and was able to take the rents from $2,000/Month to $3,600/month. I want to use the BRRRR strategy on it and think it will appraise for between $350,000 and $400,000, if not much more. My question is, what are your opinions on refinancing for less than the appraised value. Should I max out what they will lend me so I can invest as much as possible in the next multi-family asset, or should I be conservative and just take out what is needed for the initial amount of capital that is required for the next deal. Thought?

@Alex Simon I would cash out as much as possible.  But that's me.  I think the money is better sitting in your pocket than locked up in equity which has no value in use to you.  With interest rates where they are, why not?

With regard to how much the bank will allow you to cash out, that's another story. Even if the property is worth $800,000, the bank will only allow you to cash out in accordance to their maximum LTV and what their minimum Debt Coverage Ratio (DCR) is. The banks I deal with have a minimum DCR of 1.2.

Sounds like a great deal, great work!

Just a suggestion, you should put a profile pic up on your BP profile, it helps build your credibility.

@Matthew Drouin

That is a great position to be in.

Now with regards to the refinancing options and how much you should take out, I'd say it depends on what your plans are.

If you are planning on holding onto to that rental for the foreseeable future, you should stress test that property to figure out how much minimum income it needs to generate each month to meet your mortgage payments.

That monthly would dictate how much you can conservatively take out after refinancing (and providing that you lender is OK with that too) without exposing yourself.

Now if you have other deals that you want to pursue and you need as much cash as you can lay your hands on, you should take out as much as your lender would allow you to.

Personally, I'd go for the option 1, especially if you have the  ambition is build a sound rental portfolio.

Howdy @Alex Simon

Nice job. What does your current cash flow look like. What would be an acceptable minimum? I base my decision on BRRRR Refi's on that question. You must decide do you need the full amount to grow your portfolio or leave some equity in to maintain a decent cash flowing property. As long as I can get all my cash investment back and maintain my minimum cash flow requirements I will leave some in the property. I want to grow, but, not at the expense of cash flow.

So, if I refinance at $350,000 (which is at the bottom of what I think it is worth, at 4.5% interest rate at a 70/30 LTV, $6,000 in taxes, and $2,500 in insurance, the mortgage payment is $1,950/mo and the property currently leases out at $3,550/mo. So I could ReFi and still have a cash flow of $1,600 not accounting for vacancy, reserves, or routine maintenance.

So basically the bank would write me a check for $245,000, I would have all of my original investment back, I would have 30% equity in the property, and the property would still be cash flowing $1,600/mo.

I actually have never done a cash out ReFi, as this is my first BRRRR deal. Can you guys see where I'm missing anything?

Also, thank you all for your insightful opinions.

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