"cash out refinance"...I need help understanding this

[Mario Cruz]

I was watching a video where the investor bought a home with equity built in held the property for a year then did a cash refinance and made money for his next investment. Does this sound right? ultimately I'm trying to understand cash out refinance and how it works in investments. 

Thanks in advance everyone.

[Mindy Jensen]

@Mario Cruz

A typical mortgage will require 20% down, or you have to pay PMI or private mortgage insurance.

A refinance will almost always require 20% equity in the home, meaning the lender will only give you up to 80% of the value of the home when you refinance. For simple math, let's say the house in question is worth $100,000. 80% of that is $80,000. If you purchase the house for $50,000, and you refinance, you may be able to pull out $30,000. Essentially, the bank will give you a mortgage for $80,000 on the property you paid $50,000 for. 

Maybe it was outdated and you upgraded it, forcing the appreciation. Maybe it was a foreclosure.

Brandon Turner wrote a post about BRRRR investing, which is basically this method. You Buy, Rehab, Rent, Refinance, Repeat. You allow the property to season for a year, building a 1-year rental history, then refinance to pull your original investment out so you can do it all over again. Read Brandon's original post here.