BRRRR refinance question

[CJ Witmer]

Ok, I've done a lot of reading here on BP and I have some sort of mental block because the refi part is just not sinking in to me. It seems like I'm just robbing Peter to pay Paul? Can someone explain this to me like I'm a second grader? If I buy a duplex for $60k ($12k down and $48k financed) and I put $20k into it and it appraises for $115k, that's obviously a good thing. My total investment is $80k. Using 70% LTV, I could theoretically get $80,500 back. So if I refinance, it seems to me, I'm up $500. I'm refinancing $80,500 to pay off my original $80k, which sounds dumb. Obviously folks are using it and it's working, it's just not sinking through my thick skull on how it works. Can someone help and explain it so I can comprehend?

[Freddy Evangelista]

Hi CJ,

Essentially this is a strategy that you use for rental properties. The idea behind it is to obtain a property and fix it up to obtain a higher rent. When you then refinance it, what you are doing is taking your money back out of it and now your tenants are paying your new mortgage plus ideally leaving you with some positive cash flow. After the refinance you now have your money back (the $12K) to go and put it towards another property. And now you also have extra equity on the property (ARV - Refinance amount).

I hope this cleared it up a bit for you.