Cash Out Refinancing Clarification

[Benjamin Pflaumer]

Hello. I am hoping I can get some clarification and explanation on cash out refinancing. From what I have read and heard investors speak a lot about buying a property, doing some renovations and then doing a cash out refinancing. This concept this has me a little confused. It always helps when there are some numbers involved. 

Let’s say the property is $100K. Investor puts 20% down and gets a mortgage for the rest. Investor puts 30K of renovations into the property. This is where I start to get confused. I would assume now the property would be worth at minimum 130K. When doing renovations does an investor always have to have the cash on hand to do the renovations or are there loan options? Does the lender giving you the loan on mortgage also able to loan you the money for the renovation? Once the renovation is done, from my understanding, you go back to the lender and ask to refinance the property for the new appraised value and if there is a positive difference between what you own the lender and the new value the lender will give up to certain percentage of the cash?

Any help on helping me further understand this would be greatly appreciated. 

Thanks!

[David M.]

@Benjamin Pflaumer

Basically, the whole point of the reno is that you are raising the value of the property for more than it costs you. Basically, you have to buy the property undervalued.

So, in your example, the investor is in it for $130k. Let’s say the investor can flip it for $175k. So we take that as the market value... so with a 20% down loan, you can get a $140k loan... now you’ve gotten your cash investment out.. that’s the point of the brrr method

Brrr is just a flip that you don’t sell. You make money on flips because you are able to pick it up under valued so that after you fix it up, there is a profit.

Using the valuation method of purchase price plus reno costs is where you are going wrong. You need to figure the after renovation VALUE... ie the market value

Make some sense now? Good luck.