Cash out Refinancing Strategy

[Brian Nordman]

I have read in a lot of posts and heard in a lot of podcasts that many investor's strategy is to do a cash out refi to come up with capital to perform their next deal. One thing I have thought about though is when is doing a cash out refi not a good idea? For example, with interest rates going up and really no expectation to come down at some point the rates could get high enough to where refinancing would increase your monthly expenses enough to where a good chunk of your cash flow has disappeared each month. When rates were decreasing and even stagnant this strategy makes perfect sense. But where do you draw the line when the rates are actually increasing and you will be creating a larger payment for yourself?

[Steve K.]

As mortgage rates on rentals increase, it does squeeze a BRRRR investors' margins. Yes, it's expensive to suffer closing costs on the acquisition loan, and then refi 6 or 9 months later....but it's not a perpetual deal. Each new rental could be held for 30 years with that cash out refi.

The point of BRRRR is to acquire more properties quickly, with minimum (ideally zero) down on each property after the cash out refi. If I could have acquired with a 25% Down and 4.5% APR loan, vs. the BRRRR and suffer a 5.25% APR loan 9 months later (with rehab profit), I can have a property with no cash in, the 5.25% loan and it still cashflows. Now repeat that 10 or 30 or 100 times and you grow wealth quickly and retire early.

If I offered to give you my home, with no money down, knowing it has a 5.25% mortgage and cashflows $200 or $300 per month....would you be happy to take it on? (or would you regret that you don't have a 4.5% loan? and pass on the deal). That's what each BRRRR feels like....no money down at about month #9).

Read further. There are BP posters who retire at age 32 after doing BRRRR like this for 7 years.