Please Help! - What am I missing with Cash-out Refinance?

Question

Each time I try and run my numbers for a cash-out refinance, the numbers don't make sense.

If I'm required (by the bank) to leave 30% in the property...who is finding properties where they can make these numbers work?

I'm looking in Southeast Florida (Delray Beach/Fort Lauderdale/West Palm Beach) and Columbus/Dayton, OH

Many of my properties are coming from the sheriff sale/bank-owned auction and I STILL can't squeeze these tight enough...maybe someone can show me what I'm doing wrong?

Showing property of interest below: This is what I'm understanding...

Property price: $210,100

Rehab: $30k

ARV:$270k

To please a bank, they will ask me to leave 30% in the property when I try and cash out...that's going to mean if it appraises to the expected $270k, I need to leave $189k in (270 x .7) However, I've already purchased it for $210,100...is anyone seeing the difficulty here? even if I got the bank to say I could leave 25%, that's $202,500.

I have to be misunderstanding something in the BRRR process because people are making this work.

Please help!

Thank you!

Bryan Hartlen · Answer

@Grant Nash - if your goal is to refi 100% (leaving $0 invested in the property) you’re going to have to find off market sources.  In your example you’re paying 89% of ARV (Price + rehab) before counting any holding costs.  If your refi requires 30% down then your Price + REhab + Holding is going to have to be < 70% of ARV.That said a successful BRRR does not require that you recoup the full 100% of your investment IF you have the ability to leave some funds in the deal.  In your example above, leaving $21k investment in the property, would the rent rates for the market make it a good investment?

Nicholas L. · Answer

@Kevin S.

I am not sure if what you are describing addresses the OP's question.  I think you're assuming he's paying in all cash and holding, but what he's trying to do is buy, rehab, and then refinance.

And again, the only way this works is if you buy a distressed property way under market and force the ARV up.

I have done a few BRRRRs that worked and a few that didn't.

Kevin S. · Answer

@Grant Nash

I have no experience in flipping/rehabbing and will attempt to analyze strictly on numbers.

If you were to buy the 270K home as an investment you would have had to come up with a 25% DP = $67,500.  Assuming you are coming to the table with 240K (210K+30K) this would leave you with $172,500 for your next investment.

Doing it the rehab way, you have $189,000 instead of $172,500.  That's an extra $16,500 for next investment i.e buy a property with extra $66K price tag.  Repeat this four times with exact same numbers and you now buy the fifth property with an extra 264K price tag!

Don't forget with each property you have extra $13,500 in equity.  How so?  With usual 25% DP you have $67,500 equity.  Doing the rehab way you leave $81,000 (30% of 270K) in equity.  That's 54K on four properties.  Now multiply by whatever number of properties you have as your goal!

This is strictly by numbers.  Experienced BP members can correct me If I am wrong. I am here to learn myself.

Stephen Caceda · Answer

Nicholas is correct. Brrrr is difficult without getting the right “entry” on a property. Only thing I can add is that there are lenders that can go to 80% cash out to help get you closer to making the numbers work.

I can  offer 80% cash out on an investment property for example

Nicholas L. · Answer

@Grant Nash

I don't think you're missing anything, it's very tough to make a BRRRR work right now.  With that said, typically for something to work, you have to buy it off market.  MLS deals almost never work because they aren't distressed and can't be bought at a discount.

I'll give you a live example of one I just took a shot at here in PA.  I made an offer on something the other day that needed an 80-90K rehab, and was going to be worth 180-190K fixed up.  I offered 65, which was going to be tight, and got outbid.  This property was severely distressed - nothing like what you posted.  It needed a new kitchen, new bathroom, new floors, a new porch roof, and needed to be totally rewired.   It wasn't going to be a "perfect BRRRR" but I thought it was a good one.

For the person paying more than me - maybe they know something I don't.  Maybe they'll do the work themselves, or they have a way to get the ARV up that I don't know about.  I can't worry about that, I just have to move on to the next one.

But again, with BRRRR, you need something distressed.  Pristine properties and even light cosmetic rehabs don't work anymore.

Hope this helps - happy to talk BRRRR or anything else you want

Please Help! - What am I missing with Cash-out Refinance?

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