Refinance- how do you make money off that?

[Peter K.]

I heard on BP Podcasts multiple times- especially from Co-host @Brandon Turner that he bought a house as soon as his daughter was born, he bought a multi-family property for a 15 year note so that when his daughter wants to goto college (or use that money to invest in real estate) that she can just re-finance and take that cash out to pay for it.

I heard something to the affect of: you can re-finance that and take the built equity and use that cash for college?

How does this concept work? How can you-refinance on a home that you already have most paid-off? Please provide examples as they are the best way for me to grasp concepts.

[Joe Villeneuve]

You need to stop thinking like a homeowner, and start thinking like an investor.]

First, yes, you are incurring debt...good debt.  The net result of each property is this...cash flow.  The rents you are charging is higher than all the expenses (inc. the mortgage payments), so in reality, your tenants are paying off your debt on each property.

Second, follow the bouncing cash.  You started with $10k on the first property, and after you got the $50k loan, fixed it up so it was now worth $100k & refinanced it at $70k, you are walking away with $20k in cash...your original $10 + $10k more.

Do it again, and again, and again.  Each time you repeat the steps, you are $10k ahead after you refi.

Now, here's the best part.  You haven't spent a dime, no matter how hard you try.  Every time you put in $10k...they give you back $20k...plus, you get the positive cash flow from each property that accumulates as you add each property to the mix.

You need to understand the difference between debt and leverage...which is the difference between thinking like a homeowner, and thinking like an investor.