Cash Out Refi Economics Question

[Kyle R.]

Hi BP

I know BP is real big on the cash our refinance method and the BRRR method.

I have a question when trying to fight out the actual net positive of it, maybe will these numbers it doesn’t make sense hence.

Example: I have a 200k property that I had put 20% down (40k investment) that is netting me 10k in cash flow per year

Say the property values in the area have increased so the property is now worth 270k. If I cash out refi at 75% LTV I would receive back around 45k-50k.

But now since my mortgage costs went up, I might only net 5k in cash flow per year from the original property.

With the cash out money I can go and buy property #2 but since the area’s property values have gone up (hence the original refi), I might only net in cash flow around 5k from the second property also.

In this case, Property 1 (with a higher mortgage) + Property 2 = cash flow if I never refinanced Property 1. It seems like In this example there is no net-net benefit?

Does anyone have an example of this strategy working? Does it depend all on the buy?

[Tim Delaney]

You may be correct in that the cash flow is the same, but you are failing to take into account the wealth building you are accomplishing through the debt pay down. You now own two properties worth $275K instead of one that are both potentially appreciating. Even if they don't, when you have paid down your mortgages you have $550K in equity instead of $275K.