Refinance/Cash out .... How much?

Question

Hi All,

One thing I need clarification on in the BRRRR method is the refinancing part more specifically how much cash I should pull out of the property.  Property will have a ARV of about $250k and rent for about $2k.  If I get cash out of the house to cover the rehab cost, $60k, then this would cash flow nicely.  But if I get the full available cash out of the house, say 75% LTV then this increase my mortgage payment which reduces my cash flow on the house.

So here is my question but it is difficult to ask.   If you reference the chart it shows a co-planar relationship between cash out loan and the payment and profit.  Is there like a sweat spot or financial balance to which the cash out loan amount?  In the BRRRR process what do most people do?  75% LTV or just enough to get and rehab another house?

On the current property I have used about 1/2 cash and 1/2 credit card for rehab.  Do people use 100% credit on rehab and use the cash flow from other property and use minimum credit card payments to the end of the project?  If so then I can see not getting out the whole LTV cash out.

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Michael Scott · Answer

With regard to the question how much should you take out... depends on your investing goals. You need to know what your goals are and stick to them. Are you confident in appreciation and willing to sacrifice current cash flow? Do you just want to get the money out that you have into it to maximize cash flow? Are you just concerned with appreciation and building wealth, not concerned with cash flow? Get concrete with your objectives and you'll know the answer.

I would also not recommend financing with credit cards. There is way too much risk. Not saying that it can't be done but you're playing with fire, especially if you aren't able to refinance for what you need. If you don't have the money for the purchase and rehab, focus on getting private money or hard money lenders. Best of luck!

Andrew Postell · Answer

@John Daniels yeah, you might get several different opinions about this scenario because this is largely going to be where you are in life.  Meaning, can you afford to leave money in the property?  Because I can't.  I have to get my money back out....so I can buy another property.  Now, I don't need the cashflow as much because I have a W2 job.  My W2 job is what I live on and pay bills with.  But if you are a full time investor you might need that cash flow because that is what you live on.  So the difference of opinions might come into play here just with the differences of where people are in life.

One thing to note, just about every property is not going to cash flow right now.  The prices are high.  Interest rates are high.  This means I'm buying at a premium and my monthly payment will be high.  Don't forget that real estate is a long term strategy.  Don't just think of it for 1 year.  Next year, you will increase your rent.  Same with the year after.  And so on.  In 5 years you will be very glad you have this property.  I would say to consider taking the money out since the rate is lower than your credit cards and the interest is tax deductible.  Even if the payment comparison between having no credit card payments to increasing your mortgage payment is neutral, the long term benefits of having tax deductible, fixed rate debt are there.  Credit card interest isn't tax deductible.  Just some other things to think about.

Thanks!

Steven Goldman · Answer

@John Daniels Let's start with the most important  thing first. Do not use your credit cards to finance a  rehab. It temporarily ruins your credit such that you have trouble for several months after you pay off the cards restoring a good credit score. Second, rehab lenders are cheaper than credit card interest rates for the most part.

As to how much equity should you withdraw from a property. If you are working from a large investment fund you can afford to leave more money behind in each deal if that is what you want. I am unsure why you would do anything other than a maximum cash out refinance unless the property will not support a 75 or 80 percent LTV. Of course, if it will not support a 75 percent cash out LTV than it probably is a dog. Good luck!

David M. · Answer

@John Daniels

it all depends on your personal investing strategy and goals as well as your financial position.

Some would need to pull out as much equity as possible for financial reasons.  Some would still do it for investing purposes, such as to maximize leverage.

What does your "portfolio" of properties look like, financially?  Can you cashflow a little less, or negative, on this property but overall it will be covered by the cashflow of another?

Is cashflow your intent of your investing strategy?  For wealth growth cashflow isn't that important at all.

Your post sounds like you are refi'ing for a $60k loan.  Is that correct?  A "full" brrr method would have you pulling out your acquisition cost and the rehab cost.

No, normally I wouldn't be using a credit card to finance my investing.  Way too risky.