Trying to understand the numbers

[Blake Ramsey]

So here’s an example Brrrr just to see if I understand how the numbers work.

House valued: $100k

DP: $20k

Loan: $80k

Rehab: $20k

ARV: $160

Refi: $160k * 75% = $120k

Cash out: $120k - $80k = $40k for next deal

So if I take that whole $40k for my next deal, would I then have 0% equity in the property? I read that some banks require some equity left in the property after a cash out refi, would I “buy” that equity using part of the $40k I pulled out.

[Nate Sanow]

I love this question so much. Because initially brrrr is hard to wrap your mind around. The trick in your question is to realize 2 things that seem to conflict are both actually true: 1. You have $0 in a deal and 2. You do have equity in the deal. 

Equity isn’t defined by the cash you put in the deal. If it were, then when a property goes up in value by $100k, we wouldn’t say that you have $100k in equity.  

Really doing brrrr will feel like getting a birthday present, and that ROI on $0 is the gift that keeps giving. Knowing that you have the 25% equity in the deal could be seen as a type of forced savings account. Can't access it until you sell, or, until you have enough above that percentage to refi again. But it's there. Really the only way it's not there is if values go down; something I'm not overly panicked about but wise to pay attention to.

I wish you well.