Clarity on Cash-Out Refi

[Clara Levy]

Hi All,

I need some clarity on the last R in BRRRR, the Cash-Out Refi. Think of this like a math question please with a Yes or No answer.

If property is bought at $140K, 25% down meaning $35K. Rented out for $1500. Then 2 years go by. Still rented. And for XYZ/whatever reason the value/appraisal stays at 140K.

And Lender is willing to do a 80% LTV Cash out Refi. Will I really get 80% of $140K, meaning $112K? Even if my equity has barely increased from the initial %25 down? YES?

Or NO? Lender would only give me about 5% of the $140K, meaning $7k? (Because they have to leave 20% of equity in the deal).

Appreciate the clarification in advance.

[Andrew Postell]

@Clara Levy thanks for posting here. I read the above responses too and just thought I would add some clarification here just in case.

1. Don't forget that the last "R" is repeat.  We want you to continue to grow that portfolio and gain financial independence.  Only way to do it is to continue to REPEAT the process.

2. The math above is pretty close in concept but DO NOT FORGET THAT YOU HAVE CLOSING COSTS.  Anytime we buy/sell/refinance real estate we will have closing costs.  Ok, maybe not EVERY time...but in 99.9% of the time you will.  So if your home did not appreciate in value, it is likely that you would not have enough room to justify a cash out refinance.  It is true that you would pay your mortgage down over the 2 year period but usually this is not enough time to gain much room for equity building in just the mortgage being paid alone.   

3. Just to clarify on the math some:

Value = $140,000 x 80% =  $112,000

Then $112,000 - current loan balance (lets call it $100,000 to make the math easy) = $12,000

$12,000 - closing costs (let's call those $8k) = $4,000

So you would pay $8,000 in closing costs to get $4,000.  And you probably see where this is going...but that's how the math would work.

I hope that makes sense how I am describing it.  Feel free to post about anything else.  Certainly here to help.  Thanks!