Could someone please help…

[Sandra Lopez]

Hello,

I flipped a property. I am unsure if a should cash out and refinance or sale it.

Can someone please explain how the cash out refinance works.

The ARV is 175k. Does that mean I refinance 80% of the ARV of the property and cash out the 20%. Meaning I put in my pocket the 20%?

I am a little confused of how this works.

Thank you in advance for any guidance and recommendations.

[Logan Singleton]

Hi Sandra, Congrats on your first flip! For this example, let's say you have completed renovations, your property is now worth $100k, and you took out a bridge loan to fund your original purchase and the rehab costs. You owe $65k to your existing lending.

If you refinance, depending on your FICO, you get up to 80% LTV of the new value, meaning a loan for $80k. However, you have to pay back your existing lender and cover closing costs, so you would be left with $15k after you pay back your lender. Let's say closing costs are $5k. So, when closing, your new lender would give you a check for $10k to do whatever you want and a new, longer-term loan.

[Sandra Lopez]

Thank you very much for your reply Logan.

I purchased the property cash (Heloc) for 165k. Renovation cost 30k.

ARV of the property is 250k

80% of 250k= 200k (will this be the mortgage in the property?

50k= the lender will give me a check for this amount?

Is this correct?

[Sandra Lopez]

Thank you for your help.

If  cash out refinance the property, how do I paid back the 165k I borrowed (Heloc)?

80%= 200K

20%= 50k cash back to me.

How do I paid back the $165k.

Thank you in advance for your help.

[Ash Hegde]

Quote from @Sandra Lopez:

Thank you for your help.

If  cash out refinance the property, how do I paid back the 165k I borrowed (Heloc)?

80%= 200K

20%= 50k cash back to me.

How do I paid back the $165k.

Thank you in advance for your help.

In this case, your new mortgage would be 200k and the check to you would be 200k (less closing costs). You could use that to pay off the 165k HELOC and keep the rest. The 20% (50k) would be your remaining equity in the property. There is no income tax on a refinance.

[John Clark]

Quote from @Sandra Lopez:

Thank you very much for your reply Logan.

I purchased the property cash (Heloc) for 165k. Renovation cost 30k.

ARV of the property is 250k

80% of 250k= 200k (will this be the mortgage in the property?

50k= the lender will give me a check for this amount?

Is this correct?

No. The lender will give you a check for $200k MINUS closing costs, so let's say $190k. You now have 2 debts: the HELOC and the mortgage on the flip. You also have $30k in unreimbursed expenses.


If you are smart, you pay off the HELOC and reimburse $25k in expenses. You now have $5k in unreimbursed expenses, and 2 houses; one with a $200k mortgage worth $250k (giving you $50k in equity), and; one with a paid off HELOC, value and mortgage unknown, but presumably with more than $165k in equity.

You should also treat the $5k unreimbursed renovation cost as a debt and pay it back (even to yourself) accordingly.

There is no tax due because not only did you not make any realized gain, but there was no sale.

[Noah P Bonds]

If you think this property will continue to appreciate and the rents will continue to grow, then I'd suggest the cash out refi. It's hard to not make money on your rehab efforts, but remember you get to keep a property that hopefully cash flows, has loan pay down, tax benefits and appreciation.

[Sandra Lopez]

Hello,

Thank you everyone for the input.

Please correct me if I am wrong 

I will use the 200k, 80% to pay back the Heloc loan (165k) plus 30k in repairs and renovations, a total of 195k, minus closing cost.

My question is where do the $50k , the 20% goes to? How do I get that money out?

Thank you very much.

[John Clark]

Quote from @Sandra Lopez:

Hello,

Thank you everyone for the input.

Please correct me if I am wrong 

I will use the 200k, 80% to pay back the Heloc loan (165k) plus 30k in repairs and renovations, a total of 195k, minus closing cost.

My question is where do the $50k , the 20% goes to? How do I get that money out?

Thank you very much.

You don’t. The lender lent the $200k on the assumption that you had enough money in the house to make sure that you don’t want to lose it and will therefore pay the lender back. Additionally, if he does have to foreclose, the costs of foreclosure (including his attorney’s fees, etc) will be covered as well. That’s why you get the interest rate you get. If you change the risk scenario, then he charges more interest. 

you get the money when you sell

[Ashish Acharya]

A cash-out refinance allows you to tap into the equity of your property. With an ARV of $175K, you could refinance up to 80%, which is $140K. After paying off any existing loans, whatever remains from that $140K is what you can “cash out” and put in your pocket.

For example:

• ARV: $175K
• 80% of ARV: $140K
• Existing loan: $100K
• Cash-out: $40K

You could pocket the entire $140K if there's no existing loan.

Decide between refinancing or selling based on whether you want to keep the property, use the equity for another investment, or take the profit and move on.

[Tarik Turner]

Some of the help offered here is accurate and some of the help offered is a bit off
For most cash out refinance loans on investment properties the Max leverage offered is 75% LTV (You may find 80% but that really isn't industry standard) Which at a 250k "As is" value your max loan amount would be $187,500.00
If you purchased the property for 165k and renovated it for 30k you are all in for 195k
Since I am assuming the property is owned free and clear the $187,500 (minus closing costs let's call it 5% of the loan amount) can be used to pay down your debt. The numbers here aren't the best if the plan is to use the BRRRR method but there is still enough equity in the property to sell it at a profit. (Also when considering if a cash out refinance is the right move for you, be sure to understand your costs and the DSCR of the property.

[Andrew Syrios]

If you've flipped the property then you wouldn't own it and can't do a cash out refinance. 

As for the example you gave, if you refinance a $175,000 at 80%, the loan would be $140,000. But first you would have to pay off any loans you have on that property. Once you've paid off the loans then subtract the loan fees. Whatever extra cash is available would be the cash out.

So, for example, if you have an $80,000 loan on the property and the loan fees add to $2000 then:

$175,000 * 0.8 = $140,000 loan

$140,000 new loan - $80,000 paid off loan - $2000 loan fees = $58,000 cash out