How does Refinancing Work?

[Kyle Lam]

Hi All,

I had a question about the BRRRR strategy, specifically the refinancing part. If I were to buy a property with cash and pay for it all upfront, the next steps would be to the renovate and then rent it out. When I would get to the refinancing part, how does this work in my favor in terms of getting money out of this investment and moving onto another one? I know that if I were to use a loan, I could renegotiate the terms in the refinancing part; however, if I am buying with cash how does the refinancing benefit me and how can I pull money out from this investment so it is not tied up and that I can keep investing?

[Erik Estrada]

It honestly will depend on the ARV. If you are all in $200k into a property and it is worth $350,000 after repairs, then you should be able to receive all of your initial cost on a refinance using the new appraised value.

Most DSCR lenders will go up to 75% LTV on the new appraised value with 90 days title seasoning. So in my example you should be able to get your $200k and an additional $50kish after accounting for all closing costs on the refinance. Assuming the new value after renovations appraises at $350k of course.

The benefit to buying cash and refinancing later is that you can close on a property quickly, which works in your favor in competitive markets. You also pay less in closing costs overall since you aren't paying lender fees on the purchase loan.  

When you finance the purchase of the property you have to go through the whole underwriting process which can take 21-30 days. Additionally the lender might require 6 months of payments to be made on the loan before you can refinance again. There are lenders that do not have this requirement of course, but they are mainly hard money lenders or local portfolio style banks.