When does it make sense to refi and cash out?

Question

I just purchased my first 4plex a month ago and have been doing some upgrades in my unit and now, with a unit (thankfully) getting abandoned, an empty unit.

My current plan is to hold this property for the foreseeable future as it is profitable but was curious if I should look at cashflowing the rehab of all the units, refinance and pull the difference out.

It seems that the BRRR strategy doesn't allow much cashflow but the investor is betting on appreciation? Just curious on folks' opinion of when it makes sense and when it doesn't.

My current plan is to buy another 4plex in a year and move into that one to continue to take advantage of the low down payment. That being said, I have a large cash reserve already and don't need to pull anything out of this building to buy another one.

Thanks

Daniel Sager · Answer

@Andrew Postell

That makes total sense sir. Sounds like the BRRR is for folks that don't want or can't owner occupy; hadn't seen that in anything I had read so far. And yes, very low interest rate!

Regarding the appraisal, what I've been told by a couple of realtor folks is the appraisers don't want to risk messing up the deal by having too big of a swing in either direction and then risk not getting used again. Not sure how true it is but I've asked several people about it in this market and they've said the same thing. That being said, most of the 4plexes here for sale right now are listed too high to where it didn't make.

Thank you for the clarification!!!

Andrew Postell · Answer

@Daniel Sager Ah, so if you used an FHA to purchase the property you will likely NOT be able to BRRRR the property at all.  The BRRRR method is primarily designed for investors that need HUGE downpayments (25% down on a 4 unit for example) and buying a challenged property, then rehabbing it will help an investor to NOT put 25% down.  Since you already have a super low downpayment, with the lowest possible interest rate, you would have to increase your property value EXPONENTIALLY to show any benefit in refinancing.

I would also not agree that an appraiser would only appraise a property at a contract price.  Have certainly seen plenty of appraisals come in higher (and some lower) than the price on the contract.  If the appraiser did appraise the property right at contract price...it is likely that they next appraiser would come in around that value too.  Cash out loans can be different in each state but if your home has increased in value considerably then it's worth considering for sure.

I hope all of this makes sense.  Feel free to ask anything additional. Thanks!

Andrew Syrios · Answer

I actually wrote an article about just that: https://www.biggerpockets.com/blog/sense-refinance. I hope it helps. (Also, BRRRR investing is about built-in equity and principal paydown in addition to appreciation along with a little bit of cash flow as the cherry on top)

Daniel Sager · Answer

@Andrew Postell also I'd like to add that the reason I am considering this is my dream is to build a small home (not a tiny home!) with cash in a couple of years after I househack my way into a couple of 4plexes.

Daniel Sager · Answer

@Andrew Postell

I used an FHA loan with 3.5 down and I am currently occupying one of the units. I'm renovating two of them and the empty one I mentioned is in much need of updating; the other two are in pretty good shape but I could throw $2.5k in to each unit (windows included) to make them really nice.

The seller was motivated due to a divorce and based off of the other comp properties, it was listed about $40k low. The appraisal came back *exactly* what the contract amount was and I was told appraisers typically don't value a house higher than the contracted amount.

Currently it will be cashflowing a couple hundred per month when fully occupied and when I move out, it will cashflow about $1400-$1500.

Andrew Postell · Answer

@Daniel Sager this is certainly a tough question to answer.  The biggest question is likely what is your current Loan to Value?  It might help if we knew HOW you acquired the property (cash, hard money, etc).  You also mentioned you have been doing upgrades "in my unit"....does that mean you purchased this property as a primary residence?  If you could answer some of those questions that would helps us give proper guidance.  Thanks!

Daniel Sager · Answer

@David Ripplinger okay so $100 per door minimum the first month and you've essentially got zero money in the deal and the ability to roll the money into the next one. So it's a question of cashflow VS volume of doors.

Thanks for the response !

David Ripplinger · Answer

BRRRR deals should still cash flow at least some after the refi. This somewhat limits the pool of good deals to purchase in the first place, but I think there are enough out there that I won't settle for less. To be a good deal, I expect my all in cost to be less than 75% of the ARV because I really want to pull all my money back out so I can reuse it for more investments. I expect the cash flow to be at least $100 a door after mortgage and expenses, preferably higher. I'm not expecting properties to appreciate a lot. I consider appreciation icing on the cake. I do however want a property that will likely stay stable or increase gradually in market rent.

When does it make sense to refi and cash out?

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