Refinancing Rental Property

[Jae Kim]

Hi BP fam!

I'm pretty new to real estate and I'm hoping someone can help me understand the refinancing part of BRRRR. Let's say that I buy a $700,000 house with 20% down. I rehab the property for $80,000 and rent it out.

A year later, I have $530,000 left on my mortgage and I want to refinance the house by getting a new mortgage from a new bank. Appraisal for the house comes back at $850,000. So.....

Bank lends me 75% of the appraised amount ($850,000*75% = $637,500)

$530,000 of the $637,000 has to go towards repaying my previous loan so I am now left with $107,500

Is that correct or am I way off? Thanks!

[Soh Tanaka]

Ideally, you want to get all the money you put in (down payment + rehab) back when you do the refinancing, but sometimes it doesn’t work that way, and honestly it doesn't have to.

You put $140k down and paid $80k to fix it, so all in you paid $220k for this house. You are going to get $107.5k back, so that leaves you with $112.5k. Now you have an $850k property with $112.5k of your money in it or 13% "down." You also got $212.5k in equity. You just made $100k ($212.5 equity - $112.5k cash or $150k appreciation - $80k rehab + $30k mortgage paydown) in a year.

I hope the property is cash flowing good also!