Appraisal came in way higher than expected...what to do?

Question

Hi All,

I just got my appraisal back on my latest BRRRR and it came in wayyyy higher than expected....I know, good problem to have. Now I am faced with a decision, do I sacrifice cash flow and increase my risk exposure to take out the most tax-free refi proceeds or do I balance cash flow with refi proceeds to manage the risk? Looking to this great community to see how they would approach.

Here are some more details:

All in Purchase + Rehab + Holding = $64k

Appraised Value = $128k

Amount available for cash out = $96k

Monthly Rent = $1150

Monthly Cashflow after all expenses at $96k Cash Out = $48/Mo

I personally don't think the house would sell for $128k, I would think it would sell between $105 and $110k. The neighborhood is stable, but not in the path of progress. My goal is to build passive income, but since I am early in my journey and self-funding my deals I want to keep as much capital as possible. My thought was to take out 75% of what I think it would sell for in order to manage the risk. I do have property management in place, so could self manage if thing went awry to reduce my monthly expenses. Any insight into how others have approach this scenario (albeit a great one) are appreciated!!

JD Martin · Answer

I would take out the maximum they allow you to take out for the simple reason that refinancing cash out always costs money. The less closing costs you have to eat the more money stays in your pocket.

Let's say you did what you are talking about doing, which is leaving about $15k behind. Let's say you did this 4 times and were buying houses similar to what you are buying now. The 5th house, you would eat the closing costs of financing the house instead of paying cash for the house because you would have left a total of $75k behind. Closing costs might be worth $2-7k or more depending on where you are and what your loan terms are. That's a 12% loss.

Of course, if you think you're going to spend that extra money on "hookers and blow", as my friend @Jim K. would say, then you should probably leave it in the property.

Chris Levarek · Answer

@Mike Trzaska My first purchase was two duplexes for 209,000. After reno, these ended up at $480,000 appraised. Although this is great for pulling out equity, remember you are still capped. If you pull out too much, the deal can go negative in a BRRRR. So ensure you able to pay your mortgage at the higher level while putting aside reserves for capex, vacancy and repairs.

Here is the other kicker as well. With your new appraisal comes higher taxes. So be sure and put aside quite a bit extra for taxes. That first year will hit harder then you originally calculated.

So pull out as much as possible while being able to still be profitable, conservative and meet extra tax burden.

Mike Trzaska · Answer

Thanks all for the great feedback so far. I’m going to take the maximum I can while maintaining a projected pure cash flow of $100/mo. That gives me $100 a month cash flow and probably around $100 in equity pay down per month on something that already made me a healthy profit.

I think the point about taxes increasing is the one that convinced me to hold back a little in the tank.

I actually did think of flipping this when I bought it, and would likely do so if I thought I could get $128k. I really don’t think it would sell for that especially now that it’s tenant occupied.

Thanks again for the awesome responses!

Max T. · Answer

@Mike Trzaska

I apply the 1% rule to my cash outs as well. With 1150 rent should support up to 115k cash out at today’s rates.

Nicholas Weckstein · Answer

I think I would sell this deal. Take the quick flip profit and reinvest into another 2 properties. If you're only going to cash flow 48$ per month than you are basically negative cash flow at maximum leverage. If you aren't making at least a few hundred per month than I personally feel your equity would be better used to get another better cash flowing asset, or just continue to flip and grow your nest egg.

But GREAT job on the outcome of the deal so far! keep it going!!

Allen L. · Answer

The excess money that you take out from this property will be used as source funds for the next property. The rent from the next property will cover the excess money that you take out from this property. It's the way BRRRR stacks.

Forrest Williams · Answer

$48 /mo isn't much, but 94k can buy you another 1.5 houses in your market by the looks of things. If you get it as a line of credit, you could take what you need now and get out the rest later.

Joe S. · Answer

If you want to leave your equity tied up in your property That is a personal decision only you can me. If it was me I would take the equity and reinvest it.

Allen McGlashing · Answer

This is a question I also had going into my first BRRRR deal. I love reading the comments. I believe if you plan on using that capital again and again then I would absolutely take out as much as possible AS LONG AS the there is still positive PURE cash flow. That way you can buy another deal and so forth. Also take into consideration that taxes almost always go up and never come down. (Yes, you could combat the higher taxes by raising rents).

Michael Peters · Answer

I would pull out anything you can to invest in 1 or 2 more BRRRRs.  You'll start to scale really quickly if you keep this up.

Appraisal came in way higher than expected...what to do?

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