All Forum Posts by: Matt Powell

@Jacqueline Segui A quick search of the forums shows a lot of information on this topic. Just search for your subject line. That said, and disclaimer: I haven't done a deal yet, my understanding is that there's no reason you shouldn't be able to. It would look something like this:

• Find a good deal, one that allows you to buy a property for a price that, after $X amount of rehab costs, will be worth more than the original purchase price plus $X. Using common terminology, one that has an ARV (after repair value) that is higher than original purchase price + rehab.
• Finance the deal. You have a few options, but your most likely path is unconventional financing like hard money, portfolio lender, or a private lender. Unless you have tons of cash, that is. These unconventional loans are typically shorter term than a conventional mortgage, with worse terms and rates.
• Do your rehab. Once complete, you should have some equity into the property.
• Wait a while, most likely. Most lenders require you to wait at least 6 months, sometimes a year, before they'll allow you to do a cash-out refinance. Check with your lender for their specific terms. You could rent it in the short-term to generate some cash-flow.
• After the minimum required time, go to your lender and tell them you're looking refinance. They'll send out an appraiser to determine its market value. The lender will generally give you 80% of the appraised value (sometimes 75%) in a cash-out refinance. You should be looking to refinance into a conventional 30-year fixed rate mortgage.
• Get the money from the bank
• Pay off your original lender
• Pocket the surplus, if there is any
• Start paying your new lender for the conventional mortgage

With simple numbers:

• House in need of rehab for $97,500
• Needs $50,000 rehab
• $2500 in closing costs
• Get a loan from a hard money lender for $150,000
• Rehab the house
• Ask for refinance. House appraises for $200,000
• Bank gives you 80% of $200,000 = $160,000
• You pay off your hard money lender the $150,000 you owe
• You pocket the leftover $10,000
• You're now on the hook for a 30-year mortgage of $160,000 with your new lender

Hope that helps. Again, I've never done it, but it's what I've learned.

@Larry Turowski You nailed it. I was caught up on how the bank would be able lend the 80% and not get the 20% for their own security on the refinance, but I get now that the house (collateral) is worth that other 20%, so that's their security. Thanks for breaking it down for me.

Crystal clear, actually. Thanks very much. Appreciate your commitment to giving good answers. 

So it sounds like liens need to be on the property to be factored into the official equity equation. Didn't know that. But I'm still wondering, does the bank care if you have enough equity in the property to cover the remaining 20% of the appraised value when you refinance, or do they not care at all and will just indiscriminately give you that 80%? Will they run the equity numbers before giving you the 80%?

Thanks Chris, but I think I worded my question poorly. What I really wanted to know was how we could calculate how much equity Brandon had in the property post-rehab, after the house was appraised for $141,000. Equity is appraised value minus current mortgage/liens, so I'm assuming that math works out as (141,000 - 70,000 = 71,000 in equity), unless we count his rehab debts as liens. Just trying to get my mind wrapped around how to know how much equity you have post-rehab...

Thanks all. I now understand that Brandon's current equity in the property serves as his "down payment" of 20% on the refinance. How does the bank determine how much equity Brandon has in the property already (and what are those numbers in this example)?

Also, I assume that if Brandon has more than 20% of the appraised value in equity, they'll still loan you the full 80%?

EDIT: Ok, scratch my questions, I think it just clicked. The bank doesn't care how much equity you have, I guess. They'll just loan you the 80%, and it's your responsibility to come up with the remaining 20% if you have to. But Brandon doesn't have to because he's already got that much in equity due to the rehab. Do I have that right now?

Thanks @Chris Reed. I think I'm starting to get it. So how much equity DID he have in the house after the rehab? I guess since his original loan was for $70k, he had $71,000 in equity (141,000 - 70,000)? How would you calculate that?

So does the bank basically say, "Well, looks like you already have X amount of equity in the house, so we'll take whatever percentage that is of $141,000, and loan you the rest."?

Thanks @Juan Vargas and @Garry C., but I'm confused. I obviously don't know how refinances work. I assumed Brandon would go to a new bank and say "Hey guys, look at this great house. What's it worth?" And the bank would go "Looks like $141,000! We'll give an 80% LTV, so cough up the 20%." How do they know how much equity Brandon has in it at that point, and how is that tangible to them?

Thanks for your patience. =)

Listening to @Brandon Turner's webinar on BRRRR, and his first example looks like this:

• Buy house for $70,000
• Rehab: $30,000
• Closing costs: $2,500
• Total cost: $102,500
• Appraised after rehab for $141,000
• Refinance: 80% ($112,800)

So, I think Brandon would still be in the hole after the refinance. Check my logic and figure out what I'm missing:

He's $102,500 in the hole after the rehab. Then he refinances, and has to put 20% down on the $141,000, which is another $28,200. So now he's $130,700 in the hole (102,500 + 28,200). The bank gives him a loan for $112,800, which isn't enough to cover his entire debt; it leaves him $17,900 in the hole (130,700 - 112,800)! Sure, he has 20% equity in the property, which is worth $28,200, but that's not tangible money. What if he borrowed everything and owes people money yesterday?

I don't see the benefit, and I must be missing something. Why not just buy a property already rehabbed at $141,000, put your 20% down, and not owe anybody $17,900? Somebody help a newbie out! Thanks.

Welcome DJ. Lots of information here. Your business partner is a carpenter. Do you have a GC you'll be working with on your flips?