@@juanalmos1959 I just want to give a friendly reminder to be aware of where you put your money, putting that money straight back into another deal would most likely make you more money than those CC/Car payments would cost you. Just depends what you’re looking for 🤝
Amen. I am a math fanatic and this made absolutely no sense. Some people just have the gift of teaching... Others clearly don't. Now, let's jump to another video and hopefully they'll do the trick.
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Some things to keep in mind when trying to understand this: 1. Property value = Net Operating Income (NOI) divided by cap rate 2. Property value = equity (your own money) + debt 3. cash flow before taxes = NOI - Mortgage payment What his deal was: take out 400k (possible due to the incrase in property value) and used all of it (and 0 dollars of his own money) to buy a property worth 400k Result: increase cap rate (NOI as a percentage of property value) to 9.71% (vs previous 7.67%) My problem with this presentation is that he didn't include the 400k property's value in the "after refinance" column yet included its NOI and mortgage payment
Totally agree. The average weighted "cap rate" of both properties would be 145K/1.9M = 7.67% ( which is exactly the same as the individual properties). you guys will enjoy my channel for finance and economics insights
@@twincherry4958 How is it 1.9M? That 400K property value is actually part of the $1.2M Mortgage loan. Cash out refi works like this, if you left that house as it was in 2019 (no refi, nothing) then you are getting cap rate of 7.67% because your property value increased and your NOI did not increase with same rate. So to leverage your cap rate with the increased property value, use that value to cash out refi and take that increase (in this 400K) and invest to get more income. This will help cap rate to not fall to 7.67%. Basically you are using bank money based on the new value of your home to get more income. Actually this is cool concept because here property value increased due to time. You can increase property value with renovation (and little time) and cash out refi for extra income
@@saitharunthodupunuri 🙃 I just got a Heloc and used some of it as down payment...cash flow covers mortgage, insurance, etc., Heloc payment and there's still cashflow.
@Hassan Ali. I thought it was just me! If you have a foot in the game, this video might be helpful. But If you are novice with no experience this makes no sense it actually is CONFUSING.
You should seek out a video or some other form of instruction that explains what a cash out refi is. As far as cap rates and the other technical jargon, you don't need to know all that to become a successful real estate investor.
You guys being so mean lmao, Hassan's just a slow learner. I got it my first time watching this video, but just practice and try to understand it and i think you;ll get it soon enough
I would never borrow 400k to make 5k. Maybe a better use of this refi would have been to use it as a 20% deposit on a 2 million dollar property. 25k cash flow before taxes. 👍👍🔥
@Amit Golan He is assuming that the interest rate is going to stay the same and he is breaking it down into 2 different loans for simplicity sake. Instead of mathing out whatever minuscule amount of the principle that would have been paid off in 5 years he is just leaving it at the initial 800k amount. So the first set where 2019 mortgage payment stays the same is the original 800k loan that you would be replacing with the refinance than the 2nd column is showing the "equity" of 400k that you are pulling out which would cost 25k per year in loan costs. so the total payment for the refinance loan amount would be about 75k. Not sure why he broke it down that way but that's what he is doing.
Mortgage should be much lower, Interest Rates don't stay exactly the same, there are unaccounted remodeling and closing costs, and the cap rate calculation is wrong at 9.71% (should be 7.67%)
Thanks Jesse. I previously understood the concept, but never quite knew how a cash-out refi worked. Your video did a great job of explaining. I will watch it a few more times in the morning to really solidify the information. To those who are hating on this video and claiming that it's extremely confusing - please take the time to learn the basics of real estate investing before trying to understand this video. It is an explanation of cash-out refinancing. If you don't know what NOI is or how a mortgage works, please stop hating and begin by learning the basics. You need to learn to purchase a property before you can learn to refinance it.
I think it would be easier to take a 400K home equity loan, buy a quadplex or two duplexes at 20% down payment. You’ll get more appreciation, better NOI and cash on cash returns. Glad a lot of people were confused with the math. That means there’s still plenty of room to do great in real estate given most people aren’t able to comprehend the math, even with their degrees.
LOL, I am a 19yo bachelors about to be 20yo MBA grad, still found this tough to comprehend, but what i understood is you basically get 80% of the appreciation out as cash to reinvest. You said instead of buying in full why not get another mortgage at 20% down with the 400k
Some issues with this example: 1. He didn't account for closing costs on a cash-out refinance. 2. The interest rates on cash-out refinance are never the same. If you did it today you would be looking at 7%, which would increase your Annual Mortgage Payment. 3. Also Cap Rate is not the end all be all that you should aim for. Ultimately is your cashflow higher is the important question, which from what I can see when I did the math was not found to be true.
I would hope that between 2015 and 2019 you paid down some f the mortgage principal , thus further increasing the equity you’ve built in the first property. I appreciate the deep dive into the numbers, which unfortunately is scaring people. The simple way to think about it is you’re refinancing to access, leverage and use the equity you’ve built. Otherwise, it just sits there unused until you decide to sell the property.
Right! he missed out big time on that, with someone else paying the mortgage it means hes paying down the debt which increases his equity as you said but he kind of covered one side and left the other stranded.
Kevin you have no idea what your talking about. 80% ltv is standard and the market will never collapse 60%. I’m assuming you’ve never invested in real estate before
@Kevin Schmidt if his primary did collapse in value he would just stay in his primary and it doesn't effect him at all as long as his cash flow remains......are you just trying to say that prices are at another high and implying a crash..?
@Kevin Schmidt if that's the case then everyone is screwed anyway and it doesn't matter....should we all do nothing because a crash is always inevitable?
@Kevin Schmidt im not saying i haven't.... do you do nothing because you always assume a crash is coming....you're watching real estate videos and telling people not to buy...
Honestly can't understand how people couldn't follow; he explained it very clearly with a well-put-together spreadsheet. I like how he actually showed how you can increase your cap rate while at the same time describing the basics of the refinance.
Well, for starters: -He glazed over terms that his target audience (aspiring first time home owners) is most likely unfamiliar with. -He didn't simplify the concept as whole, but instead focused on the math of refinancing
Only reason I understood this is because I know about it but to be fair he left important factors out of the picture that only make real estate investing a lot more enticing.
after many months studying and doing numbers I finally got it... Once you get the whole context of the process and learn the numbers, its much easier. it sounds tricky, but let’s say that the only formula you need to know is just this one: (ARV or New value of the home X your existance LTV) - your current mortage amount = Cash out available Now you have some tax free cash of your equity that can be use in whatever you want, but obviously the main idea is to buy more real estate with it.
Quick question. When you fo this. If you were to foreclose on the 2nd property would you also loose the original property? Or are they two completely separate entities?
Great video! I just don't understand why the mortgage amount didn't decrease in 2019. I would assume that 4 years of mortgage payments would have decreased the balance on the mortgage by at least $200k.
That's not how a 25yr mortgage works. Even if you're terrible at math, you should quickly see that you're not paying off a quarter of the mortgage in less than a quarter of the time. But if you know anything about mortgages, you're not getting anywhere near 200k in just 4 years. Use an amortization calculator, and you'd see that you'd only have paid about 75k on the principal.
I had a lunch meeting with my banker Friday. The whole point of it was to ask him if I could do a cash out refinance on my second rental and I got so interested in talking to him about his rentals that I forgot to ask. Go figure.
Hi, after the refinance, why isn't the total property value $1.9M considering both properties for calculating CAP? On the NOI, you sum both incomes so I'd think both property values need to be counted in the CAP, ie $1.5M + 400K. Thanks!
Thanks & I like how you demonstrated both the affects the refi has on each asset individually and combined. Really allows you to understand the power of leveraging that equity !
I don't understand most of the comments. Most other videos just say "then I take out all the money by refinancing and use it for the next home." This video was very helpful in understanding the numbers.
I have two questions. 1. How did you calculate annual noi, annual mortgage payment and cash flow before taxes or was it just a random number you came up with? 2. Looking at these cap percentages, and the equity when you refinance can you explain more on why it is beneficial for the equity and the cap percentages to be higher, what does it mean, and where is my profit in all of this to invest in another property? Thank you for taking the time to explain and hope to hear from you soon ! Happy holidays to you !
As a regular potential first-time buyer just curious about what cash out refi was, the mention of NOI completely confused me. Then there’s the cap rate… I find this _very interesting_ (and would love to learn more later) but it’s a level or two beyond where I’m at right this second. I think your video hit well with folks who were more entry level (and not investors, for example) who ended up confused.
I just refi cash out 100% this month December 2021. If I was watching this guy's explanation before I refi my home, I would be so confuse as heck! I just did a simple math, my new Appraisal value of my home, minus all my debts and closing costs, equal cash out amount in my pocket. The payment per month is what we anticipating and the new rate is in 3.59%. Part of that cash is to build a fence around the front of our property and to invest in a new venture. Simple things people complicate it so much. God Bless.
For all the confused people, the simplest explanation is this. You got 100k equity in a paid off house. You can take out a loan on that equity (a cash out refi / heloc, etc). That money allows you to buy another 100k property. Some people might say thats stupid and why would you just shift equity around. It's not stupid if you find an undervalued home you can flip or hold for a while. Then you are making money without sacrificing a solid investment in the paid off house.
Also figure out the DSCR after refi. Dont become over leveraged. Also, note that your new mortgage will be higher than previous and thus higher DC payments and lower NOI and COC.
In short, a HELOC is generally used as a short-term solution for quick acquisition of the property, and a cash-out refi is used to then move the acquired property into a much more stable strategy for the long haul. For example, I use a HELOC as my liquid capital so that it's available whenever I find a good deal. That way, I can snag it easily by making a cash offer. Then, once I've purchased the property, I do a cash-out refi after the fact, which accomplishes two things: (1) it moves the debt into a long-term, fixed-rate solution so that I can set it and forget it, and (2) it pays off what I originally drew out of my HELOC, which frees my liquid capital back up to look for the next deal. Then, I just rinse and repeat ad infinitum. 😉
how long do you keep it mortgage free (on average) before you refinance and put debt on the property? my understanding is banks normally wont normally allow refinancing until 3-6 months of ownership has passed? have you experienced this.............. ?
@@RAG718 Generally speaking, you're right. A standard cash-out refinance requires the property to season for a minimum of six months before you can apply. However, under the category of cash-out refinance, there's a subcategory called a "delayed-financing exception." This exception is fairly new as it was only created in 2011, so you may have to shop around a bit to find a lender that (A) knows what it is and (B) knows how to process it. Anyway, the exception allows you to do a cash-out refinance immediately after closing on the property. The trade-off is that it comes with stricter (although not insurmountable) guidelines. But, it can be done. In fact, I just simultaneously wrapped two of them up at the beginning of last month, which freed up my capital to buy another one and start the process all over again.
If you're taking on a new mortgage for the duplex you're buying then your overall debt load increases... doesn't stay 1.2M correct? If you took that 400k and bought the duplex cash then your debt load would stay 1.2M but you would have created extra NOI and cash flow... am I correct here?
I think the “new” cap rate calculation is wrong. Shouldn’t the “value” after refinance include the value of the new property? That would mean a value of $1.9M and a cap rate of 7.67% - which is exactly what I would expect, since that’s the rate he used to calculate the NOI on the new property. The value of using a cash out refi is not in increasing your cap rate. The cap rate is, by design, agnostic to financing. The value of a cash out refi is leverage-it puts that equity to work with the bank’s money. It allows you to buy new properties without putting in your own cash. So where it shows up is in your return on equity. Before the cash out, the ROE (ignoring mortgage pay down and appreciation) was about 7.1% ($50k cash flow / $700k equity). After the cash out, ROE was 10.8% ($75.7k cash flow / $700k equity). What happened was you took $400k in equity and used it to buy an income-generating asset. Your net equity didn’t change, but your cash flow did. So your ROE went up. But again, this has nothing to do with your cap rate, because your cap rate measures rent / property value, and a cash out doesn’t affect the relationship between rent and property value.
What are the typical fees associated with doing a cash-out refinance? Are there a bunch of closing costs, property valuations, inspections, etc. that are required?
I appreciated the effort but I couldn’t follow the logic, the house increase in value but the moriste stay the same, then 9,7 vs 10 is better? Thanks for the effort but I am more confuse.
Ok the reason the mortgage was the same is because the 500k increase in the value rolled over into the previous equity. Meaning you have 700k in equity which also means you only need an 800k mortgage to buy the now 1500000 property.
So many negative comments. If you don't get this video, you have a long way to go in understanding refi and you should probably reach out to someone to try understanding it verbally/face to face where you can ask questions along the way.
Charles, you are correct. These numbers are not correct because the refinance would raise the mortgage to $1.2mil and the cash flow would go way down to close to nothing. After refinancing the smartest decision would be to buy another commercial property with the $400k as a 20% down payment. Purchase a $2mil property that cash flows twice as much as the first.
As I mentioned in the video, sometimes it goes up, sometimes down depending on the market. I used the same rate to not make it more complex than it needed to be.
@Ryan short. Ok I'm keepibg up.. So say he does that and the commercial property is making good $$.. Commercial payments are usually 7 years.. After than you refinance to a longer loan or ??
I thought this video was supposed to “simplify” things. I finished watching with more questions than what I had started with. Not a video for novices. I looked up terms and acronyms that I was not familiar with though and learned some new things, I just wish they had been defined in the video rather than having to go look them up myself elsewhere.
To clarify: if I buy a home with my own cash for $40k, and I take out a hard money loan for $50k to rehab, will a bank refinance the home after the rehab is complete ? The ARV should be around $200k...
Man I really need to learn this, I have 130k in stocks, I’m 22 years old, and NEVER dipped my hands in realm of real estate, I live in a 10k RV and own 30k worth of vehicles, what am I doing with my life.
I had to watch it a second time to understand but now I get it. Granted that the assumptions are correct, it could be beneficial. However, real life situations may vary based on the leverage and equity conditions. Thanks for the video
I think the cap rate after refinance is calculated incorrectly at 9.71%. You compared the NOI of the two properties to the value of just the 1st. You would need to divide the combined NOI by the combined value ($1.9MM), so the cap is still 7.67%. Debt can’t have an impact on cap rates.
You can't make 2min videos on RUclips anymore. They get buried by the algorithm. Every creator needs to be making 7min+ videos even if its all fluff just to make the cut these days. For what it's worth Jesse I thought this was worthwhile and you're right, most refi videos gloss over these details and they need better explaining.
Honestly this video is very good. I don´t understand all these bad comments! It makes sense and I´am not even an english born kid. I copied it into my excel sheet. Very good video! Thanks!
Can you get a cash out refinance if the property is financed? Say you put 20% down, did rehab (which made it went up in value) then rented it. Or, it could be done, I'd just have to wait 6 months?
I like how you threw shade first at other videos, setting the bar that your video was going to outdo theirs. Then went on to makena complicated video 😂 well done sir.
Let’s say you have $300k left on your mortgage at 3.625% with a monthly payment of $2k (our only debt). The home is worth $1.1 million. You have $300k cash. Pay off mortgage, or use it for a down payment on another home near the school your kids would attend and rent out the old home at $4,200 a month? Keep in mind new home would be around $2.5 million (SF Bay Area) - any suggestions? Goal is to get to $10mil in assets...
Thank you for taking the time. HOWEVER, YOU ARE VERY BAD AT EXPLAINING THINGS BECAUSE YOU DEVIATE TOO MUCH. Really, thank you for taking the time. Who cares !! You have big pockets. ✌️ This video is AWESOME because it gets a lot of comments (negative ones!) YOU WIN, GUY.
My dumb question of the day is that I put 20 percent down on my personal residence, in order to avoid PMI. If I cash out refi to get money for a down payment on an investment property, will the bank require me to maintain that same 20 percent equity and if so, will they insist that there be a PMI payment included in the new mortgage?
I like the idea of purchasing property using cash-out refinancing or HELOC instead of letting the equity sit there. However I believe the math in this video is wrong. After the purchase, if the NOI of the two properties combine, the total value need to combine as well, bringing the total value to 1.9 million. The CAP rate at the end cannot be calculated based on 1.5.
dude ok so why would the equity be 700k if it was 200k 4 years ago, that means property value went up 500k yes but weren't you paying off the mortgage during those 4 years so equity should be more than 700k because of the principal pay down right? I'm confused
makes no sense to me. If u took out 400k from 1st prop and bought a 400k duples w that why still mortgage pyments on that second duplex if u bought it outright w cash from 1st refi ?
Exactly and why does the value of the second property not show up on the far right of the table. He basically said refinance to buy a property then both the value and money you use to refinance somehow magically vanish? Wtf. Need to redo the video to include the value of the second property in the final table and also remove the mortgage for the second property since there shouldn't be one. This would change the final cap rate significantly
What is confusing is your 2019 mortgage value. Isn't it more accurate to represent this as the 2019 mortgage balance or payoff amount - which in the intervening years (2015-2019) you would have been building equity (not just from the property price appreciation) so that 800K value should be smaller no?
why did the "after refinance property value not include the value of the duplex? If you added the mortgage payment, you should have added the property value to the 1.5 mil building????
When the $400,000 dollars are taken out of the new mortgage (after refinancing) is that cashback or is it being taken out of the equity of the new value of the house? I'm confused about whether that amount is gained from the valuation of the house or is it borrowed from the equity?. Maybe a few words can untangle my doubt. Also, how do you calculate the Annual Mortgage Payment?
The property price increased from 1mil in 2015 to 1.5mil in 2019. Your initial investment was 200k but now that the valuation of the property went up, that increased your equity to 700k. (200k deposit + 500k appreciation) Since you request a refinance for your appreciated 1.5mil property the bank will still need to hold a 20% deposit on that new price. So the 20% of the new property price is 1.5mil x 20% = 300k in equity-deposit which leaves us the remainder 400k to re-invest in the duplex. The property appreciation, increased the amount of equity from which you can borrow from. Correct me if I’m wrong, I’m still new at this game so I’m might missing something.
This makes sense. i have a property appraised at 8.6 million dollars in 2000. Today it's worth 34.5 million. 20 Years later i'm still paying a mortgage however i'm not paying nearly as much. Thanks to this video i'm in the process of selling and walking away with some serious cash...well not compared to Trump folks...but anyways. Thanks bro!🙂
Question: a) Is that the only way you can get a refinance? What if the value of the property didn’t increase or decrease at all this 4 years? b) Why the equity is still 200k after 4 years? Doesn’t the mortgage repayment year by year counts as equity? Wouldn’t it in 2019 be $401,984 ? [( Annual Mortgage ($50,496 * 4 Years) + 200k initial investment] Plus 500k appreciation. Shouldn’t the equity be something like $901,984 in 2019? Am I getting this totally wrong?
he did exactly what he said he wasn't gonna do. confused the F out of everyone by procrastinating and not having a flow to present his info
ok I'm glad I wasn't the only one who was completely lost lol
Y, I thing biggerpockets is a fluff
@@juanalmos1959 I just want to give a friendly reminder to be aware of where you put your money, putting that money straight back into another deal would most likely make you more money than those CC/Car payments would cost you. Just depends what you’re looking for 🤝
This video was absolute dogshit
Exactly
Glad I looked at the comments. I thought I was the only one struggling to make since of this
Thank you for finding the most difficult way to explain this
😂👍
Amen. I am a math fanatic and this made absolutely no sense. Some people just have the gift of teaching... Others clearly don't. Now, let's jump to another video and hopefully they'll do the trick.
@@melvinp.h.3069 I mean, SHIT!!!!
Yep, ended this video within 30 seconds.
Lost me about 2 minutes into the video 😂
I fell asleep 4xs trying to follow this. I'm in physical pain and just passed out. BP please redo on a smaller scale like a $100,000 home. THX.
Just take a zero off his numbers 🤷♂️
I now have more questions than before.
Me to, wtf🤷🏽♂️
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@@anthonymason3501 this doesn't seem like a scam at all!
@@thereconracoon3715 just contact him, and you will be glad you did.
That’s a good thing find the answers to those questions and you’ll be one step closer to your goals
Some things to keep in mind when trying to understand this:
1. Property value = Net Operating Income (NOI) divided by cap rate
2. Property value = equity (your own money) + debt
3. cash flow before taxes = NOI - Mortgage payment
What his deal was:
take out 400k (possible due to the incrase in property value) and used all of it (and 0 dollars of his own money) to buy a property worth 400k
Result: increase cap rate (NOI as a percentage of property value) to 9.71% (vs previous 7.67%)
My problem with this presentation is that he didn't include the 400k property's value in the "after refinance" column yet included its NOI and mortgage payment
You forgot the cap rate formula 😋
Totally agree. The average weighted "cap rate" of both properties would be 145K/1.9M = 7.67% ( which is exactly the same as the individual properties).
you guys will enjoy my channel for finance and economics insights
So if my home went up in value for example to almost 400k and if I want to buy my parents a new home how can I go about this please help ty ❤️
@@twincherry4958
How is it 1.9M? That 400K property value is actually part of the $1.2M Mortgage loan.
Cash out refi works like this, if you left that house as it was in 2019 (no refi, nothing) then you are getting cap rate of 7.67% because your property value increased and your NOI did not increase with same rate.
So to leverage your cap rate with the increased property value, use that value to cash out refi and take that increase (in this 400K) and invest to get more income. This will help cap rate to not fall to 7.67%. Basically you are using bank money based on the new value of your home to get more income.
Actually this is cool concept because here property value increased due to time. You can increase property value with renovation (and little time) and cash out refi for extra income
@@saitharunthodupunuri 🙃
I just got a Heloc and used some of it as down payment...cash flow covers mortgage, insurance, etc., Heloc payment and there's still cashflow.
0:40 “I see other videos of people on youtube getting into the weeds” proceeds to talk through an 11 minute video of him getting into the weeds 😑
@Hassan Ali. I thought it was just me! If you have a foot in the game, this video might be helpful. But If you are novice with no experience this makes no sense it actually is CONFUSING.
I agree his numbers sound crazy y not start at 200000 some folks are newbies hon.
@@alib5074 you can divide everything by ten if it makes more sense for your market/experience. Just wanted to use large whole #s here.
What is the cash flow after the refi? You left that blank?
This video is more confusing than my life
Hassan Ali then you are an idiot bc this is basic 101 stuff
You should seek out a video or some other form of instruction that explains what a cash out refi is. As far as cap rates and the other technical jargon, you don't need to know all that to become a successful real estate investor.
dont buy apartment buildings then
Ya just keep working at the bowling ally
You guys being so mean lmao, Hassan's just a slow learner. I got it my first time watching this video, but just practice and try to understand it and i think you;ll get it soon enough
I would never borrow 400k to make 5k. Maybe a better use of this refi would have been to use it as a 20% deposit on a 2 million dollar property. 25k cash flow before taxes. 👍👍🔥
@Korra Norg isn’t there an interest payment on the borrowed money(equity) when you take it out though?
Please write a script when you’re explaining something this complex. Reduces bouncing around and helps you cut to the point.
I don't understand what people are so confused about. I think you did a good job explaining
Basic rules of cash-out refinancing: do not do it if interest rates didn’t drop by at least a full percentage point!
Thank you very much!
Curious how the mortgage stays the same in 2019 after annual payments of ~50k
Pretty sure because he was trying to keep it simple
@@spldrong but by doing that it makes it look waaay better than it actually is.
@Amit Golan He is assuming that the interest rate is going to stay the same and he is breaking it down into 2 different loans for simplicity sake. Instead of mathing out whatever minuscule amount of the principle that would have been paid off in 5 years he is just leaving it at the initial 800k amount. So the first set where 2019 mortgage payment stays the same is the original 800k loan that you would be replacing with the refinance than the 2nd column is showing the "equity" of 400k that you are pulling out which would cost 25k per year in loan costs. so the total payment for the refinance loan amount would be about 75k. Not sure why he broke it down that way but that's what he is doing.
Mortgage should be much lower, Interest Rates don't stay exactly the same, there are unaccounted remodeling and closing costs, and the cap rate calculation is wrong at 9.71% (should be 7.67%)
Correct me if I’m wrong but I think he was using the same mortgage amount to show that the leverage ratio stays the same (20%-80%)
Thanks Jesse. I previously understood the concept, but never quite knew how a cash-out refi worked. Your video did a great job of explaining. I will watch it a few more times in the morning to really solidify the information.
To those who are hating on this video and claiming that it's extremely confusing - please take the time to learn the basics of real estate investing before trying to understand this video. It is an explanation of cash-out refinancing. If you don't know what NOI is or how a mortgage works, please stop hating and begin by learning the basics. You need to learn to purchase a property before you can learn to refinance it.
Do you have any suggestions on where or how to learn about this subject?
@@alannickerson7143 biggerpockets.com and the biggerpockets real estate investing podcast are phenomenal. Check em out!
@@SoundifyYourself LOL sounds like an alt account
I think it would be easier to take a 400K home equity loan, buy a quadplex or two duplexes at 20% down payment. You’ll get more appreciation, better NOI and cash on cash returns.
Glad a lot of people were confused with the math. That means there’s still plenty of room to do great in real estate given most people aren’t able to comprehend the math, even with their degrees.
LOL, I am a 19yo bachelors about to be 20yo MBA grad, still found this tough to comprehend, but what i understood is you basically get 80% of the appreciation out as cash to reinvest. You said instead of buying in full why not get another mortgage at 20% down with the 400k
Confusing af.
It's wrong, that's why.
Thanks for the video but I'm not 100% sure it made it into my mind. Can someone explain it simplier ? Or redirect me to a post?
Some issues with this example: 1. He didn't account for closing costs on a cash-out refinance. 2. The interest rates on cash-out refinance are never the same. If you did it today you would be looking at 7%, which would increase your Annual Mortgage Payment. 3. Also Cap Rate is not the end all be all that you should aim for. Ultimately is your cashflow higher is the important question, which from what I can see when I did the math was not found to be true.
I'm glad not everyone understands this concept, otherwise we'd all be rich :) Having said that, I'm happy to help anyone with a question.
Can you cash out refinance when a house is paid off?
I would hope that between 2015 and 2019 you paid down some f the mortgage principal , thus further increasing the equity you’ve built in the first property. I appreciate the deep dive into the numbers, which unfortunately is scaring people. The simple way to think about it is you’re refinancing to access, leverage and use the equity you’ve built. Otherwise, it just sits there unused until you decide to sell the property.
Right! he missed out big time on that, with someone else paying the mortgage it means hes paying down the debt which increases his equity as you said but he kind of covered one side and left the other stranded.
What camera are you using? The visual quality of this video is amazing!
I'm doing 80% ltv on my primary residence to start investing in real estate. Pulling out 56k in equity.
That's how I started, actually that was the second move. Good fortune to you!
Kevin you have no idea what your talking about. 80% ltv is standard and the market will never collapse 60%. I’m assuming you’ve never invested in real estate before
@Kevin Schmidt if his primary did collapse in value he would just stay in his primary and it doesn't effect him at all as long as his cash flow remains......are you just trying to say that prices are at another high and implying a crash..?
@Kevin Schmidt if that's the case then everyone is screwed anyway and it doesn't matter....should we all do nothing because a crash is always inevitable?
@Kevin Schmidt im not saying i haven't.... do you do nothing because you always assume a crash is coming....you're watching real estate videos and telling people not to buy...
Honestly can't understand how people couldn't follow; he explained it very clearly with a well-put-together spreadsheet. I like how he actually showed how you can increase your cap rate while at the same time describing the basics of the refinance.
Well, for starters:
-He glazed over terms that his target audience (aspiring first time home owners) is most likely unfamiliar with.
-He didn't simplify the concept as whole, but instead focused on the math of refinancing
Only reason I understood this is because I know about it but to be fair he left important factors out of the picture that only make real estate investing a lot more enticing.
he could have explaned it easier without adding the second property
Thanks Jesse! This is so far the best video I have watched on the matter. The Excell was of significant help.
after many months studying and doing numbers I finally got it... Once you get the whole context of the process and learn the numbers, its much easier. it sounds tricky, but let’s say that the only formula you need to know is just this one:
(ARV or New value of the home X your existance LTV) - your current mortage amount = Cash out available
Now you have some tax free cash of your equity that can be use in whatever you want, but obviously the main idea is to buy more real estate with it.
I don’t know why ppl are saying this is confusing, but i found it to be the opposite. Thanks jesse.
Yup. Was easy to follow for me too:)
Right above the 20% @6:33 the 300,000 is actually written as 3,000,000. Where 3000,000/1,500,000 equation is
Quick question. When you fo this. If you were to foreclose on the 2nd property would you also loose the original property? Or are they two completely separate entities?
Great video! I just don't understand why the mortgage amount didn't decrease in 2019. I would assume that 4 years of mortgage payments would have decreased the balance on the mortgage by at least $200k.
Same
Yep, He missed this.
Exactly
That's not how a 25yr mortgage works. Even if you're terrible at math, you should quickly see that you're not paying off a quarter of the mortgage in less than a quarter of the time.
But if you know anything about mortgages, you're not getting anywhere near 200k in just 4 years. Use an amortization calculator, and you'd see that you'd only have paid about 75k on the principal.
I had a lunch meeting with my banker Friday. The whole point of it was to ask him if I could do a cash out refinance on my second rental and I got so interested in talking to him about his rentals that I forgot to ask. Go figure.
I understand how home equity works. I got to admit the way you explained it was a little confusing...
Hi, after the refinance, why isn't the total property value $1.9M considering both properties for calculating CAP? On the NOI, you sum both incomes so I'd think both property values need to be counted in the CAP, ie $1.5M + 400K. Thanks!
Thanks & I like how you demonstrated both the affects the refi has on each asset individually and combined. Really allows you to understand the power of leveraging that equity !
I don't understand most of the comments. Most other videos just say "then I take out all the money by refinancing and use it for the next home." This video was very helpful in understanding the numbers.
I have two questions.
1. How did you calculate annual noi, annual mortgage payment and cash flow before taxes or was it just a random number you came up with?
2. Looking at these cap percentages, and the equity when you refinance can you explain more on why it is beneficial for the equity and the cap percentages to be higher, what does it mean, and where is my profit in all of this to invest in another property?
Thank you for taking the time to explain and hope to hear from you soon ! Happy holidays to you !
I appreciate the less hectic, chill tone of this vid.
As a regular potential first-time buyer just curious about what cash out refi was, the mention of NOI completely confused me. Then there’s the cap rate… I find this _very interesting_ (and would love to learn more later) but it’s a level or two beyond where I’m at right this second. I think your video hit well with folks who were more entry level (and not investors, for example) who ended up confused.
I just refi cash out 100% this month December 2021. If I was watching this guy's explanation before I refi my home, I would be so confuse as heck! I just did a simple math, my new Appraisal value of my home, minus all my debts and closing costs, equal cash out amount in my pocket. The payment per month is what we anticipating and the new rate is in 3.59%. Part of that cash is to build a fence around the front of our property and to invest in a new venture. Simple things people complicate it so much. God Bless.
Is there a video alone explaining what is equity and basics of real estate, mortgage, fixed rate and all that. I dont care if it's a stupid question.
Pregnant Nuns you’ll probably have to look them up one by one but yea, there has to be!
I don't understand what this comment section is saying....awesome video, helped a lot
This presentations seems like it's just a quick refresher for people who already learned what a Cash-Out Refinance is and how to use it.
For all the confused people, the simplest explanation is this. You got 100k equity in a paid off house. You can take out a loan on that equity (a cash out refi / heloc, etc). That money allows you to buy another 100k property. Some people might say thats stupid and why would you just shift equity around. It's not stupid if you find an undervalued home you can flip or hold for a while. Then you are making money without sacrificing a solid investment in the paid off house.
Actually pretty clear. One question I want to bring up was how much was the purchase price of the Duplex?
400000
Should always leave extra money for unexpected contingencies and costs and not spend it all
wait so if he used his own 400000k to get the duplex. why does he have to pay mortgage. is that the mortgage for the 400000 he borrowed?
Also figure out the DSCR after refi. Dont become over leveraged. Also, note that your new mortgage will be higher than previous and thus higher DC payments and lower NOI and COC.
Jeremiah DSCR?
carlos eliz Debt service coverage ratio, how much the property’s income can cover the debt.
Great video but would the mortgage in 2019 be lower considering the person had been making payments for four years?
Kerry Triplett no, because its an interest only loan
1:33 to start off...
I would love to hear as to when you should do a cash out refi, versus a HELOC. Thx for the video!
In short, a HELOC is generally used as a short-term solution for quick acquisition of the property, and a cash-out refi is used to then move the acquired property into a much more stable strategy for the long haul.
For example, I use a HELOC as my liquid capital so that it's available whenever I find a good deal. That way, I can snag it easily by making a cash offer. Then, once I've purchased the property, I do a cash-out refi after the fact, which accomplishes two things: (1) it moves the debt into a long-term, fixed-rate solution so that I can set it and forget it, and (2) it pays off what I originally drew out of my HELOC, which frees my liquid capital back up to look for the next deal.
Then, I just rinse and repeat ad infinitum. 😉
Scott Kay's, I appreciate the reply. Short and concise explanation!! Appreciate it 👍
My pleasure! 👍
how long do you keep it mortgage free (on average) before you refinance and put debt on the property? my understanding is banks normally wont normally allow refinancing until 3-6 months of ownership has passed? have you experienced this.............. ?
@@RAG718 Generally speaking, you're right. A standard cash-out refinance requires the property to season for a minimum of six months before you can apply. However, under the category of cash-out refinance, there's a subcategory called a "delayed-financing exception." This exception is fairly new as it was only created in 2011, so you may have to shop around a bit to find a lender that (A) knows what it is and (B) knows how to process it.
Anyway, the exception allows you to do a cash-out refinance immediately after closing on the property. The trade-off is that it comes with stricter (although not insurmountable) guidelines. But, it can be done. In fact, I just simultaneously wrapped two of them up at the beginning of last month, which freed up my capital to buy another one and start the process all over again.
If you're taking on a new mortgage for the duplex you're buying then your overall debt load increases... doesn't stay 1.2M correct? If you took that 400k and bought the duplex cash then your debt load would stay 1.2M but you would have created extra NOI and cash flow... am I correct here?
I think the “new” cap rate calculation is wrong. Shouldn’t the “value” after refinance include the value of the new property? That would mean a value of $1.9M and a cap rate of 7.67% - which is exactly what I would expect, since that’s the rate he used to calculate the NOI on the new property.
The value of using a cash out refi is not in increasing your cap rate. The cap rate is, by design, agnostic to financing.
The value of a cash out refi is leverage-it puts that equity to work with the bank’s money. It allows you to buy new properties without putting in your own cash. So where it shows up is in your return on equity.
Before the cash out, the ROE (ignoring mortgage pay down and appreciation) was about 7.1% ($50k cash flow / $700k equity). After the cash out, ROE was 10.8% ($75.7k cash flow / $700k equity). What happened was you took $400k in equity and used it to buy an income-generating asset. Your net equity didn’t change, but your cash flow did. So your ROE went up.
But again, this has nothing to do with your cap rate, because your cap rate measures rent / property value, and a cash out doesn’t affect the relationship between rent and property value.
What are the typical fees associated with doing a cash-out refinance? Are there a bunch of closing costs, property valuations, inspections, etc. that are required?
How does debt to income ratio effect all of this? If your example is commercial property, does DTI even play a role?
Thanks so much for explaining
I appreciated the effort but I couldn’t follow the logic, the house increase in value but the moriste stay the same, then 9,7 vs 10 is better? Thanks for the effort but I am more confuse.
Ok the reason the mortgage was the same is because the 500k increase in the value rolled over into the previous equity. Meaning you have 700k in equity which also means you only need an 800k mortgage to buy the now 1500000 property.
So many negative comments. If you don't get this video, you have a long way to go in understanding refi and you should probably reach out to someone to try understanding it verbally/face to face where you can ask questions along the way.
If you do cash out refi at a higher amount, does the bank still look at your dti to see if you can service the debt?
Wouldn't the mortgage on the 1st property go up after the refinance. Shows same mortgage.. Would it be a 2nd loan?
Possibly not if he went back up to 30 yrs on the finanancing.
No one ever talks about the cost involved in refinancing. What is are typical numbers?
Charles, you are correct. These numbers are not correct because the refinance would raise the mortgage to $1.2mil and the cash flow would go way down to close to nothing. After refinancing the smartest decision would be to buy another commercial property with the $400k as a 20% down payment. Purchase a $2mil property that cash flows twice as much as the first.
As I mentioned in the video, sometimes it goes up, sometimes down depending on the market. I used the same rate to not make it more complex than it needed to be.
@Ryan short. Ok I'm keepibg up.. So say he does that and the commercial property is making good $$.. Commercial payments are usually 7 years.. After than you refinance to a longer loan or ??
Best video ever!! I am dropping out of college and doing real estate.
I thought this video was supposed to “simplify” things. I finished watching with more questions than what I had started with. Not a video for novices. I looked up terms and acronyms that I was not familiar with though and learned some new things, I just wish they had been defined in the video rather than having to go look them up myself elsewhere.
it all make sense but it makes me wonder if cap rate is a good way to look at your finance now
To clarify: if I buy a home with my own cash for $40k, and I take out a hard money loan for $50k to rehab, will a bank refinance the home after the rehab is complete ? The ARV should be around $200k...
Very well explained. Thanks. I appreciate that you didn't talk way too fast like a lot of other guys on YT. Easy to understand if you pay attention!
Man I really need to learn this, I have 130k in stocks, I’m 22 years old, and NEVER dipped my hands in realm of real estate, I live in a 10k RV and own 30k worth of vehicles, what am I doing with my life.
Would you include the the cash out refinance apart of the cash on cash initial investment if you used the cash to remodel home?
I had to watch it a second time to understand but now I get it. Granted that the assumptions are correct, it could be beneficial. However, real life situations may vary based on the leverage and equity conditions. Thanks for the video
I think the cap rate after refinance is calculated incorrectly at 9.71%. You compared the NOI of the two properties to the value of just the 1st. You would need to divide the combined NOI by the combined value ($1.9MM), so the cap is still 7.67%. Debt can’t have an impact on cap rates.
Not for beginners but after a few other vids going back to this vid showed the principle in concrete details
Great info, thanks for the help. Starting a cash-out soon.
This video was too painful to get through. Critical feedback: just get to the point. This topic could've been easily explained in 1-2 minutes.
sorry for the pain Justin. I wanted to present an example...not just explain what a refi was.
You can't make 2min videos on RUclips anymore. They get buried by the algorithm. Every creator needs to be making 7min+ videos even if its all fluff just to make the cut these days. For what it's worth Jesse I thought this was worthwhile and you're right, most refi videos gloss over these details and they need better explaining.
I Disagree, great job
Honestly this video is very good. I don´t understand all these bad comments! It makes sense and I´am not even an english born kid. I copied it into my excel sheet. Very good video! Thanks!
Can you get a cash out refinance if the property is financed? Say you put 20% down, did rehab (which made it went up in value) then rented it. Or, it could be done, I'd just have to wait 6 months?
Great video man. I’m shocked to read comments that people are confused. I thought you explained it great!
For people not versed in the jargon like me it’s super confusing. If you’re versed in real estate I imagine it’s not.
but if you refinance the mortage the montly payment goes up right ?
Not necessarily. It depends on how long you finance it
Hey Jesse, regarding the NOI. How come you added morgage payment as part of it? OR was it just a coincidence in the numbers?
I like how you threw shade first at other videos, setting the bar that your video was going to outdo theirs.
Then went on to makena complicated video 😂 well done sir.
Let’s say you have $300k left on your mortgage at 3.625% with a monthly payment of $2k (our only debt). The home is worth $1.1 million. You have $300k cash. Pay off mortgage, or use it for a down payment on another home near the school your kids would attend and rent out the old home at $4,200 a month? Keep in mind new home would be around $2.5 million (SF Bay Area) - any suggestions? Goal is to get to $10mil in assets...
Was it just me or did anyone else notice in the beginning the “remaining equity” he had $3,000,000/$1,500,000??????? Instead of 300,000/1,500,000
Thank you for taking the time. HOWEVER, YOU ARE VERY BAD AT EXPLAINING THINGS BECAUSE YOU DEVIATE TOO MUCH. Really, thank you for taking the time. Who cares !! You have big pockets. ✌️ This video is AWESOME because it gets a lot of comments (negative ones!) YOU WIN, GUY.
after you cash out refi.. should you pay the original debt or buy a new property?
On your formula.when your multiplying home value and the 80% How did you get 80% when solving to get the available equity?
Its good to have more questions. This should happens . Just study and dig deeper and you'll understand everything.
What’s a cap rate?
My dumb question of the day is that I put 20 percent down on my personal residence, in order to avoid PMI. If I cash out refi to get money for a down payment on an investment property, will the bank require me to maintain that same 20 percent equity and if so, will they insist that there be a PMI payment included in the new mortgage?
Great question, did you ever figure with out ? Wondering the same.
@@htx.v3 Never tried it. Just got a HELOC instead
What if you’re doing a home cash buyout to buy out the other owner of the same property? Is that wise?
What does the assessor look at in or around the home to give a value?
I like the idea of purchasing property using cash-out refinancing or HELOC instead of letting the equity sit there. However I believe the math in this video is wrong. After the purchase, if the NOI of the two properties combine, the total value need to combine as well, bringing the total value to 1.9 million. The CAP rate at the end cannot be calculated based on 1.5.
Hongqiu Zhao would agree with your explanation buts let’s wait for the reply
Don’t Focus On cap rate focus on COC !!!!!
Did you have to create a second mortgage on the second home?
dude ok so why would the equity be 700k if it was 200k 4 years ago, that means property value went up 500k yes but weren't you paying off the mortgage during those 4 years so equity should be more than 700k because of the principal pay down right? I'm confused
I’m lost immediately bc I don’t even know what a cap rate is 😭
Did u miss out the part where u need to pay interest for 400k?? The sheet only shows mortgage cost??
makes no sense to me. If u took out 400k from 1st prop and bought a 400k duples w that why still mortgage pyments on that second duplex if u bought it outright w cash from 1st refi ?
Exactly and why does the value of the second property not show up on the far right of the table. He basically said refinance to buy a property then both the value and money you use to refinance somehow magically vanish? Wtf. Need to redo the video to include the value of the second property in the final table and also remove the mortgage for the second property since there shouldn't be one. This would change the final cap rate significantly
Elizabeth Lopez because the money you used for the duplex is basically a second mortgage on the first property
Vid left me more confused than when i started watching
i couldn't even finish the video. You make that way more complicated then it needed to be.
What is confusing is your 2019 mortgage value. Isn't it more accurate to represent this as the 2019 mortgage balance or payoff amount - which in the intervening years (2015-2019) you would have been building equity (not just from the property price appreciation) so that 800K value should be smaller no?
why did the "after refinance property value not include the value of the duplex? If you added the mortgage payment, you should have added the property value to the 1.5 mil building????
When the $400,000 dollars are taken out of the new mortgage (after refinancing) is that cashback or is it being taken out of the equity of the new value of the house? I'm confused about whether that amount is gained from the valuation of the house or is it borrowed from the equity?. Maybe a few words can untangle my doubt. Also, how do you calculate the Annual Mortgage Payment?
The property price increased from 1mil in 2015 to 1.5mil in 2019.
Your initial investment was 200k but now that the valuation of the property went up, that increased your equity to 700k. (200k deposit + 500k appreciation)
Since you request a refinance for your appreciated 1.5mil property the bank will still need to hold a 20% deposit on that new price.
So the 20% of the new property price is 1.5mil x 20% = 300k in equity-deposit which leaves us the remainder 400k to re-invest in the duplex.
The property appreciation, increased the amount of equity from which you can borrow from.
Correct me if I’m wrong, I’m still new at this game so I’m might missing something.
This makes sense. i have a property appraised at 8.6 million dollars in 2000. Today it's worth 34.5 million. 20 Years later i'm still paying a mortgage however i'm not paying nearly as much. Thanks to this video i'm in the process of selling and walking away with some serious cash...well not compared to Trump folks...but anyways. Thanks bro!🙂
I need to refinance because I need to legalize my ADU, how should I approach this? Or, convert it back into a garage
Question:
a) Is that the only way you can get a refinance? What if the value of the property didn’t increase or decrease at all this 4 years?
b) Why the equity is still 200k after 4 years? Doesn’t the mortgage repayment year by year counts as equity? Wouldn’t it in 2019 be $401,984 ?
[( Annual Mortgage ($50,496 * 4 Years) + 200k initial investment]
Plus 500k appreciation. Shouldn’t the equity be something like $901,984 in 2019?
Am I getting this totally wrong?