Cash-Out-Refinance | What It Is & How To Use It!

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all right bigger pockets people you

asked for it and we're doing it we're

talking cash out refinance day if you

know what it is you know you don't

buckle up let's hit an intro alright

ladies and gentlemen today we are

talking about the cash out refinance or

cash out refine your able to do with

this property means it's going up in

value enough that you can take some

equity and you can play with it now to

keep things simple we're gonna do an

example on Excel we're gonna do a

building that's worth a million dollars

it's increased to 1.5 million and we'll

kind of run through the scenarios what I

see on YouTube is I see a lot of videos

that go a little too much into the weeds

and then you start losing people then

other ones that are just kind of

explanatory notes on what a refinances

hopefully after this video number one

you'll know what a cash refinance is and

number two you'll know what to do with

that money when you do get it alright

let's get into it all right don't worry

about all of this mess here this is a

very simple example I'm gonna do and

it's actually very close to a deal I had

in the past now for the simplicity of it

we're gonna use big round numbers so

we're talking about a million dollar

property has an increase to 1.5 million

and we're gonna figure out what we can

do with that number one how do we

refinance that and number two when we

get that cash from the bank and this is

where I think a lot of videos fall short

what the heck do you do with that money

and how do you make it work for you so

let's get into it here so I thought it'd

be pretty um I think it's pretty simple

here so what we have we're gonna look at

this area first so 25 2015 is when you

purchase the property value of the

property was 1 million the mortgage is

$800,000 and that's one of the first

assumptions we're gonna make we're gonna

assume you put a 20% down payment okay

that's the equity piece here and we're

also going to assume that the bank

requires you after you refinance the

property to maintain that 20% equity or

in other words 80/20 loan to value LTV

it's going to differ by different

it's different banks you know could be

larger smaller let's just assume it's

20% so annual net operating code as you

can see I like to keep things simple a

hundred thousand is what we're going to

assume in net operating income this is

would be a ten percent cap rate and I

understand not listen if I wish our

markets were anywhere near this the

markets that we're currently in if your

markets lower or markets higher that's

fine just using an example here already

calculated the mortgage rate assumption

number three I guess is the fact that we

have an annual mortgage payment here of

4.5% I think I amber ties this over 25

years so that's the assumption number

three so number one twenty percent down

payment assumption number two we're

assuming $100,000 in Noi and number

three four point five percent mortgage

everybody's cool with that

let's keep rock and roll in here okay

now one hundred thousand minus this

fifty and change got this little number

here this is your cash flow before taxes

cap rate as we mentioned ten percent

okay so listen

twenty nineteen was great you're in New

York or LA or San Francisco or Toronto

and you've had a great run here your

property has gone up to 1.5 million your

mortgage stays the same right nothing

changes their equity this is where you

know you get a little bit of a changer

so you have the two hundred thousand

you're really put in however we've gone

to one point five million so now we are

at seven hundred in total equity good

for you the question how do you get it

and what do you do with it so net

operating income there's I'm gonna stop

listing them because I'm gonna mess them

up so this is another assumption we're

making so I think it's fair to say in a

market that has increased in property

value net operating in crease and I've

been fairly conservative with that I

said at net operating income over this

time period increased by 15 percent

that could be through either the passage

of time or forced appreciation where

you've you know say increase your rents

etc so we're at one hundred fifty

thousand and twenty nineteen mortgage

like I said stays the same so the

payments the same

however your cash flow before taxes is

up and one crucial thing to note here is

you have your seven point six seven

percent cap right now because the cap

rate in 2019 is calculated on the 2019

noi and the 2019 value so gone are your

days of 10% cap rates you're now at

seven point six seven so if somebody

bought this particular property and you

sold it that would be the cap rate

they're realizing now let's talk about

this so one point five million dollars

what can we pull out of this property so

let's scroll down here and this is you

know I'm going to run through this here

all you really need to see right now is

this guy here so the way you calculate

it again keeping an 8020 loan-to-value

is you multiply your value by 80% okay

then you subtract the current mortgage

okay the the current mortgage we have

here let's see is $800,000 so you need

to basically you're increasing your

mortgage when you're refinancing so you

have to look at this like the bank's

cutting you a check for the current

words which they're not nobody actually

cuts a check but this is the math here

what that equates to is available equity

of $400,000 so out of that 500 you've

increase you can pull 400 now you can

just tell that you're maintaining an LTV

by thinking about it but if we were to

clarify it further let's look at your

total debt now so this is your remaining

equity I is it 20% so this is your your

debt that you've pulled out of it right

the four hundred thousand eight hundred

thousand of what was originally the

mortgage so you now your total debt is a

1.2 million so stay with me here a value

of 1.5 million - your new debt load of

1.2 million leaves you with three

hundred thousand dollars and three

hundred thousand dollars divided by 1.5

is boom 20% so you're sitting pretty you

have done what the bank has asked you to

do now they ever really asked you to

just required it so I mean you would

have had to do that in anyways okay so

this is the fun part

so you're able to pull out this

available equity $400,000

and I put it here as a cache of so what

I did I think yeah 2019 so it's still

2019 you have this four hundred thousand

dollars and this is where I'm gonna make

another assumption typically when you

pull equity out of a property you're

pulling it out of the property and

you're usually using your sorry when you

pulled that out of the equity which is

increasing your work so it's technically

debt now so that four hundred thousand

when you pull that out a lot of times

when you go to buy a new property you're

usually gonna put your own cash into the

deal and they think that's what

complicates a lot of these YouTube

videos because when you're using your

own cash then it kind of starts messing

around with the mortgage payments so for

simplicity this is what we're gonna do

we're gonna take this $400,000 that we

that we increase they are debt load by

and we're gonna buy do flex and we're

gonna buy it with no cash so this is

gonna be totally leveraged so if you

look down at the mortgage payments here

I'm also making that assumption that the

mortgage payments are going to remain

the same as the mortgage payments on our

current place now that might not be the

case sometimes the mortgage payments

will be lower sometimes they'll be

higher here you could argue since cap

rates have gone down mortgage payments

may have gone down as well but we're

gonna leave that aside and just assume

that the mortgage remained the same at a

4.5% so I've already calculated the

mortgage so let's go back here $400,000

we've got 30 thousand dollars in net

operating income and I want you to

understand how I how I achieve this this

was the prevailing market cap rate we

can assume in 2019 so keeping that

assumption we're gonna say in 2019 here

that the yield the cap rate is also

going to be seven point six seven

percent so I know why is thirty thousand

six hundred and eighty now subtracting

the mortgage payments which we already

talked about you are left with five

thousand four hundred thirty two dollars

of cash flow before taxes now I know

you're thinking that's probably what

you're thinking it's not that great we

looked at a property even though is half

the half the value so if we look over

here we were getting 49,000

now granted this is 400,000 but even if

you chop this 49,000 in half it's much

more than what we're getting here but

this is really where you have to

understand what you're doing when you're

refinancing and you have to look at it

as the totality of the property you have

and the property you're purchasing so

let's pop down to the after refinance

section here and this is where it starts

making sense what have you done you've

got a property that's worth 1.5 million

you were able to take out four hundred

thousand dollars and buy another

property now your total debt load now is


sorry 1.2 million dollars however if you

go down here we need to add the annual

net operating income we need to add the

2019 the current property and the 2019

new property the duplex so suddenly

we're at one hundred and forty five

thousand dollars in change for net

operating income okay starting to look

better and here's part of the reason

that it starts making even more sense

the annual mortgage payment this one now

is adding this one plus this so the

duplex plus the current the current

property so now you're at a mortgage

annual mortgage payment of seventy five

thousand so it's almost a weighted

average and now here's the number that

you know makes this really shine if you

look at the nine point seven one percent

that is the cap rate on your new deal

your new noi with your new value so you

basically in a market of seven point six

seven percent you've averaged out by

doing an average of your current

property plus this duplex you have of

nine point seven one percent and that's

the beauty of the cash out refinance so

listen if you're in a situation where

you think that taking equity out of your

property but you are still being prudent

you can still make payments or

above-water you're not doing it the deal

just to do the deal you in an after

refine its position have a even better

yield then the cash or refinance is a

fantastic tool for any investors all

right I hope that is clear as mud and

I'm just joking I hope it I hope that

helped you know if there's anything

specifically here that I didn't go into

enough detail where you just have

questions in general comment below and

maybe in another video I can clarify if

there's any points that you'd like me to

go over so smash the like button

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next week take care