How To Triple Your Money With A Cash-Out Refinance

How To Triple Your Money Refinancing

Look for a property that has room for improvement. This could be a property that needs updating to increase the income or one that is just under market on its rents. You will find this with older, tired landlords or inexperienced ones. You need to purchase the property and increase the NOI by any method like the ones above to be able to refinance it and get paid.

For example, let’s say you bought a property for $700,000. It’s an 8-unit multifamily property. The price per unit is $87,500, and the rent per unit is $750.00. With 40% expenses, this puts the property at a gross income of $72,000 and a net income of $43,200. The property has a cap rate of 6.17%, which we found by dividing the net income by the purchase price of $700,000. You know the market rate for these apartments is actually $1,200 per month, so over the course of the next year, you re-lease the apartments at the appropriate market price. Now, you have a new gross income of $115,200, and with 40% expenses, a net income of $69,120. The market cap rate, which you purchased this property at, is 6.17%. With the new income of $69,120 divided by the cap rate, the new property value is $1,120,259.

Now, you put 25% down to buy this property, so you have $175,000 into the deal altogether. You go back to the lender and say you want to take out a new loan on the property because the value has increased and the income can support more debt. They come back with an appraisal showing that the property is now worth $1.1M, and they want 30% down for the new loan. Let’s break down the math. Now you have a new loan of $1,100,000 and pay off your old loan of $525,000. That leaves you with $575,000, but the lender needs 30% down on the new $1.1M loan to maintain a good debt service coverage ratio. The $330,000 down on the new loan leaves you with $245,000 remaining.

That is your net proceeds from the loan—a non-taxable event, debt is not taxed. When you pay the loan off, that money will be due, but there are many ways to avoid that. You can refinance again in the future, hold the asset indefinitely or 1031 exchange into another asset tax deferred. This is how you make a significant amount of money with a small multifamily deal in a short amount of time—$245,000 in one year, with minimal work, especially if you have a management company in place. Not bad for your first deal, is it? That’s a 140% return on your initial investment in one year, in cash – nontaxable event. Plus 30% equity of $330,000 an additional 188% on you investment. That is close to 3.28X or 328% on your money in one year. This is very realistic and can be done repeatedly.

It gets even better—what if you did this with an 80-unit property? Just add a zero: $2,450,000 in one year. This is the beauty of commercial real estate. If you increased the income by just $25 per month on a 200-unit property at a 5.5% cap rate, that would be a $1,090,909.09 increase in value, which can be duplicated every year. Rents have gone up by more than $25 per year, by the way. In 10 years, that’s a $10 million increase in value. Pretty sweet, right?

How is that possible? Because commercial assets are valued based on income, NOT neighborhood sale comps like a house. When you buy 1-4 units, this is considered residential real estate, and the value is solely based on comps. When you buy 5+ units, the value of the property is based on the income it produces. This is the beauty of commercial real estate and forced appreciation, as shown in the example above.

That might seem too good to be true, but it’s not. I did this with my first commercial multifamily apartment building, and you can do it too. You can put your money to work in one of our deals, let us do the heavy lifting with our infrastructure and experience, and share the profits with you.

This is how you make serious money in commercial multifamily real estate with the cash-out refinance method.