Simulation: a fictional property for practice.

A BRRRR when rates rise before you refinance

Your plan assumed a 7% refinance. Six months later the best rate is 8%. Does the rental still work?

A fictional continuation of the BRRRR rental. Rates and costs are examples.

• All in: $229,000
• Appraisal: $300,000
• Refinance offered: 75% cash-out, $225,000, now at 8% for 30 years
• NOI and reserves: NOI $20,429 a year; reserves $1,760

Mission 1: The new numbers

• Debt service on $225,000 at 8%: $19,812 a year
• Cash flow after reserves: About −$95 a month
• DSCR: NOI ÷ debt service: About 1.03

One percentage point turned a thin positive cash flow into a loss.

Mission 2: What can you do?

Pick the sensible options.

• Take a smaller loan and leave more cash in, so the rent covers the payment
• Keep the house without refinancing until you find better terms, if your cash allows
• Take the full loan and cover the shortfall from your paycheck indefinitely

Before buying, run the refinance at a rate one or two points higher than today’s.

Would you refinance with the full 8% loan? Buy means take it, Investigate means compare lenders and loan sizes first, Pass means hold off on refinancing.

Buy, investigate or pass? Work through the drill to see what an experienced investor would weigh.