Buying a second property w/ 1st property equity.

[Mark Fitzpatrick]

I bought my first property in Myrtle Beach about 4 years ago. I paid 70k and now owe about 50k on the mortgage. I put 14k as a down payment then. It is a 2bd 2bth condo. I recently moved to Charleston, SC for a new and better job(On-Site Manager). I rented that unit for 900 a month. My HOA dues are $275 and my mortgage is $275 HO6 is $50. So total expense is $600 and income is $900. I just rented it this month so I haven't even received the check yet from my cousin how is managing it. So I only have minimal money saved up for the new property.

Now to by my next property I will need to use the equity in that property for the down payment. Now I figured I would refinance the property. I am not sure how that all works. Would I do another Mortgage for 70k on the property? Should I take all the equity out that I can or just what i need for a down payment? Zillow says the property is worth 80k now. 

I need some advice on what I should do? The Condo properties in Mount Pleasant where I work run for about 180k to 230k. I am hoping to do an FHA loan on the new property to keep the down payment down since I don't have much money saved. First property is a conventional loan. Or should I just take all the equity out of the first property and put it into the new property?

I am trying to learn so appreciate feedback a lot. Thanks

[Chris Martin]

Sorry for the length. Got carried away.

From your OP, $14K down on a $70K purchase is 20%. That was for an owner-occupied condo. Refinancing as a Non owner occupied (NOO) may not even be an option in MB, depending on your lender. Many MB and NMB banks don't finance fractured condos (the are Fannie Mae 'non-conforming') and those that do will look at combined value limits. for instance, 1st and 2nd mortgages (including a LOC if you can find one on NOO) will be 70% on a FNMA N-C fractured condo:

80K * 70% = 56K.

After financing costs, there isn't much to take out.

BTW, on a 'green' rental (rented less than 2 years) commercial typically will use a 7% vacancy rate and account for management fees (8%-10% is common) even if you don't use/pay a manager. $900 less the vacancy and management is $747. A 5% repair expectation is also typical, and some banks require CapEx reserves (depends on the bank and if you are classified as 'resort') So Your $300 is more like $100. Knowing condos, that might not even cover your next special assessment. And some banks will only let you claim 75% of rental income without 2 years proven track record... so your income side becomes negative (pre-amortiation and depreciation expense).

The upshot: most investors stay away from condos. Investors see the 'fantom' costs and high HOA fees as deal killers. Add in lack of control (even if you are on the HOA board) as the final blow.

Regarding "How would I do BRRRR if what I am doing is not it?" I don't know the ins/outs of the brrr thing. There are literally hundreds (if not thousands) of posts about it on BP. I do know the concept is not exactly new.

How all the 'value' investors I know operate is this. They/we start with cash or near cash, meaning an independent credit facility or some other collateralized line. We buy an underperforming asset (business, rental real estate, etc.) as a turn around. We fix the systemic problems and boost the income through operational efficiencies. The 'fix' process requires capital, some times lots of capital. Then, when the systems are fixed and we have achieved operational marks (e.g. for RE rentals have the property place in service and rented), we add the asset to a finance tranche. This is kind of a basic flow to how turn arounds work.

So... putting the pieces together... to do a turn around play, which a brrr is, you need to make sure you can execute all the necessary steps. For non-conforming condos, the Achilles heel is the financing part.

So to answer "How would I do BRRRR if what I am doing is not it?" you need to find an asset class that will be financeable. Don't select mobile homes or condos, for instance.