Analysis Paralysis - How to start with the BRRRR Method?

Question

Hi BP Family! I'm a newbie in the REI community but I am so excited to become a part of the BP Family! This is my very first post and reaching out for some guidance and expert opinions please!!

Have you ever been stuck in reading, researching, listening for so long that you get so confused that you don't know anything anymore? This is where I am now and hope I can get some help...

I am planning to begin my investor career with BRRR strategy but my first step is to take some equity out of my  property to have down money to purchase next property.

I purchased my primary residence (condo) in 2018 with conventional loan 20% down on 15 yr note; I then fully rehabbed it. Fast forward 4 years, I am looking to refi with cash-out option. Note: I am still living there. The way I understand it, the "new" loan after I refi will be still my primary residence loan, with a seasoning period, correct? After I refi and receive the cash out portion, I will start looking to purchase a small multi-family. My plan is to put 5% down and house-hack the property. But this will be "another" primary residence loan, which is something I can't have. I guess my confusion is with the loan types and how to navigate them. Will I have to wait for the seasoning period to elapse before I put a renter in my condo and purchase another property? Will my loan for condo remain as primary residence loan or do I have to change it? and how can I purchase the multi-family property on a primary residence loan if I already have one???

Any help / feedback / advice will be greatly appreciated - hope to hear your thoughts!

Seth Hochberg · Answer

Hey Victoria! Welcome to Bigger Pockets =)

I think the confusion lies that there are two types of refinances: (1) Cash out refinance and (2) rate and term refinance.

Rate and Term Refi: You purchase a house worth 200k with a mortgage with Bank A at 5% interest (20% down = 160k mortgage). At some point (years later, typically) let's say you own 30% equity now, but you realize that you could get a lower interest rate. So, you go to another bank and ask for a rate and term refinance. They will pay off the rest of your mortgage to bank A for you (in our example that's 70% or 140k), and now you have a mortgage with Bank B at 3% interest. That's all it is. This strategy is not a real-estate-investor-only strategy. It makes sense for anyone - it's advisable whenever the interest rates drop (like they did during COVID). You do have to pay a closing cost, so you need to do the math to make sure the money saved on the lower interest rate is worth the up front closing costs. This does not seem to apply to you here.

Cash Out Refi: This is only common with BRRRR strategies. You purchase a house at 100k in cash. You own 100% of it. You put in 50k of renovation. So you've spent 150k. You go to the bank and say I own a house outright, and I would like to take as much equity out of it as possible. The bank says, sure, let's just appraise it to make sure we're not giving you too much money. They appraise it, and if you did it right, the house appraises for 200k. They give you 75% of the appraisal value, which equals 150k AS A LOAN. Now you have a normal mortgage with monthly payments (and more importantly, all your cash back)

You purchased a condo with a normal 20% down payment. Let's say you have 30% equity in the property now. And you renovated it too, so you might have even more equity. The issue is that you do not own close to 100% of the property, so a cash-out refinance doesn't make sense. Seasoning period also doesn't apply here since you have purchased the home years ago (seasoning period is prevent someone from buying a house in cash and cash-out refinancing it a few weeks later). Also, you already have a primary residence loan on this property - that's the mortgage you're paying each month right now.

But the general spirit of what you're trying to do is still an excellent idea, just the terminology is throwing you off. You own 30% equity in your house (let's say). And you've down renovations, so you probably own even more equity because of that. You should get a HELOC (a loan on the equity you have in the house) to use as cash to buy your next property. If you want to do an FHA loan to put 5% down on a multi-family, that's a great idea. Ask for a HELOC to get cash out of our primary residence, and use that to pay for a multi-family down payment. As soon as you move out of your primary residence, put a tenant there and that tenant will pay off your original mortgage. Your new tenants in the multi-family should be paying off your FHA loan/mortgage on this second house that you're living in. The multi-family residence (presumably an FHA loan) requires that you live there for one year (a primary-residence loan). After the year, you can legally move out, and get another primary residence loan on another property. This is an excellent rinse-and-repeat strategy. Hope this helps!