BRRRR question for new RE investor

[Matthew Hurchik]

Hi all,

Brand new to biggerpockets and learning a TON over the past few days from the youtube page, podcast and website. I am 26 years old and just bought my first 620k two-family rental property in suburbs of Boston. I have owned for over 8 months and have 'bought' 10-15% equity (~5% down with FHA loan as I am living in one unit, and renting the other). My original plan was to live here f Have been making mortgage payments of ~5.5k (2k over the 25 yr mortgage payment). I have also put ~30k work into the property (landscaping, bathroom, plumbing, electrician, tree removal). Based on the market and the improvements I would bet the property has increased significantly in value.

I am just learning of the BRRRR method and I think it is perfect for me as I want to keep growing my portfolio. I make good income but don't have a ton of capital (put most of my savings into the property). Now that the market has ballooned since my purchase, and I have made significant improvements, I think I need to start planning for the 'refinance' and 'repeat' part of BRRRR.

That being said, I was wondering what the community would suggest for me. There is incredibly low inventory in my area (as is with the rest of the country) and bidding wars are happening here too. I'm not sure it is the best time to buy a new property, but at the same time I may not be able to get a higher appraisal value over the next couple of years than I could right now - depending on what happens with the market. 

I know that the normal path with BRRRR would be to refinance to purchase another property. Would it make sense to refinance and hold off on buying a new property? Or does that defeat the purpose. Not entirely sure what happens with a refinance - I have heard Brandon and David say many times that I would get my money back. What exactly does that entail - is that 'money' just available funds for another property? Does this all not apply because I am living in the property?

Really happy to be part of this community and excited to keep learning at a rapid pace! 

Best,

Matt

[Drew Petro]

Matt, my 2 cents ... When you refinance a property you convert "equity" into cash. The bank will send an appraiser to your house and they will judge the value of the property relative to other comps in the area (for 1-4 unit homes more or less). In your case, I am not sure if you can refinance into another FHA loan. In my experience, when we refinance with the bank, they will give us 75% loan-to-value. So, if the appraiser says your home is worth $800k, you could get a loan from them for $600k. You would then pay back your old mortgage and keep the difference in cash (if you owed $560k on your old mortgage, you would keep $40k as cash in your bank account).

Since it is your primary residence, perhaps they bank will give you 90% LTV (make you keep 10% of equity in the house), thus if your house appraises at $800k, you could get a loan for $720k and when you payoff the old loan, you keep the difference in cash.

Once the cash is in you account, there is no time limit to spend it. The "repeat" aspect is the overall vision, not necessarily an instant jump. You will then have "ammunition" in your account as capital, just wait until a good deal comes along to use it! (Contrary to if you do a 1031 transaction, which is a whole different topic, but requires you to sell).

Final thing I would say - think of the refinance as two separate transactions. You are going to a bank (could be a different bank than the one you have a mortgage with now), asking for a NEW loan. That new loan will be for the complete appraised amount minus downpayment (or equity left in). Since your old mortgage is a lien against your house, the new bank loan will be obligated to pay that loan off. They will send the money directly to the first bank to pay off the loan. They will then send you the difference as cash. That is your new refinance capital! Hope this helps!