BRRRR question for new RE investor

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
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BRRRR question for new RE investor

Matthew Hurchik
Member since 2021 · 4 posts · 1 vote

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

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Drew Petro
Member since 2020 · 21 posts · 12 votes
5y

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!

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  • Austen Mueller
    Real Estate Agent · PA · Member since 2021 · 240 posts · 131 votes
    5y

    Welcome to bigger pockets! Your in the right place. Couple questions here that need answering. I will let the mortgage pros help with the refinance bit. As for reinvesting the capital, I would connect with a property management company and consider reinvesting in a different market to take advantage of current market value and interest rates. 

    Best of luck!   

    0Reply
  • Drew Petro
    Member since 2020 · 21 posts · 12 votes
    5y

    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!

    1Reply
  • Matthew Hurchik
    OP
    Member since 2021 · 4 posts · 1 vote
    5y

    Thank you! I have a couple calls with different lenders set up for tomorrow and Friday.

    Drew, this is incredibly helpful information - makes much more sense, I have saved an image of your message and shared it with a bunch of friends/colleauges. And Austen - I love that idea. Was actually thinking about looking in the City (Boston) for my second purchase to diversify anyways. If I go this route, I will definitely use a property management company/service. 

    Best,

    Matt

    0Reply
  • Brian Plajer
    Rental Property Investor · Chalfont, PA · Member since 2021 · 190 posts · 90 votes
    5y

    I am in a similar situation in that I have a decent income however, noT much cash as my primary mortgage is a big nut to pay. I was thinking of refinacing Back to a 30 year (I have about 20 years left) to reduce my monthly payment and get some cash back for investing in rental property. It does money to refi though and theres all that interest. I’m Still deciding

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