Capital-raising decision for BRRRR
Howdy. I am a new member to BP, originally from San Antonio, TX currently living in New Braunfels, TX, and just starting out in REI. I've read to the guide to BRRRR from David Greene and I'm anxious to start assembling a team. I have a question that's been gnawing at me:
1. My primary residence will be paid off in March 2023 since I've been throwing all extra income and non-emergency savings at the house. We will be 100% debt free. Because of this, I have no liquid capital to start BRRRR. I can either save ~75k in the next calendar year (presumably 50k for down payment, 25k for rehab) and wait a year before beginning, or, is it possible (and wise) to borrow against my primary residence to get started now and keep the momentum going. I'm concerned about losing momentum of trying a 90 day challenge to buy my first property. What are your thoughts on managing the finances given this situation?
I have no network yet in the San Antonio/Austin metro (if we stay local) or the Indianapolis, IN metro (if we go out of state), but my wife and I are very interested in building a significant real estate portfolio for the next 20+ years. I'm already on the path with self-education, but I'm eager to connect with lenders, property managers, contractors, and agents who have a heart of a teacher. If that's you, let's talk! I want to add value to your businesses by learning and DOING my part as well as I possibly can as the portfolio grows.
You can do a cash out refi or open a heloc on your home. It should not be too hard to get up to 75% of the value of your home back out of it.
Generally for BRRRRs, people say to take the heloc route, because then you are only paying interest when you are using the money. That being said, I would personally encourage a cash out refi, because you are going to probably get a little bit better of a rate and more importantly, because then you have the cash. Banks are allowed to close helocs essentially whenever they want. It would suck to need the money, attempt a draw, and then be notified that your heloc has been closed to new withdraws.
Good luck! Being able to leverage your homes equity puts you in an excellent position to take advantage of this slower market!
Quote from @Darryl Schott:
Welcome to the BiggerPockets forums!
I agree with cashing out your equity with a standard refinance. A HELOC comes with higher interest rates.
In your pursuit of a debt-free life, paying down your home mortgage isn't normally included because it's really just a money shuffle. Your putting your cash into the house instead of into an investment. Yes, you technically save some money by paying off your mortgage, but you could get a better return by investing that money into a property that produces a 12% return.
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Quote from @Darryl Schott:
Howdy. I am a new member to BP, originally from San Antonio, TX currently living in New Braunfels, TX, and just starting out in REI. I've read to the guide to BRRRR from David Greene and I'm anxious to start assembling a team. I have a question that's been gnawing at me:
1. My primary residence will be paid off in March 2023 since I've been throwing all extra income and non-emergency savings at the house. We will be 100% debt free. Because of this, I have no liquid capital to start BRRRR. I can either save ~75k in the next calendar year (presumably 50k for down payment, 25k for rehab) and wait a year before beginning, or, is it possible (and wise) to borrow against my primary residence to get started now and keep the momentum going. I'm concerned about losing momentum of trying a 90 day challenge to buy my first property. What are your thoughts on managing the finances given this situation?I have no network yet in the San Antonio/Austin metro (if we stay local) or the Indianapolis, IN metro (if we go out of state), but my wife and I are very interested in building a significant real estate portfolio for the next 20+ years. I'm already on the path with self-education, but I'm eager to connect with lenders, property managers, contractors, and agents who have a heart of a teacher. If that's you, let's talk! I want to add value to your businesses by learning and DOING my part as well as I possibly can as the portfolio grows.
Welcome to BP - you've come to the right place. I think you have thought out your plan pretty well - but what is your current interest rate on your primary residence? If its significantly lower than current rates (anything under 5% basically), I would question why you are paying that off with all the extra income? If your plan is to get going on real estate investing as soon as possible, you'd probably be better off saving that money for down payment vs. taking out a HELOC or cash-out refinance on the primary at today's higher rates?
Regardless - your point of networking is also strong, would love to connect, we (Easy Street Capital) are a BRRRR specialist lender in Austin and specialize in lending on BRRRR projects, and throw a lot of good meetups and events in the area. Would love to connect!
@Nathan Grabau Excellent point on the HELOC, I didn't realize the bank can stop new withdrawals anytime.
@Nathan Gesner I appreciate your opinion as well on this, thanks! I hadn't considered the rate differences yet between HELOC and cash-out refi as I'm still on the learning curve.
@Robin Simon I'm already so close to paid off (2 months) and the interest rate is below 3%. I tend to agree that just saving money for down payment, while slower, is the best COA. It also means my investing will have nothing to do with my primary residence and lowering my risk significantly.
I had been paying it off following Dave Ramsey's baby steps (#6) after maxing out other investing (roth 401k, college savings) and was seriously considering moving the family to Hawaii in the next 2-3 years, however, we officially changed direction and now are staying in Texas and starting REI.
@Darryl Schott Nothing wrong with following Papa Dave's baby steps. I watch his videos on YouTube for entertainment and alternative prospective. It's great for people with low level understanding of money, budgeting, and how leveraging ASSETS builds wealth. It could be obvious at this point but it sounds like you're beyond his approach. Simply asking questions in these forums is proof of that.
Leveraging you're primary is the easiest and arguably safest way to acquire an investment property. IMO it depends on how you purchased it but you can't go back in time. If you're making extra payments on a 3% interest rate primary loan FULL STOP. This is where most investors disagree with Papa Dave because that money should be "branching out" for other investments. Pile those extra payments in a savings account. Debt comes with risk but those sub 3-4% rates are literally gold. I wouldn't give up that rate to refinance. Pull a HELOC or something else to tap the equity. Texas is a great market! I agree with your plan so take advantage of it. So much growth going down there.
Quote from @Darryl Schott:
Howdy. I am a new member to BP, originally from San Antonio, TX currently living in New Braunfels, TX, and just starting out in REI. I've read to the guide to BRRRR from David Greene and I'm anxious to start assembling a team. I have a question that's been gnawing at me:
1. My primary residence will be paid off in March 2023 since I've been throwing all extra income and non-emergency savings at the house. We will be 100% debt free. Because of this, I have no liquid capital to start BRRRR. I can either save ~75k in the next calendar year (presumably 50k for down payment, 25k for rehab) and wait a year before beginning, or, is it possible (and wise) to borrow against my primary residence to get started now and keep the momentum going. I'm concerned about losing momentum of trying a 90 day challenge to buy my first property. What are your thoughts on managing the finances given this situation?I have no network yet in the San Antonio/Austin metro (if we stay local) or the Indianapolis, IN metro (if we go out of state), but my wife and I are very interested in building a significant real estate portfolio for the next 20+ years. I'm already on the path with self-education, but I'm eager to connect with lenders, property managers, contractors, and agents who have a heart of a teacher. If that's you, let's talk! I want to add value to your businesses by learning and DOING my part as well as I possibly can as the portfolio grows.
First off, congratulations on your diligence to prepare yourself to invest. Most never get that far. I personally did a HELOC (please insure that the time and terms are right for you). I don't think you can go wrong either way. Building a trusted team is essential. We manage and also invest using BRRRR so we're happy to answer any questions. Best of luck and Happy Investing!