Conventional Loan OR refinance existing property?

Question

Everywhere I look I see investors using the BRRRR model. I purchased properties in cash just to pilot my real estate endeavor with minimal risk, but now want to start leveraging the bank. Property I bought for 178 in 2018, now worth 220. Should I do a cash out refinance to fund my next rental to capitalize on the increased value or a conventional mortgage? If I did a cash out refinance I would buy in cash with those funds, because I do not want a mortgage on top of my refinance rate. Also, are there any big red flags I am missing in regards to refinancing vs conventional mortgage? Look forward to hearing any and all ideas!!

Travis Blinkiewicz · Answer

it wouldn't be ANOTHER mortgage. the refi replaces your existing one on the property.

when you receive your cash, you use that to fund the next property (buy and rehab), then you rent it, refi that property and do it all over again.

check you the BP BRRRR book, its a great read in this topic and has helped me quite a bit!

Dilini Sundaram · Answer

Is that how people do BRRRR though? They take a cash out refi, then get ANOTHER mortgage on top of that? Or am I missing something?

Heath Thomas Jr · Answer

Yes you are decreasing your profits, but you are doing that to leverage up your capital. There are obviously risks with doing this, but people are banking on enough margin of safety and return of capital to make it worthwhile.

In your case, it definitely sounds like it would make sense to do a cash out refi since rates are still historically low and it could free up a ton of capital to do more deals and/or reinvest at a higher return.

Dilini Sundaram · Answer

I do have other capital I could use but I feel like I could capitalize on the value of the property going up so much (didn’t do a flip just went up because the housing market is hot).

Mel Hayes · Answer

I'm in the exact same situation as you.  Own in cash but now I'm out of capital to keep buying.  I bought for 75 in 2018 and its 170k now.  Problem is, you're not getting much for under 170k.  Do you have any capital left?  Can you do an FHA?

Dilini Sundaram · Answer

Currently cashflows about 18k a year-after the refi I assume it will be more like 7200. What confuses me on BRRRR is that aren't you significantly depleting your profits because of the refi rate, then taking that amount and getting a mortgage. (My situation is a bit different because of the 100% equity, but let's say I only had 60k equity) Then I would refi at 4.25, then get a mortgage with that 60k at 3.5. Am I missing something with BRRRR

Travis Blinkiewicz · Answer

Is the property you are refinancing a rental that would be cash flowing after you refi it? at 75% LTV cash out refi, that's 165k (220k x .75) . I would go with refi and us that money to find a fixer, buy with cash, pay for rehab with same cash, and rent it out. Then refi  and do it all over again all within a short period. With the refi, your cash flow each month will go down but you will be able to do this fast over and over again. BRRRR rocks.