Investor · Folsom, CA · Member since 2016 · 16 posts · 1 vote
My wife and I own a duplex that we rent out that has about $660,000 in equity. I am thinking of doing a HELOC on it. This is my first time and this is the part where I get a little shaky. Assuming a LTV 70% for a HELOC we could get $462,000 to draw from? If I used this money to do a brrrr I should by something at 70% of ARV? So say I used $400,000 to buy a home and rehab, I would want the ARV to be $520,000? I rehab, rent, and then refinance? Now is where I get even more shaky. I see on other threads that you can get your money back to buy another rental after refinancing (the repeat portion of brrrr). I apologize if this seems dense but how do you get your money back after the refinance? In addition, has anyone done this outside of their own area? It is tough to find anything in my area of the SF Bay Area at that low of a price.
Hey @Bradley Adams, there are no dumb questions! However, if you can, it's best to buy the property for cash up front- it saves you from having to pay the bank closing costs twice. It gives you a great deal of negotiating power too- many buyers will accept a lower cash offer over a higher financed offer. If you pay cash, you can also refi right away. If you can't pay for the entire thing in cash, then yeah, you have to pay those costs twice and wait six months to season the loan before you can refi.
Keep in mind, if you use a HELOC on your personal home, banks consider that a cash payment.
I am not aware of any conventional HELOC options on non-owner occupied properties. I would guess that you'd need to either do a cash out refi or portfolio or private lending.
As for the BRRRR method, the idea is that you buy right and make necessary improvements so that you have 25% or more equity in the property when you have your appriasal done. When you refinance, the equity is your "down payment." You do a cash out refinance for the other 75% or so, take the cash and start all over.
I am doing exactly what you are asking about in your original post, I just use the HELOC from my personal home. Best of luck out there!
@Corby Goade Corby, thanks for your response. I was basically making sure that I had the concept down and also how to get the cash back. I was under the impression that the strategy was to pay cash for the property. That makes a lot more sense making a downpayment then doing a cash out refi to get back the downpayment. Trying to ask the dumb questions early on so I know exactly what I'm doing when I get out in the real world.
Hey @Bradley Adams, there are no dumb questions! However, if you can, it's best to buy the property for cash up front- it saves you from having to pay the bank closing costs twice. It gives you a great deal of negotiating power too- many buyers will accept a lower cash offer over a higher financed offer. If you pay cash, you can also refi right away. If you can't pay for the entire thing in cash, then yeah, you have to pay those costs twice and wait six months to season the loan before you can refi.
Keep in mind, if you use a HELOC on your personal home, banks consider that a cash payment.
Great posts, guys--helped me clarify my own plan. I've a HELOC pending on my primary residence and planning on using it for a modified BRRR out-of-state. It's good to know that you can cash out-refi right away on an all cash purchase.
This might be a naive question, but with cash purchases the fees would be for title insurance/search and some sort of transfer tax/recording fee, no? Am I missing anything else? Is an attorney recommend for closing on a cash purchase?
Great posts, guys--helped me clarify my own plan. I've a HELOC pending on my primary residence and planning on using it for a modified BRRR out-of-state. It's good to know that you can cash out-refi right away on an all cash purchase.
This might be a naive question, but with cash purchases the fees would be for title insurance/search and some sort of transfer tax/recording fee, no? Am I missing anything else? Is an attorney recommend for closing on a cash purchase?
Thanks,
Merritt
Hi Merrit!
For you to do a cash out refinance on a rental, most banks have a seasoning period. If you do the cash out refi before that period of time is over, then they go by purchase price, not new value.
Some banks are 6 months, some 1 year. I managed to find a bank that will do as little as 90 days. This is for commercial loans on residential houses though, so rules are a bit different. But, that 90 days gives me plenty of time to buy the property, make necessary fixes, and get a paying tenant with a lease. Banks feel a WHOLE lot better if they do a cash out refi if there's an existing tenant, so they know there won't be likely issues getting paid back.
Hope that helps! I'm going through this exact thing at the moment, so I've had the fun of finding this out all on my own. :)
@Bradley Adams I'd be glad to see if I can help you work through the details no matter who you end up working with. Connect with me on BP as well and we can direct message for any questions you have on what you're trying to accomplish (I think it's a good strategy today with still cheap interest rates on HELOCs so you have cheap cash available for other ventures).
Thinking about my first BRRRR using a HELOC. The equity in our personal home would allow for a roughly 60k HELOC. This would cover, say, a 35k down payment and reno costs on a BRRRR property, but---and I might not be thinking about this correctly---it seems like the refi wouldn't cash out nearly enough to cover that HELOC, effectively leaving at least the down payment tied up in this property. All that to say--am I missing something here, or does the HELOC/BRRRR approach only work when you have a large enough HELOC for a "cash" purchase of an investment property?
My wife and I are looking to use the Brrrr method in the Clearwater area. As I am trying to analyze deals with the Brrrr calculator, using a HELOC, I am not sure how acoount for the HELOC in the calculator. I want to use it to buy the property outright and paying back interest only until I refinance. It is a variable rate on 105k, currently at 5.65% with an interest only payment of $494.38. Can anyone help me understand how to plug that into the calculator? I am sure it is simple and I am just missing something.