The idea of BRRRRing my way to financial freedom! what are ur???

Question

I'm an owner of a brick two family home, but with the layout of a three family in the Rockaway Beach section of Queens NY. I've implemented the House Hacking strategy I learned about here at Bigger-Pockets which has allowed me to live for free in one of the units while the tenants pay the mortgage. I'm working on paying off home loan within the next 5 years  so i can begin BRRRRing propeties with a HELOC for CashFlow.

I'm in a Constuctions union, I'm also a NY State Licensed Real Estate Sales Agent, and I just recently became a NY State Licensed Real Estate Apprasier "Assistant".

I purchased my home in the Rockaway Beach area not only because I found a property that met the criteria to House Hack, but also because the market here seemed to be on a path to growth. From the two years I've been here property values have appreciated significantly.

My thoughts are, pay off home loan, take out a (Home Equity Line of Credit) which will amount from 70-75% of the equity I have in the property, with the notion of what it should appraise for considering I'm in the industry, then go maybe down south, possibly Florida, were homes are alot cheaper than NY City with a significant amount of cash from taping into my equity and find homes to BRRRR?

I'm looking to here your thoughts and perspective.  What do you think?

Todd Rasmussen · Answer

@Joe Diminic

I'm not sure I understand why you are paying your house off in order to borrow against it. Instead of paying extra principal so you can borrow it back at a high rate, why not put it into the bank and start investing earlier? You can free up the equity in your home now via a heloc or cash out refi the current mortgage and have a lower interest rate. For BRRRR I'd suggest leaning towards a cash out refi instead of a HELOC. You'll want to keep that money as cheap as possible over the long term.

Joe Diminic · Answer

The ultimate objective of a BRRRR is to recover 100% of your capital investment so you can continue to recycle the same funds over and over again.  "Its your seed money so to speak."

A HELOC secured by an asset thats free and clear from of any debt esp in NY City where the value of properties are very high will give me access to alot more capital. The reason thats important is because when BRRRRing properties, lenders will require a seasoning period to expire before they will approve a cash-out refi. Which means my funds will be held up for potentially a year before i can recover it. And having access to a lot more cash would allow me to continue BRRRRing.

The reason I think it would be best for me to initially pay off my home first, then HELOC it ( which is like having a access to a credit card with a low intrest rate secured against my home) is because I'll only use it if and when the circumstances are fit.

The plan I'm pondering would work like this:  Pay of home, do a HELOC and only use what I need to BRRRR Properties, Keep recycleing the same funds to build a respectable portfoilo, then pay back the HELOC with Cash-Out Refi from the properties I'm BRRRRing and my home will be paid in full no debt and my cash producing properties are cash flowing and life is gd!

Dan H. · Answer

I believe in leverage and appropriate risk but I only use HELOC for short term debt due to the variable rate.  This would include a purchase that we were expecting to BRRRR and therefore refinance in a year.

Also waiting to acquire equity via equity pay down to purchase addition RE is a slow process.  It basically swings between low leverage to moderately high leverage back to low leverage, etc.  It seems schizophrenic.

For a property purchase where the loan is not going to be refinanced in the near term, I prefer a cash out refinance.  It will cost more than a HELOC but the rate is fixed near historically low interest rates.  The initial cost can be rolled into the loan or pay a slightly higher interest rate for a zero cost refi.  I like never having to worry about increased interest rates.

Note a rate of 4.5% that raises to 8% nearly doubles the payment.  It is hard enough to know where interest rates will be in two years, trying to predict where they will be in 20 years is virtually impossible.

Good luck