I have a few questions about the BRRRR strategy.
Ex. Bob buys his home for 300k, down payment of 60k, and loan for 240k. He rehabs his place for 20k. The total investment is 80k (down payment + rehab). Bob refinances the property for an appraised value of 700k. The bank will allow him to take a loan up to 75% of the appraised value (0.75 * 700k = 525k).
He takes 525k loan and pays original loan back (525 - 240k) leaving him excess 285k. Now I have a few questions :
- 1. If Bob originally bought his home as a primary residence, does he need to buy another primary residence and be forced to rent his original home or could he possibly use it as a 2nd home without needing to move from his place? (I know the point of BRRRR is to rent and get passive income)
- 2. How synchronized does this process need be with finding another property? Like if Bob commits to the refinancing at the appraised amount, takes a loan of 75% of appraised value, pay off original loan, and realize he has excess capital - is there any time frame within that he needs to use the capital?
- 3. How is that money used for the 2nd home down payment?
Please let me know if I’m missing something.
Updated 23 days ago
First off, if Bon could invest $20k to increase his equity by $400k...we need to have a chat so I can figure out Bob's secrets. Numbers aside, here are some answers:
1. Yes, Bob can refinance and keep it as his primary residence (most lenders are willing to give 80% LTV on a cash-out refinance on a primary residence and only 70% LTV on a rental property).
2. No, I think you may be confusing the cash-out refinance with a 1031 exchange. When you refinance the property, you're not selling it, so there are no capital gains, so no capital gains tax, so no need to reinvest that capital into another property within a certain timeline.
3. If you're lucky enough to get some additional cash back after a refinance that money is yours to do whatever you want with.
Thanks for the reply! A few more questions...
Based on the Bob example :
1. Why can the original property loan be paid off? It seems kinda weird that the bank would allow Bob to take out a loan of 525k (0.75 * 700k) to pay his remaining loan on the original property off and then use the excess to finance another property. The part that's making cash out refinance unclear is this idea of getting another loan to pay the original loan off
2. How many times are we allowed to do this against a property? Hypothetically, if Bob does a cash out refinance right now and then 5 years later, his property is worth 900k allowing him to get a larger chunk of cash from the bank to finance something else. Could he do it again against the same property?
Thoughts? @Kenton LeVay
1. In your example, the lender will loan $525k because that's based on the VALUE of the home. During the refinance process, the lender will send out for an appraisal on the property. They'll take into consideration things like comparable home sales, current condition, etc to develop a fair market value for the property ($700k in your example). The bank will loan on that amount and use the $700k home as collateral. If Bob defaults, the lender will foreclose on his $700k home. Once Bob gets the refinance, he will use the $525k to pay off his existing loan, so then he will only have one loan (the refinance).
2. You're allowed to do it as many times as you want on a property as long as there is equity. But the larger the loan value, the higher the monthly payment is to pay off that debt.