In a previous post, I noted the four best ways to find banks to refinance buy and hold properties. From my observations in the BiggerPockets Forums, the biggest question regarding the BRRRR strategy (buy, rehab, rent, refinance, repeat) is on the third R; refinancing. So what are the best ways to get your refinance approved? Well, let me count the ways…
5 Ways to Get Your Refinances Approved
1. Build rapport with the lender.
This cannot be overstated enough. Lenders are not some sort of cybernetic automaton. They are flesh and blood human beings. There seems to be this myth floating around these days that lending has become so dominated by mathematics, regressions, and algorithms that you will either be accepted or not based on the numbers that show up on your tax return and credit score. This is simply not true.
When a lender takes your loan to committee, that lender is there to sell the property and more importantly, to sell you. If that lender believes in you, more often than not, you will get the loan you are looking for. If he or she does not, then you probably won’t. It’s not hard to tell when someone is unenthused, and the loan committee will be able to pick up on this quite easily. If they sense hesitation in the lender presenting your loan, you will almost certainly be rejected. Your goal has to be to sell the lender so the lender will sell the committee. And of course, first and foremost, you’ve got to sell the lender to even take a look at your loan!
Therefore, it’s a good idea to take the lender out to lunch or bring him or her to your office if you have one. Describe your life story, your business, and your business strategy and let your passion for the business shine. Make sure they know you care about this and are deeply invested, both financially and emotionally. Make sure you also know what you are talking about. Review your personal finances and the information regarding whatever property you are trying to refinance. You want to come off as an expert, as banks obviously want to lend to people who know what they’re doing. Finally, ask the lender what the bank is looking for to make sure you aren’t wasting their time. They will appreciate this, as most people these days only care (or act like they care) about themselves. And, of course, never be afraid to engage in a little rapport-building chit-chat.
Related: The Pros & Cons of the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Strategy
2. Don’t ask just one bank.
Some banks just aren’t interested in investment properties. Some banks want very long seasoning periods (the time you need to own a property before they will lend on appraised value and not just the amount of cash you have into the property), and others have bad terms and rates. You want have to sift through a lot of coal to find a few diamonds.
Personally, I like to try to add a new bank to our catalog every so often even if we have a bank willing to do business with us. This is not just because I might find better rates. It’s also because sometimes banks will lose their appetite in what we have to offer. I want to be able to quickly go to another bank that we have already built a relationship with. So, even if you have one good lender, that does’t mean you should stop looking. Ask other investors who they use. If a bank is willing to lend to another investor buying similar properties, they are more likely to lend to you. And always make sure to let them know who recommended you. That acts as a sort of social proof: “Hey, if we lent to this other person, and that person knows you, then you’re probably also a good person to lend to.”
And again, for more ways to find banks, see here.
3. Fix your property up.
Banks don’t want to lend to slumlords any more than tenants want to rent from them. One of the best ways to get a bank to believe you know what your doing is to present them with a very nice-looking, functional and clean property. Yes, you don’t want to rehab out the equity of a property (a common mistake BRRRR investors make), but you need to make it look nice. For example, the following are pictures of a property we recently refinanced:
As you can see, nothing in this property is particularly fancy—regular carpet and vinyl flooring, basic black appliances, standard Home Depot cabinets, Formica countertops, etc. In nicer properties, you may very well want to go with higher end materials. But that’s beside the point. The important point here is that the house is very clean, everything looks good, and everything is functional. Trust me, this is not what many banks normally get. Bringing something like this to them proves your professionalism and expertise more than any mere words can.
Of course, you’ll want to have the property rented before you send it to a bank to get refinanced, but you should send them all of your marketing pictures. Which leads us to the next part:
4. Blow them away with your documents submission.
My goal when submitting documents to a bank is not to give them everything they need, it’s to blow their socks off. I go over my strategy in more detail here, but the short version is I send them a Dropbox folder (or flash drive) with a list of all the partners’ financials, the company financials, business plan and documents, as well as all of the property financials, a pro forma, and lots and lots of pictures.
This will make you look all the more competent as well as provide the lender with all the documents they need (and more). Remember, it’s critical to impress the lender so that he or she will sell you to the loan committee. It’s also important to give them everything they need to make an informed decision, because a confused mind almost always says no.
Related: 3 Critical Keys to a Successful Refinance (for the BRRRR Strategy!)
5. Keep your cash flow high.
Banks really love cash flow. They want the property to have at least a 1.2 debt coverage ratio (debt service divided by net operating income), and they also want you personally or your business to have a strong “global cash flow.” In this sense, it’s important to do what you can to keep your cash flow as high as possible. Any work on a property that can be justifiably capitalized (put on the balance sheet instead of the operating statement) should be.
And while we all like to talk about quitting our job to go into real estate full time, you need to be cognizant of what this may do to you in the eyes of banks. Bank really, really love W2 income. I’m not saying you shouldn’t quit your job and go into real estate full time, but you may want to talk to some banks about it first, especially one’s you’ve built a relationship with. You might also want to get your refinances completed before you consider making the switch.
But overall, the numbers, while very important, aren’t the be-all, end-all of getting a refinance. Banking is still a people business and you need to master the art of coming off professional, competent and enthusiastic for the business. If you follow all of these steps, you should be able to get your refinance loans approved more often than not.
Any tips you’d add here? What has helped you get approved?
Weigh in below.