Real Estate Deal Analysis & Advice

4 Common Refinancing Issues in BRRRR Deals (& How to Conquer Each!)

Expertise: Mortgages & Creative Financing, Real Estate Investing Basics
37 Articles Written
Banker recommend customer for signing loan contract

Any BRRRR investor will tell you the trickiest part of the BRRRR process is the refinance stage. (Yes, it's even trickier than the rehab.)

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The refinance stage is the moment of truth on how well your business plan will go. You’ve negotiated the purchase price, navigated the rehab process, and even tenanted the property. Now it’s time to pull your capital out through the refinance process.

The lender establishes an after repair value (ARV) via an appraisal and underwrites you and the property to qualify you for the new loan. But there are a few common refinance issues that can creep up and stop any investor in their tracks. They are:

  1. Can you qualify for the new loan?
  2. Can the property qualify for the new loan?
  3. What are the seasoning requirements for the new loan?

There are several things you can do to stack the investing cards in your favor. And any seasoned investor knows that what I’m about to show you should be tackled before you close on the initial purchase.

Situation 1: Your property passes underwriting, but you don’t.

Solution: Be a good candidate for lending.

While you talk to your lender about refinancing the property, proactively ask where you need to be at with:

  1. FICO score – The best rates for lending start with a FICO score of 740+.
  2. Reserves – Many lenders want to see six to 12 months of reserves in this post-COVID environment as opposed to just three to six months of reserves just a few months ago. Additionally, a lender may ask for 12 months of interest reserves to help cover their basis, as well.
  3. Debt-to-income ratio – Currently, you need to carry a DTI of less than 50% to qualify for a Fannie Mae/Freddie Mac loan. Many lenders right now want to see a W-2 income to qualify you, too.

Knowing these factors up front may impact how you initially purchase and pay for the rehab on the property.

Instead of using a HELOC for the down payment and a credit card for the rehab (both of which can impact your FICO score negatively), perhaps you learn how to use hard or private money to purchase the property and fund the rehab. This will allow you to keep more of your cash in the bank, and surprisingly, help you qualify for future lending.

This also means you might want to hold off on changing jobs, reducing your hours, or quitting your job altogether before your refinance is complete. Also, refrain from making huge purchases that will throw off your DTI and/or deplete your reserves.

Lastly, don’t purchase more properties or execute other refinances without involving your lender to ensure you can still qualify. I’ve seen many BRRRR investors get stymied by scaling too fast and losing qualification for lending. It’s painful to find an amazing deal and then have to sell it rather than holding it in your portfolio.

being-held-accountable

Situation 2: You pass underwriting, but your property doesn’t.

Solution: Ensure your property underwriting is complete and stress-tested to weather unforeseen scenarios.

Another situation that may hang you up on the refinance is poor or incomplete underwriting. Here are a few areas where you need to make sure you are being practical with your numbers.

After-Repair Value (ARV)

It's tempting to try and "pull your own comps" using sites like Zillow, Redfin, and Realtor.com. However, this can be dangerous if it's your sole source of data. Make sure you confer with a qualified Realtor or property manager to establish a true ARV for your property. If you fall short of your ARV post-rehab, you may have to leave some of your personal funds in the deal to close the loan.

This doesn’t make it a bad BRRRR necessarily, but if you can’t afford to leave money in, that’s a problem.

Rehab

It’s also tempting to over-rehab a property to attempt to push a higher value for the ARV. Under-rehabbing is just as costly. Partner with a qualified Realtor and/or property manager to understand what will push the value on the property.

Rents

Partner with a seasoned property manager in the area to help you double-check your rents based on the type of property and the level of rehab you intend to do. Also, stress-test your underwriting model in case you have to drop your rents to remain competitive in the market. This will help you establish both practical and worst-case scenarios.

Expenses

Double-check all operating expenses for your property so you understand what your true cash flow is (and what the bank will be underwriting). These may include:

  • Insurance – Call a local insurance provider and get a quote. This is also a good way to see if previous owners have made claims on the property and what they were.
  • Taxes – Search the county tax records and pull the current tax bill for the property. As an investor, you will most likely lose the primary owner’s homestead exemption. If there is still an exemption in place, call the county to understand what your new tax rate will be.
  • HOA – Determine HOA status of the property and if there is an HOA, include this in your analysis. If you don't find an HOA, ensure your title company is searching for an HOA as well during due diligence.

All of these numbers affect the underwriting model and ultimately the debt service coverage ratio (DSCR) on the property. Remember, the lender can use up to 75% of the income from the property to cover operating expenses. If that amount covers the expenses, great! If they don’t, the difference will be added to your balance sheet as debt. If this is added to your balance sheet as debt, it can throw off your DTI (notice the snowball effect here).

A lender may require that the property hit a certain DSCR to qualify for lending regardless if you can carry the debt personally. The cool thing is I know this up front during my underwriting phase. Personally, I keep all of my DSCR 1.25 or above for this very reason.

Lastly, know what the zoning is on your property. I recently worked with a BRRRR investor who almost closed a property all-cash, only to find out it was zoned mixed-use and not commercial. Fortunately, this investor will be able to navigate this issue up front rather than finding it out during the refinance process.

Related: How to Work with Lenders for the BRRRR Method (+ a Massive Open Secret to BRRRR Success!)

Situation 3: You have to wait 6+ months to even do the refinance.

Solution: Understand what your titling seasoning requirements are based on how you purchased and rehabbed the property.

Long seasoning periods can cause hiccups if you have multiple projects going, the market is moving quickly, or if your job is unstable and you need to qualify for the refinance now. How you purchase the property will also affect how and when you can complete the refinance.

For now, let’s hit some high points.

Conventional Financing

This type of financing is the most familiar type: a mortgage backed by Fannie Mae or Freddie Mac. Currently, you can get the lowest rates, lowest fees, and no prepayment penalties with this type of lending.

However, you will have to personally guarantee the loan, and there are stringent underwriting guidelines. You can get up to 75% LTV on a refinance. Just know that not all conventional lenders work well with investors, so find an investor-savvy conventional lender.

Commercial Financing

This type of financing underwrites the property as an income property. Oftentimes, you will have higher interest rates, prepayment penalties, and you most likely will have to sign a “bad boy” carve-out (kind of like a personal guarantee).

There are lenders who will do both the rehab (known as fix and flip) and commercial part of the loan process, which can save you time and money (and headaches). I have even seen some commercial lenders send the same appraiser back out to the property for the post-rehab ARV, limiting your refinance surprises. Post-COVID-19, these types of programs are just now starting to come back online.

analyze-cash-flow

Situation 4: Neither you nor the property pass underwriting.

Solution: Treat your lender as a business partner, not a vendor, and line up your refinance lending during the due diligence phase of the initial purchase.

This is a common rookie mistake. Unfortunately in this situation, there’s a very real possibility you will have to exercise a different exit strategy to move the property.

Treat your lender as a full-on team member who will help you scale. Loop in your chosen refinance lender in the beginning and ask them about their willingness to refinance the property for you given your underwriting parameters, where the market is, current rates, and your economic situation (see situations one and two above).

This isn’t a guarantee that they will refinance when the time comes. But it’s a bonus if you can go into a deal knowing what you have to do to come out the other end relatively unscathed.

Related: 5 Refinancing Steps You’ll Need to Complete for the BRRRR Strategy

Pulling It All Together

Refinancing a BRRRR property is a relatively straightforward process. However, you can see where small landmines can creep in if you aren’t careful.

If you do step on a landmine, make sure you are prepared to mitigate the situation. Here are a few ways to do just that.

  1. The property doesn’t qualify for the loan
    • Complete property underwriting and due diligence before the initial purchase.
    • If the refinance appraisal comes in low, contest the appraisal and see if the appraiser will raise their value.
    • Be prepared to leave money in the deal to close the gap in the down payment, and look to refinance again later.
    • Have multiple exits and look to flip or sell retail or to an investor.
  2. You can’t qualify for the loan
    • Exit the deal through another exit strategy and get your investing ducks in a row to qualify next time.
    • Bring in an equity partner to secure funding.
    • Refinance out your money with a private lender who will carry the note for you.

As with anything in life (and real estate) the most powerful question you can ask when you hit an obstacle is, "How can I overcome this?"

You’d be surprised at what you find as the answer.

What hurdles have you faced during a BRRRR refinance? How did you resolve them?

Share your experiences in the comments below.

Whitney is a real estate investor and personal finance trainer whose vision is to launch 10,000 families on the path toward financial independence. After purchasing her first rental in 2002, and hi...
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    Ian Dickerson
    Replied about 2 months ago
    Very insightful article Whitney! I'm just getting into REI and heavily leaning towards BRRRR as my strategy so any and all information is helpful.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 2 months ago
    Glad you found value, Ian! Good luck!
    Barry W Bahr Investor from Tampa, FL
    Replied about 2 months ago
    Great information Whitney. I just finished reading David Greene's book on the BRRRR method. Refinancing is the key to make BRRRR work. Thank you for your insight on refinancing.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 2 months ago
    You are welcome, Barry!
    Derrick Walston Rental Property Investor from Virginia Beach, VA
    Replied about 2 months ago
    This was an amazing breakdown. Thank you!
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 2 months ago
    Glad you found value, Derrick.
    Daniel Long
    Replied about 2 months ago
    Great overview! Thanks
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 2 months ago
    You bet, Daniel!
    Edgardo Saldana Investor from Clifton, New Jersey
    Replied about 2 months ago
    Is been my experience that when you refinance your property that the appraisal comes at 30k less. In addition, I pay for an full appraisal before I buy and rehab to reduce reduce the risk. Use business credit card so your DTI do not get effect.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 2 months ago
    Very cool, Edguardo! Thanks for sharing.
    Tim Lee New to Real Estate from San Francisco, CA
    Replied about 2 months ago
    Super helpful article for a rookie like myself! I'm planning on using a HELOC to purchase my first rental property this year, but I do have a mortgage and a student loan. Will using the HELOC affect my DTI and prevent me from doing a cashout refi? If so, I do have some cash savings to help with the purchase as well. Thank you again!
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 2 months ago
    Yep! Brian described it perfectly :)
    Brian Findley Rental Property Investor
    Replied about 2 months ago
    A heloc with a balance does impact your dti. You'll inform the lender your down payment is sourced from your heloc. The projected heloc monthly payment (based on the proposed loan balance - once you've withdrawn down payment $$) will be added to your other monthly payments to compute the debt side of your dti. Good luck!
    Pasi Musaindapo Lender from Denver, CO
    Replied about 2 months ago
    This was very helpful. Thanks. Refi is very tricky right now but not impossible.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 2 months ago
    Agreed, Pasi! You have to plan the work and work the plan even more so now!
    Michael Tran Developer from San Diego
    Replied about 2 months ago
    Thank you for the great article. Can you lend some insight to a BRRR refinance with jumbo loans during the Coronavirus era?
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 2 months ago
    Hmmm... I would talk to a lender on that one. Jumbo loan guidelines are a moving target right now and vary state to state .
    Oscar Garcia from Humble, Texas
    Replied about 2 months ago
    Very informative thanks
    Antreet Connor Rental Property Investor from Melbourne, FL
    Replied about 2 months ago
    Great article. I just tried to refi my first BRRRR deal and ran into some issues. This is very helpful. Thanks!
    Salvator Lorick New to Real Estate from Middletown, NY
    Replied about 1 month ago
    @Antreet Would you mind telling us what problems you ran into? thanks
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 2 months ago
    Glad this article helped, Antreet!
    Michael Fleming Lender from Harker Heights, Texas
    Replied about 2 months ago
    Thanks for posting! Great Article. I have done a few BRRRR, currently I am having challenges as I can not find a Bank who will do a cash out refinance of an investment property during these COVID times. Has anyone else seen this? Has anyone found a Bank that will?? Thanks.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 2 months ago
    Sorry to hear you are having issues, Michael. And no, you aren't alone. Keep talking to lenders and researching new ones. Guidelines are constantly changing these days.
    Lavon Ivy
    Replied about 2 months ago
    I am very concerned about this article. There were some really good points, however, considering that many tenants are not paying rent and many lenders are not doing cash out refinances on non seasoned deals. I have been in real estate for over 30 years and I really would like to see these very strong platforms provide more realistic facts for new investors. Brrr can be a disaster if overleveraged or there is no cash flow during this pandemic. It can lead to foreclosure epidemic.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 1 month ago
    Lavon, I completely agree that some investors are getting caught "with their pants down" on projects right now. Lenders aren't going to lend on a BRRRR that where the investor has not done their due diligence upfront and ensured that the property will have a proper LTV and DSCR on the rei. Hence why some people are having issues right now! I wrote an article earlier in May describing that investors must start stress-testing their calculations since we don't know the true ARV of the asset, true rents, and true vacancy during this time of volatility. Also, as described above, reserve requirements are much stricter now than in the past which is catching many investors who only have just a few dollars in the bank off guard. What I'm seeing in the forums is the opposite, where newer investors are glossing over the advice of more seasoned investors who are trying to help them understand just how dire this situation truly is and launching into more risky deals.
    Todd Hoggatt Investor from Florida Panhandle
    Replied about 2 months ago
    Yes, I have a property I've rehabbed and rented but can't get it refinanced. All of my money is tied up in this thing so I can't do the "repeat" part. A list of cash-out re/fi lenders would be helpful.
    K Smith from Reno, NV
    Replied about 1 month ago
    Maybe I'm missing some details, but these articles always seem to explain just enough to make you think you can solve the problem and then get stuck. Lol. For example, Mom is in assisted living, I'm thinking of paying off her loan, have her sign title over to me, then rehabbing the property for rent so the cash flow will cover her monthly expenses. I have good income, good credit(760+), and very low DTI ratio. No one would give me a loan to buy it, and I'm worried I won't be able to get the cash out after the rehab for the next one. Do I need to have an existing mortgage with a lender to initiate a cash out refi, or can i get a new loan as a cash-out-refi? Thanks everyone for your comments, sometimes the feedback is as informative as the article that precipitated it!