BRRRR Investors: Ready to Refinance? Consider 3 Key Components to Up Your Odds of Success

BRRRR Investors: Ready to Refinance? Consider 3 Key Components to Up Your Odds of Success

5 min read
Whitney Hutten

Whitney is a real estate investor and personal finance trainer whose vision is to launch 10,000 families on the path toward financial independence.

Experience
After purchasing her first rental in 2002 and hitting a home run, then nearly losing it all on her second deal, Whitney took control and figured out how to invest in real estate the right way. She realized that success must leave clues. So, she studied and replicated the very personal finance and wealth creation strategies the wealthy use to create financial freedom.

Today, Whitney is a partner in $500MM+ of real estate assets, including 5,000+ residential units (MF, MHP, SFR, and assisted living ) and 1,430+ self-storage. Additionally, she has flipped over $3MM in residential real estate and has a solid portfolio of commercial notes. (Don’t tell anyone though… BRRRR investing is still one of her favorite strategies—26 units and counting!)

In 2018, Whitney founded ASH Wealth and the Investor Accelerator Mastermind, where she helps you develop a clear, workable plan that gives you the results you dream of, solves your business startup or scaling issues, and drives massive progress toward your real estate and financial goals.

In her spare time, Whitney enjoys trail running, mountain biking, camping, and spending time with her family.

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Whitney’s been featured on the BiggerPockets Blog, BiggerPockets Real Estate Podcast episode #340, BiggerPockets Rookie Show episode #29, BestEver Podcast, The InvestHer Show, The Investing for Good Show, Life Bridge Capital podcast, The Road to Family Freedom podcast, Frenzied to Financial Freedom podcast, Purchase to Profits podcast, and more!

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Refinancing money out of a BRRRR property is always one of the high points in my investor career. Nothing feels better than closing on a refinance and having a cash-flowing property—plus money in your pocket to do your next deal!  

Refinancing out can also be the most tenuous part of the BRRRR process

With that said, let’s discuss several keys to making your BRRRR refinance go swimmingly smooth, as well as steps you can take should it go sideways (or south).  

Who’s Involved in Refinancing?

There are three major players in a BRRRR refinance: 

  • You
  • The property
  • The appraiser

Let’s take a closer look at each one.

Your Role in Refinancing

Believe it or not, you have a huge impact on if the refinance goes through. The lender is underwriting you if you are using conventional lending and the home if you are using commercial lending (although you still have to sign a personal guarantee). 

house cutout and coins stacks increasing in height in a row on table

Here are some action steps to take to improve your odds:

  1. Line up your “take out lender” during your initial diligence of the property and have them pre-qualify you on the loan. 
  2. Have a good FICO score and reserves, so you can actually qualify for the new loan.
  3. Don’t change jobs, reduce your hours, or quit before your refinance is complete.
  4. Don’t make major purchases that would throw off your debt to income ratio (DTI) or deplete your reserves, or your lender may no longer see you fit to lend to.
  5. Don’t purchase more properties or execute other refinances without involving your lender to ensure that you can still qualify for the refinance loan.
  6. Partner with the lender to know what type of loan you qualify for and what type of down payment you will have to bring. The lender is a team member.  

Though this all seems to be common sense, I’ve seen investors get tripped up by purchasing too many properties at once, executing complex refinances on multiple properties at once, or being silly and reducing their hours at their job or quitting their job two weeks too early!

Related: The Essential 11-Step Guide to Refinancing Investment Properties (For BRRRR Strategy Followers!)

The Property’s Role in Refinancing

Another player in a successful refinance is the actual home and rehab. This work should be completed in the due diligence phase as you finalize all numbers for the purchase AND refinance at one time.

Have you run your numbers accurately?  

  • The property: Are you purchasing a property that is in a stable or appreciating neighborhood and market? If prices are declining, you will need to account for a decline in the ARV you desire (and ask yourself why you are purchasing in a declining area anyways!).
  • After repair value (ARV): Did you pull accurate comps for the level of rehab you are doing? Have you ensured your numbers work at the lower end of the comp range?
  • Taxes: Did you account for possibly losing a tax homestead exemption? When you purchase a home, the previous owner might have had a homestead exemption. An investor, at some point during the hold, will lose that exemption. The lender counts this as an expense in their underwriting. Also, is the local government raising property taxes? I had one home where the taxes tripled during the time I held it. (I now have sold it.)  
  • Insurance: Did you account for the difference in premiums in your post-refinance numbers? Again, the lender counts this as an expense. Have your insurance agent write a quote for the pre- and post-rehab home so you aren’t surprised.
  • Rehab: Did you bring the home up to market competition level? The appraiser will be looking at the recently sold properties and upgrading and downgrading your home to those retail sales. Make sure your home is on a similar level with regard to number of beds, baths, garages, and finishes. This does not mean over-rehabbing the property—just being on par! Make sure the rehab is also quality work. In addition, take care of major mechanical and foundation issues before refinancing, and keep all receipts.

If you have purchased a great home in a great market, run your numbers, rehab it to the competing market, and you should have a relatively good chance the refinance will go smoothly.

But there is still one hurdle to clear—and that’s the appraiser.

Young black couple using laptop at home look at each other

The Appraiser’s Role in Refinancing

At the time of this post, home sales are on fire and getting a timely appraisal is extremely challenging. (I’ve currently been waiting three weeks on three of my properties!) The lender doesn’t even get to choose the appraiser, rather they put in a request to an appraisal network. Most appraisers are solid and competent; we investors LOVE this type of appraiser. 

The BRRRR derailing wildcard is: what if you get matched to a less than ideal appraiser?  

Perhaps the appraiser doesn’t know the sub-market, or that you rehabbed the property, or is generally just not trained on how to count (I’m serious!) or to pull comps (even more serious!). It happens!  

Just last year on one of my BRRRR refinances, I’m absolutely positive the appraiser never visited the property. We rehabbed the property from a three-bed, one-bath, 1,000-square-foot home to a four-bed, two-bath 1,300-square-foot home.  

Drumroll, please… 

The appraisal came in just $5K over what we had purchased the original distressed property for ($30K under market).

Guess what?! The appraiser counted only three beds, one bath, and 1,000 square feet, AND they only included the data from the original sale, including the old pics! Clearly, he had never visited the property and/or the comps!

I’ve always been amazed that an appraiser can miscount the number of rooms, bathrooms, and square footage and still stick by their report. Yet, this jackal stuck by his report.  

And if you know me at all… I don’t take “no” for an answer!

So, what can you do if you get a rotten, no-good appraisal report that threatens your deal?  

Related: What Yields a Higher Return: Selling Now, Selling in a Few Years, or Refinancing?

How to Deal With a Bad Appraisal

First step… BREATHE!  

Next:

  1. Contest the report with the lender. You can appeal why you think the home should be evaluated differently. The appraiser then has the opportunity to correct their report and make justified adjustments to value. Unless there is a glaring issue, the appraiser will own up to, this maneuver might pull the value up $5-10K.
  2. Request that the lender not use that specific appraiser again. To avoid the bad lending practices of 2008-2010, lenders have to use an appraiser from a network. While you can’t request a specific appraiser, you can ask for one to not appraise your properties again.
  3. Start the process over. You can wait the allotted time (typically six months) and start the refinance process over again.
  4. Bring cash. You can also bring extra funds to close the transaction and try refinancing the property again at a later time.

If you can’t resolve the bad appraisal by contesting, all is not lost. You have two more maneuvers to execute:

  1. You can switch conventional lenders. The new lender may still have a waiting period, but hopefully much shorter than six months. Make sure you have enough time with any hard money or private money lender to do that.
  2. You can also consider going commercial lending or local portfolio lending. Since rates will be higher, make sure your numbers still work for you to go that route.

Conclusion

There are clear action steps, within your control, that you can take to ensure your BRRRR refinance goes smoothly. And while you can’t control the entire refinance transaction, you are now empowered with ways to deal with most BRRRR refinance situations.

hard-money-lenders

Would you like me to expand on any of the above? Do you have any additional advice to offer investors looking to refinance?

Let’s talk in the comment section below.

Refinancing money out of a BRRRR property is always one of the high points in my investor career. Nothing feels better than closing on a refinance and having a cash-flowing […]