BRRRR Strategy and seasoning requirements...
Rental Property Investor · Milton, WA · Member since 2017 · 6 posts · 5 votes
BRRRR Strategy and seasoning requirements...
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Contractor · Los Angeles, CA · Member since 2015 · 887 posts · 323 votes
9yHere is something I saved from another BP post. I will paste it here. Hope it helps. Here goes:
1. The Conventional Rules For a Cash Out Loan
Fannie Mae and Freddie Mac are the Government Agencies that sponsor conventional lending. Most banks will have these loans as an option. There are other loan types as well but for brevity we will limit this post to the “Conventional” lending (Fannie/Freddie).
- Conventional Loans limit your cash out on an investment property to 75% of the “After Repair Value” on a Single-Family home (70% on a 2-4 unit home). This is also the same percentage that you need for a non-cash out refinance (more on why that is important later).
- If you purchased the investment property with a loan, then conventional loans will require you to wait 6 month to take cash out.
- This rule does not apply if you purchased the home with CASH (more on that in section 2).
Let’s explore some examples here:
If you purchased a property with a 15% down conventional loan (85% loan to value) and you wanted to get cash out, you wouldn’t be able to do so since the cash out limit is 75% of the “Loan to Value”. The MAXIMUM cash out you can receive is 75% of the value of the property.
If you purchased a property with a loan, but did the rehab on with your own cash, then you would need to wait 6 months to get that cash back. Keep in mind you could only receive 75% back of the After Repair Value.
So if you bought a home with a loan of $50k, it required $30k in renovations, and it appraised for $100k after the repair work was complete then….
You would refinance the $50k loan, receive back $25k in cash…since $75k would be 75% of the After Repair Value.
2. Buying a home with Cash
Buying a home with cash has become increasingly popular for many investors but often an investor will be caught with the restrictions to cash out loans if they need to get their money back. There is a plan to avoid this entire section (In section 3) but it is important for us to know about these restrictions. If an investor is buying with cash and flipping they get their money back when they sell the property. But if they are seeking to hold a property for any length of time and want their cash investment back there are some important rules to understand with conventional loan:
If you buy a property with cash (or with a HELOC) you can receive a cash out loan on Day 1.
There is not a 6 month waiting period with receiving a cash out loan if you purchased a home with cash or with a HELOC
BUT you will be limited to the amount of….
Your purchase price + closing costs (costs when you purchased the home)
OR
75% of the “After Repair Value”…
WHICHEVER IS THE LOWER AMOUNT (super important)
These rules are important to understand so here are two examples:
Example 1: If you purchased a home with $50k of cash, and put $30k of renovations into the loan, and the home was worth $100k. 75% is $75k and $50k is your purchase price. So you could only receive $50k in your first 6 months ofownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.
Example 2: If you purchased a home with $80k of cash, put $5k into the home, and the home was worth $100k. 75% would be $75k and your purchase price is $80k…so the lower amount is $75k.
When buying a home with cash you can absolutely get cash back right away but you will be limited to the lower of those two amounts.
3. HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH
With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:
Create an LLC and have the LLC lend you a mortgage on the property you are receiving.
The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.
Here’s how it works:
You create an LLC
You buy a home
Your LLC gives you a loan for the home
You file the deed for that loan at the county courthouse
You use the money from the LLC to buy and fix up the property
Once the property is completed, your conventional lender comes to refinance the loan
Your conventional lender runs title and sees there is a loan.
Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value.
Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.
Some things to think of:
To file a deed at the county courthouse is $100-$150 in cost (depending on which county)
And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.
19 Replies
- Investor · Taylorsville, GA · Member since 2014 · 352 posts · 540 votes9y
Hi, @Michael Slusher. I've done both cash out refi's with 6 months seasoning as well as cash outs with delayed financing, and what you're finding is consistent with what I've experienced.
For delayed financing (which with my lender the refi process can start as soon as the deed is recorded), you can only get your purchase price (exclusive of wholesale fee if you use a wholesaler) plus closing costs back.
For a refi based on ARV, I've not found anyone who will do it for less than 6 months seasoning.
Sorry that doesn't help much, but just wanted to share that I've found the same to be true.
If you do come across someone who will do a refi based on ARV without seasoning, please share!
- Financial Advisor · Des Moines, IA · Member since 2017 · 173 posts · 58 votes9y
There are lenders who will do cash out with only 1 month seasoning, but LTV won't be more than 70%.
- Rental Property Investor · Birmingham, AL · Member since 2017 · 53 posts · 56 votes9y
My understanding is that the key difference between delayed financing, through which the 6-month seasoning period is waived, and "regular" cash out refinancing is that with the former, the total amount of the loan is capped at your out of pocket costs to purchase the property, which does not include post-purchase repairs (although you can roll into your mortgage your closing costs of the refinance as long as you are still under the LTV limit). In other words, there are 2 limits in play - what you paid for the property, and the max LTV (75% for SFRs).
With the latter, while you must wait at least 6 months before cashing out, there is only 1 limit - the 75% LTV maximum - meaning that you can theoretically pull out more cash than you put in if your repairs have boosted the value high enough.
- Contractor · Los Angeles, CA · Member since 2015 · 887 posts · 323 votes9y
Here is something I saved from another BP post. I will paste it here. Hope it helps. Here goes:
1. The Conventional Rules For a Cash Out Loan
Fannie Mae and Freddie Mac are the Government Agencies that sponsor conventional lending. Most banks will have these loans as an option. There are other loan types as well but for brevity we will limit this post to the “Conventional” lending (Fannie/Freddie).
- Conventional Loans limit your cash out on an investment property to 75% of the “After Repair Value” on a Single-Family home (70% on a 2-4 unit home). This is also the same percentage that you need for a non-cash out refinance (more on why that is important later).
- If you purchased the investment property with a loan, then conventional loans will require you to wait 6 month to take cash out.
- This rule does not apply if you purchased the home with CASH (more on that in section 2).
Let’s explore some examples here:
If you purchased a property with a 15% down conventional loan (85% loan to value) and you wanted to get cash out, you wouldn’t be able to do so since the cash out limit is 75% of the “Loan to Value”. The MAXIMUM cash out you can receive is 75% of the value of the property.
If you purchased a property with a loan, but did the rehab on with your own cash, then you would need to wait 6 months to get that cash back. Keep in mind you could only receive 75% back of the After Repair Value.
So if you bought a home with a loan of $50k, it required $30k in renovations, and it appraised for $100k after the repair work was complete then….
You would refinance the $50k loan, receive back $25k in cash…since $75k would be 75% of the After Repair Value.
2. Buying a home with Cash
Buying a home with cash has become increasingly popular for many investors but often an investor will be caught with the restrictions to cash out loans if they need to get their money back. There is a plan to avoid this entire section (In section 3) but it is important for us to know about these restrictions. If an investor is buying with cash and flipping they get their money back when they sell the property. But if they are seeking to hold a property for any length of time and want their cash investment back there are some important rules to understand with conventional loan:
If you buy a property with cash (or with a HELOC) you can receive a cash out loan on Day 1.
There is not a 6 month waiting period with receiving a cash out loan if you purchased a home with cash or with a HELOC
BUT you will be limited to the amount of….
Your purchase price + closing costs (costs when you purchased the home)
OR
75% of the “After Repair Value”…
WHICHEVER IS THE LOWER AMOUNT (super important)
These rules are important to understand so here are two examples:
Example 1: If you purchased a home with $50k of cash, and put $30k of renovations into the loan, and the home was worth $100k. 75% is $75k and $50k is your purchase price. So you could only receive $50k in your first 6 months ofownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.
Example 2: If you purchased a home with $80k of cash, put $5k into the home, and the home was worth $100k. 75% would be $75k and your purchase price is $80k…so the lower amount is $75k.
When buying a home with cash you can absolutely get cash back right away but you will be limited to the lower of those two amounts.
3. HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH
With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:
Create an LLC and have the LLC lend you a mortgage on the property you are receiving.
The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.
Here’s how it works:
You create an LLC
You buy a home
Your LLC gives you a loan for the home
You file the deed for that loan at the county courthouse
You use the money from the LLC to buy and fix up the property
Once the property is completed, your conventional lender comes to refinance the loan
Your conventional lender runs title and sees there is a loan.
Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value.
Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.
Some things to think of:
To file a deed at the county courthouse is $100-$150 in cost (depending on which county)
And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.
- Rental Property Investor · Birmingham, AL · Member since 2017 · 53 posts · 56 votes9y
@Account Closed I am fascinated with Option 3. Have you used that maneuver before on a property purchase? Does the refinance lender really not make you wait 6+ months to refinance if you effectively act as both mortgagor and mortgagee?
Really appreciate the info!
- Contractor · Los Angeles, CA · Member since 2015 · 887 posts · 323 votes9y
- TX · Member since 2017 · 70 posts · 38 votes9y
I would like to know about lender who offer delayed financing without seasoning or 1 month seasoning as well, so if anyone knows of a lender who does this please do PM me or share. (ps. local lenders are a bonus)
- Rental Property Investor · Milton, WA · Member since 2017 · 6 posts · 5 votes9y
I was listening to a Podcast and one of the sponsors was B2R Finance and it redirected me to this site for Finance of America, https://www.foacommercial.com/?redir=b2r
Anyone use this company for the BRRRR strategy. Says only 90 day seasoning requirement for refinance up to 75%. Below is copied from the site. May have found the holy grail...Any insights???
LOAN PURPOSE - Purchase a single property, or
- Refinance a single property, with option to take cash-out3
INTEREST RATE1 6.50-9.00% MINIMUM PROPERTY VALUE $100,000 TERM 30-year fixed, full amortization BORROWER TYPE LLC or Individual MAXIMUM LOAN-TO-VALUE (LTV) - 80% LTV for Purchase
- 75% LTV for Refinance
MAXIMUM LOAN-TO-COST (LTC)
COST IS PURCHASE PRICE AMOUNT.Time Owned : Constraint - ≤ 90 days : 80% LTC
- > 90 days : Full appraised value
WHEN DO WE USE LTV VS LTC? - Purchase: Use lesser of LTV or LTC calculation
- Refinance: Use LTC until property has seasoned for 90 days, then use LTV
CASH FLOW REQUIREMENT - <$150K value: Max 70% Property Debt-to-Income Ratio (PDTI)
- ≥$150K value: Max 85% PDTI
REHAB FINANCING N/A - Investor · Kirkland, WA · Member since 2017 · 121 posts · 53 votes7y
@Eleu Lee I have heard of some hard money lenders that require a short seasoning period, but most just want to make sure you have the cash in your account. You should ask your lender, but there's a strong possibility that the answer is "No".
- 7yRyan BlakePro MemberLender · TX · Member since 2018 · 936 posts · 713 votes
@Account Closed
You have the right formula! Everyone should take note.
The only other formula similar that I know of is to get a hard money loan and then just refinance the hard money loan debt. A standard rate and term refinance (meaning no cashout) can be done any time after the initial debt is placed on the property. My hard money lender funds 100% of the purchase and repairs at 75% of ARV so I am left with very little money invested in the property.
Unfortunately, they only lend in Texas and a few other areas.
In short, if you have the cash, do what Jorge suggested. If not, find a hard money lender that is low out of pocket (will finance 100% of the deal) and then refi as quick as possible. It leaves you with some money in the property (your closing costs and holding costs) but is typically only 5 - 8% of the homes ARV and your refi won't come with PMI because it is at 75% of the homes new ARV.
Hope this helps.
- Member since 2018 · 2 posts · 0 votes6y
Thank you it was very educational
I'm starting my private money brokering business so it help a lot
thank you
Asaf
- Rental Property Investor · Indianapolis, IN · Member since 2015 · 19 posts · 6 votes6y
@Michael Slusher
Contact limaone Capitol
- Rental Property Investor · Gainesville, FL · Member since 2019 · 20 posts · 20 votes6y
@Monte Watson
- Member since 2018 · 33 posts · 12 votes3y
Quote from @Account Closed:
Here is something I saved from another BP post. I will paste it here. Hope it helps. Here goes:
1. The Conventional Rules For a Cash Out Loan
Fannie Mae and Freddie Mac are the Government Agencies that sponsor conventional lending. Most banks will have these loans as an option. There are other loan types as well but for brevity we will limit this post to the “Conventional” lending (Fannie/Freddie).
- Conventional Loans limit your cash out on an investment property to 75% of the “After Repair Value” on a Single-Family home (70% on a 2-4 unit home). This is also the same percentage that you need for a non-cash out refinance (more on why that is important later).
- If you purchased the investment property with a loan, then conventional loans will require you to wait 6 month to take cash out.
- This rule does not apply if you purchased the home with CASH (more on that in section 2).
Let’s explore some examples here:
If you purchased a property with a 15% down conventional loan (85% loan to value) and you wanted to get cash out, you wouldn’t be able to do so since the cash out limit is 75% of the “Loan to Value”. The MAXIMUM cash out you can receive is 75% of the value of the property.
If you purchased a property with a loan, but did the rehab on with your own cash, then you would need to wait 6 months to get that cash back. Keep in mind you could only receive 75% back of the After Repair Value.
So if you bought a home with a loan of $50k, it required $30k in renovations, and it appraised for $100k after the repair work was complete then….
You would refinance the $50k loan, receive back $25k in cash…since $75k would be 75% of the After Repair Value.
2. Buying a home with Cash
Buying a home with cash has become increasingly popular for many investors but often an investor will be caught with the restrictions to cash out loans if they need to get their money back. There is a plan to avoid this entire section (In section 3) but it is important for us to know about these restrictions. If an investor is buying with cash and flipping they get their money back when they sell the property. But if they are seeking to hold a property for any length of time and want their cash investment back there are some important rules to understand with conventional loan:
If you buy a property with cash (or with a HELOC) you can receive a cash out loan on Day 1.
There is not a 6 month waiting period with receiving a cash out loan if you purchased a home with cash or with a HELOC
BUT you will be limited to the amount of….
Your purchase price + closing costs (costs when you purchased the home)
OR
75% of the “After Repair Value”…
WHICHEVER IS THE LOWER AMOUNT (super important)
These rules are important to understand so here are two examples:
Example 1: If you purchased a home with $50k of cash, and put $30k of renovations into the loan, and the home was worth $100k. 75% is $75k and $50k is your purchase price. So you could only receive $50k in your first 6 months ofownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.
Example 2: If you purchased a home with $80k of cash, put $5k into the home, and the home was worth $100k. 75% would be $75k and your purchase price is $80k…so the lower amount is $75k.
When buying a home with cash you can absolutely get cash back right away but you will be limited to the lower of those two amounts.
3. HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH
With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:
Create an LLC and have the LLC lend you a mortgage on the property you are receiving.
The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.
Here’s how it works:
You create an LLC
You buy a home
Your LLC gives you a loan for the home
You file the deed for that loan at the county courthouse
You use the money from the LLC to buy and fix up the property
Once the property is completed, your conventional lender comes to refinance the loan
Your conventional lender runs title and sees there is a loan.
Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value.
Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.
Some things to think of:
To file a deed at the county courthouse is $100-$150 in cost (depending on which county)
And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.
Does step 3 still work? Anyone actually done this?
- 3yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Check out this article posted last week - most of this thread is old and the options have definitely changed and developed since then
https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...
Harpoon Capital514 Reviews - Member since 2018 · 33 posts · 12 votes3y
Quote from @Robin Simon:
Check out this article posted last week - most of this thread is old and the options have definitely changed and developed since then
https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...
Thank you! Yeah, I had already come to realize I was going to have to us DCSR loans. I have a couple lenders that do that.
I see the Hard Money vs Cash in your article. What about using HELOC money?
My biggest problem so far has been finding good deals where I can buy and rehab AND still get the ARV to be 75% LTV. - 3yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Joshua Jones:
Quote from @Robin Simon:
Check out this article posted last week - most of this thread is old and the options have definitely changed and developed since then
https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...
Thank you! Yeah, I had already come to realize I was going to have to us DCSR loans. I have a couple lenders that do that.
I see the Hard Money vs Cash in your article. What about using HELOC money?
My biggest problem so far has been finding good deals where I can buy and rehab AND still get the ARV to be 75% LTV.HELOC is probably not that different than cash - the real issue is whether your offer has appraisal/loan contingencies, so that shouldn't be an issue if using HELOC
Harpoon Capital514 Reviews
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