So I purchased a SFR about 3 weeks ago and the renovation process has been underway for about that same time. Along the way we have come along some unforeseen costs that will force us to eliminate some of the design work we had in place.
As another exit strategy I am considering the vehicle of Buy, Rehab, Rent & Refinance as mentioned numerous times here on Bigger Pockets. I do understand the concept fairly well since it is pretty self explanatory but I do have a question in regard to the refinance or cash out on the back end.
This SFR was bought with cash and was wondering when the refinance step approaches, what is the best way to find the most beneficial percentage of being cashed out at?
Should I expect a cash out % of 70-75% of the assessed value of the home?
Thanks BP. I appreciate the assistance!
A couple factors will dictate the amount you can take out. First of all each lender has different percentages they will allow you to take out of the property. So shop around to see what your options are. Second it is important to analyze the numbers and know what type of cash flow you want from your property once leveraged. If you want a certain amount per month cash flow after accounting for all the expenses, then that will dictate the equity you cash out to give you the performance you are looking for.
There are a lot of factors that come into play here when you are looking at the refinance lending options. Most important are the terms of the loan you will be using on the back end, which will provide you with the ability to get the cash out of your property. The terms include:
-LTV% (amount of the value that the bank will loan you)
Using these, you can get a good idea of 1) how much money you will be able to get out of the property and 2) what the property's operations will look like once leverage is applied to the investment. Like @Ryan Billingsley said, it is good to have an ideal figure of how you want the property to operate once leverage is applied, as this will dictate how much money you will need to leave into the project to make those numbers work.
If you have held title to a property for 6 months, you can get a cash-out refinance through a Fannie/Freddie mortgage that will use 75% of the new appraised value of the property, and also provide you with 30/30 terms and a low interest rate in order to optimize cash flow. If you don't want to go this route, I would hook up with some commercial lenders in the area who can maximize LTV and give friendly terms if you decide to use less leverage than what they are offering. You will typically see a 5 year term/20 year amortization with a slightly higher interest rate (5% or so) with these commercial banks.
Best of luck!
Depends on the lender. Ask them. It's their terms, their rules, their money.
Same with all the posts as to excellent advice
I am looking at doing a BRRR with my property if it does not move within 60 to 90 days after being complete. From my experience, at our local level, I have networked with a few small lenders, i.e. credit unions or small-scale banks to see what lending models and options they would do.
Make sure that you can stay under at least 70% of ARV with acquisition/repairs/fix costs to recover your equity.
ARV on subject property is 100k
To fully take advantage of Cash out Refi.
All costs associated with property should come under 70k to recoup initial equity.
Also, research delay financing. Stricter terms but there is no seasoning to title...
Knowledge is Power. Great question
So if I hold title to the property for 6 months I should be able to cash out 75% of the new appraised value of the home. Does this % vary from lender to lender?
The other route using a shorter term with shorter amortization rate (less leverage) would be used to capitalize on the LTV prior to the 6 months of holding title?
Appreciate the replies
We are in the process of doing our second cash purchase, rehad, refi and the mortgage broker originally told us that we could do 70% refi with cash out up to the appraised value. When the time came to actually put in the app with the lender though they said it was 70% LTV on the appraised value up to the price that we paid for the property. So we will not get additional money on top of what we paid but at least we get what we initially paid back.
Another thing to be aware of is that a lot of lenders will not do a cash-back refi on any property that you have owned for over 180 days for some reason so you will have to act quickly as soon as you purchase and rehab something.
If you are going the BRRRR route, couple things. Like most people already said, a lot of lenders will require a 12 month "seasoning" term, however if you call around enough you will find a lender or two that will do refi cash out after 180 days. I know lenders who are willing to do a cash out of 85% after a 12 month seasoning, however I wouldn't recommend that much leverage. Most banks will require reserves on additional rental properties, usually 6 months. However, I found out that my lender will only require a 2 month reserve for a rental if you have 30% equity in a property. Hence, I would only refi to 70% so A) I have a lower payment, better cash flow B) Banks are happier/will require a lower reserve C) having more equity will make it easier to obtain a commerical line of credit once the portfolio is larger.
Also, with the BRRRR I would make sure not to over leverage. Leverage is a powerful tool in real estate, but it can be dangerous.
The numbers on the SFR are stated below:
Purchased + Closing = 58,925
Rehab budget= 32,000
Holding Costs= 225-250 month
Current Assessed Value = 130,000
Resale = 135,000- 137,999
Post Repair Assessed Value = Hoping for 150-155,000.
I am planning on taking the same steps if the home has trouble selling in 60-90 days and it is possible I will make more money if I used this procedure initially. This being the first time I may use this method just want to make sure I take all the correct steps prior the renovations being completed so everything is situated if this exit strategy is necessary.
Thanks for the advice my man.
Good deal. Also if you can. Check out @BrandonTurner BRRR webinar. Great information
@Daniel Sisto - your first post mentioned that you had to cut out some design aspects due to unforeseen problems. I want to be sure that the ARV (Post repair assessed value) that you name above (150-155k) also reflects the changes.
Some folks will go into a deal with an expected ARV, make downgrades to the renovation and still expect to hit the same ARV...then find out at the refi that the appraisal has come in lower; the lower appraisal naturally impacts the refi loan amount.
Of course, not all changes will impact value equally; and in today's market, the appreciation may help you in the meantime.
Yes. That is right. We had some additional electrical work that has been added and needed to be done. Also when we were rewiring the electrical, when taking down the sheetrock we noticed that some of the exterior walls were not insulated (live in upstate NY, folks must have been freezing) So those were the unforeseen costs.
Deff have taken these aspects into consideration when trying to predict the assessed value post rehab. I will not be reselling the home for that 150-155k but predicting that the assessed value will come in at that due to the condition the home was in prior to it being assessed at 130 k. The home was in pretty rough shape (layout wise, finish wise) so im hoping the assessed value will increase by that 20k but as we know only time will tell haha.
BRRR Cash Out Financing....... Some Conventional Guidelines
- The typical cash out financing is done after 6 months of owning the property, based on ARV and available for mortgages #1-4. Please see delayed financing for less than 6 months after closing.
- On a primary residence you can pull out up to 80% LTV on a SFR and up to 75% LTV on 2-4 unit multi-families.
- On an investment property; A SFR if you have #1-4 mortgages you can pull out up to 75% of the equity and a duplex is up to 70% equity.
- On an investment property; If you have #5-10 mortgages you can only pull out money in the first 6 months (delayed financing) that you own the property, if you didn't originally get a mortgage on the property. As long as the value is there (on a SFR 70% LTV and duplex 65% LTV) You can take out up to the purchase price plus closing costs on the property.
- If you are willing to pay the fees and go through two closings.... You can take out private or hard money on free and clear properties #5-10 and do a rate and term refinance with conventional to pull money out on them.
- PROPERTIES LISTED FOR SALE
For a rate and term refinance transaction, the borrower must evidence that the listing has been cancelled, and must not have been listed for sale as of the date of the application.
For a cash-out transaction, the borrower must provide evidence that the listing was cancelled at least six months prior to the date of application.
- Cash Reserves Required For Other Properties Owned by Investor;
- If the borrower has 1-4 mortgages, an additional two (2) months for every other SFR investment property and second home is required and additional six (6) months for every other 2-4 unit investment property and second home
- If the borrower has 5-10 mortgages, An additional six (6) months for every other investment property and second home.