Specialist · Somerset & New Brunswick, NJ · Member since 2016 · 215 posts · 10 votes
I found a great single family house in my town. I wanna buy it and use it as a rental so i can become a landlord. I wanna do the BRRR process as in Buying it , Rehabbing the little things , Rent it out locally , Refinance it from the bank.
Now here is where i need help?
Each step
Buy : where can i find PML that will lend me enough for the buying of the property , closing costs and the little cosmetic stuff ?
Rehab : Should that be out of pocket or do i include that in the numbers for the PML
Rent : I know i could rent it as a college rental ( not to for from the college campus )
Refinance : Would that be just a normal loan ? or a mortgage loan of the amount i took out from the PML ?
Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes
10y
For refinancing, you'd be looking at a conventional loan, but would be paying a 1/4 to 1/2 point higher on the interest rate due to it being an investment property.
For a true BRRRR, the goal is for the property post rehab to appraise high enough that you can take out enough money to fund your next deal as well as paying off the original loan. Most big banks will lend 75% of the appraised value for a cash out refinance. That 75% number is the key to understanding if you have a good deal, a mediocre deal, or no deal.
(Post Rehab Appraised value) X .75 - Loan value = Cash out
Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes
10y
Most people start the BRRRR process using their own seed money saved up from their day job. That way they can do conventional financing. This requires having enough for 20% down payment, and rehab.
Then next popular option is private money. Offer family and friends 10% interest for a 6-12 month loan. There are a couple of advantages of going this route. First, you'll only need enough for the down payment and rehab, and not full purchase price. You'll just need to have the money in your bank account two statements before applying for the mortgage so the bank doesn't track the money back to being loaned. Additionally, you won't have the hassle and paperwork of dealing with a HML, as well as more flexibility if things don't go exactly as planned.
Another option is a loan against your 401k if you have funds there and your employer offers loans.
And finally there's HML as you mentioned. I can only speak from what I've read on Bigger Pockets. I suspect you might have some issues getting hard money for you first project, even more so with great deals being hard to find. I think the first step is really doing your homework so you have a complete project plan laid out to prove to a HML that you know your stuff. Then search the forums to find a group that might lend in your area.
Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes
10y
For refinancing, you'd be looking at a conventional loan, but would be paying a 1/4 to 1/2 point higher on the interest rate due to it being an investment property.
For a true BRRRR, the goal is for the property post rehab to appraise high enough that you can take out enough money to fund your next deal as well as paying off the original loan. Most big banks will lend 75% of the appraised value for a cash out refinance. That 75% number is the key to understanding if you have a good deal, a mediocre deal, or no deal.
(Post Rehab Appraised value) X .75 - Loan value = Cash out
Investor · Southeast, MI · Member since 2016 · 425 posts · 184 votes
10y
Also, to clarify, so if you paid cash for the property and rehab, the bank will just do a refinance, even though it wasn't financed before? I guess it's like a secured loan, with the banks security being the property?
So, if a house was $38K, and repairs $30K, and ARV is $108K,
This would mean 75% x $108K = $81K
$81K- no loan = 81K, but if we were covering the cash we input, then left over is $13K. We put the $13K into the new deal as a down payment, and repeat?
Investor · Columbus, OH · Member since 2016 · 34 posts · 11 votes
10y
I have a quick question regarding the BRRR concept. I was hoping for a little clarity myself. I am a few weeks away from completing a rehab. I boughta SFH for 31K and investing 25k for rehab. My realtor said it would likely appraise for 91k when completed. Assuming he's close, 91K - 75% LTV is 68k. So the bank gives me a check for 68K and I now have a 30 year fixed loan with a payment of $400/mo. That allows me to take the 68k to reinvest. But what is the point if I would generate 800/mo in rent and can pay myself entire 800 verses giving bank $400?
Investor · Minneapolis, MN · Member since 2012 · 187 posts · 117 votes
10y
The key for the BRRRR strategy is to buy low enough and rehab enough to significantly increase the property value such that 75% of new valuation is enough to pay off your original lender and to pay for your other cash you put into the deal for rehab work, holding costs, and closing costs (twice).
Be extra conservative in your estimates of ARV because refinance bank appraisers are very conservative. And their number is what your loan amount will be based off of. This appraisal amount is not the same as trying to determine if a buyer is willing to pay more for your awesome design skills, style, staging, colors, or a bidding war. This appraisal is based on previous sold comps and they are all over the place for quality and sale amounts. Appraisers will do you no favors to get to your target number.
If you buy at 70%ARV minus repairs, BRRRR works well. If you are paying more like 80% ARV-repairs the refi does not pay off everything plus all the cash you put in.
BRRRR is easier to do in an appreciating market where an appraisal in 5-12 months can be 3-5% higher because of market forces. In a declining market, buying right is even more important.
Also calculate what happens after you do refi to a much larger loan. You may be paying $150-$200 more for the new mortgage payment. Are you still cashflowing?
I have a quick question regarding the BRRR concept. I was hoping for a little clarity myself. I am a few weeks away from completing a rehab. I boughta SFH for 31K and investing 25k for rehab. My realtor said it would likely appraise for 91k when completed. Assuming he's close, 91K - 75% LTV is 68k. So the bank gives me a check for 68K and I now have a 30 year fixed loan with a payment of $400/mo. That allows me to take the 68k to reinvest. But what is the point if I would generate 800/mo in rent and can pay myself entire 800 verses giving bank $400?
The point is: "to take the $68k to reinvest"! With 2x $91k properties, you'll still be getting that $800/m cash flow, but you have DOUBLED your net worth once your tenants pay your loans off!
And EACH time you reinvest similarly, your cash flow goes up another $400/m without you having to come up with ANY extra dollars yourself! I reckon THAT'S the point! Congrats on your start!...
Piedmont, OK · Member since 2016 · 18 posts · 7 votes
10y
@Marc Jolicoeur@Brent Coombs I'm sorry if this is listed above, but I want to make sure I'm clear on it. Do banks typically require a rental history before the cash out refinance? I feel like I had read 6 months of rental history was typically required. Thank you.
Investor · Minneapolis, MN · Member since 2012 · 187 posts · 117 votes
10y
I have done two Conventional refi's with 75 LTV. The second one did require me to show a signed lease, however they never asked if I was actually collecting rent or not. Maybe they skipped that question because my bank account reserves looked great. I seem to remember it being the same with my first refi too.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
Not speaking from experience (but from reading about others'), the MAIN criteria the refi Lender considers is the percentage of THEIR appraisal (typically lending not more than 70%) policy, so that even if you renege later, they should be able to recoup their dues if foreclosing. ASK them!...
Residential Real Estate Agent · Salt Lake City, UT · Member since 2014 · 156 posts · 50 votes
10y
Is there a seasoning period before you can refinance? It seems like there are quite a few variables and not a lot of straight forward facts on this topic.
I'm looking at a deal to buy with hard money at $160k. It needs about $25k in work but will appraise for $240k when it's done. If I can get this refinanced at 75% LTV then it's a fairly good deal, I will still have some money in it, but the CoC return will be awesome still. If I can only get 70% LTV, it's not nearly as great. So which is it? Does it just depend on the bank and what your broker can get you?
Will I be stuck with 6 or 12 months seasoning period? This also changes the numbers quite a bit based on what my hard money costs will be.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
Cody, again, you need to specifically ask Lenders that question. As far as I can work out, some of them MAY allow such refi without seasoning so long as you're not wanting cash out as well.
Remember also, using the 70% Lender appraisal "rule" (hopefully appraising at $240k), your all-in cost should be not more than $168k INCLUDING rehab! Cheers...
Investor · Chicago, IL · Member since 2013 · 59 posts · 6 votes
9y
From what I understand you have to wait 6 months after initial purchase before you can cash out refi on a conventional loan. Those are Fannie & Freddie rules. But there are different rules for comercial and other loans.
Investor · Safety Harbor, FL · Member since 2016 · 83 posts · 42 votes
9y
Conforming loans (conventional) will require a seasoning period. If you find a small local bank that does portfolio lending, they make their own rules so they can decide to not require seasoning. I'm searching for a small local bank in my area now, for just this purpose. I'm asking them specifically if they will do a cash out refi within 30-60 days of me purchasing a property with cash. Search BP for these topics and you will find lots of good info.
Hello, paying 160000 would mean no refinance with cash out for you and Your goal is enough cash out for the next deal after paying off your first short term loan and accounting for repairs, closing, holding.
240000 ARV x.70 =$168000 is what you could borrow @ 70%LTV. You said PP of 160000 and 25000 rehab. You're already up to 185000. This isn't including your closing costs and holding costs either. You wouldn't be able to refinance and all your money would be tied up in this property. Your first loan...if short term loan with high interest ie hard money lender...what's your exit strategy? Will the expenses be covered by renting it or dip into your pocket every month? If you sell then you're paying short term capital gains taxes. These are things to think about.