Rental Property Investor · Fort Collins, CO · Member since 2015 · 128 posts · 327 votes
I would like to specialize in BRRR, and my concern is actually getting the final R done. Between seasoning, lenders not going above purchase price, etc, it sounds like this step trips a lot of people up!
I have the ability to make the initial purchase in cash and fund the rehab out of pocket. If I do this, though, I want to be sure I can get my cash back out quickly, because I can't do my next deal without it! So my question is, should I buy with cash or should I get a mortgage on the initial purchase? Which is most likely to make the cash-out refinance happen as soon as the rehab is done?
I expect "talk to lenders" to be a common answer, but they won't tell me much about an after-repair cash-out refinance when I don't even have a property picked yet!
I'm going to assume from your question you're just starting out and I'll answer based purely on my own experience. I always use mortgages and now in hind site I can see the benefit of starting that way. Use a local institution. A small bank or preferably a credit union. Get all the money you can from them on your first deal. Use half your money to rehab. That leaves the other half to purchase your second deal while the first is seasoning. Use credit cards, first deals rent and your day jobs wages to rehab the second deal. After all that use the two rents to hammer that mortgage down. Now when you go back to the bank you look like you know what you're doing. They'll be dying to give you money. This way you're building your resume so to speak and building a relationship with the bank which lowers your risk profile in their eyes. Million ways to go about it but that has worked for me. Good luck!
With this question, I'm specifically asking if having the first mortgage will delay the refinance, perhaps by allowing lenders to invoke "seasoning" requirements.
James I have a different perspective on this. If you pay cash for the property and then conduct the rehab and place a tenant in the space you will have less money In it then if you obtained a mortgage on the front end. I use private lending and obtain commercial financing. Here is the upside: no seasoning, I am usually able to get all of my money out and then pocket some if I choose. If you rehab right and build added value you can keep repeating the process over and over. You will need a LLC for the commercial loan. I think it is the best move.
I have a feeling that you just read this thread, or that it's just a really small world.
If you buy all cash, yes you can start the cash out refinance using the FNMA Delayed Financing Exception the very next day. Yup, that's what we did there, except it was convoluted five ways from Sunday because the "all cash" actually included not one, but multiple, mortgages. Writing a check would be much less convoluted.
Loan amount will be capped at purchase price plus refinance closing costs on the cash out refinance, assuming the appraised value allows for it. You have to wait six months to get your rehab budget out via a cash out refinance where the loan amount is larger than the purchase price plus refinance closing costs, assuming you want an Agency 30YF.
Gotta start with your scenario and your local REI-friendly lender and work backwards, not with the rules. :) Your scenario can change faster than Fannie Mae will change her rules.
eg. ..."Properties listed for sale in the six months preceding the disbursement date of the new mortgage loan are limited to 70% LTV"..., and ..."The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs"...
If you want to pull out MORE, wait for the seasoning period dictated by their overlay policy. Cheers!
Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
9y
@James Free I'm in a similar situation as you and still deciding between paying cash for my first BRRRR property or getting a loan on the purchase end. Most likely I will try to obtain a loan for the purchase this way I can spread my initial "seed" money out over a few properties utilizing 25% down payments versus having it all tied up into one property and waiting to cash out refinance.
Davis, CA · Member since 2016 · 595 posts · 344 votes
9y
For most people, maybe besides mega flippers with contractors on tap.... 6 months for rehab, marketing, tenant etc... is probably not all that much "waiting"... no?
If i was gonna do BRRR, I would use financing... just as risk management. and flexibility... wouldnt want to tie up all my cash, or risk all my cash in one deal if they find a dead body under it or asbestos, or lawsuit or. or. or...
Lender · Bethesda MD · Member since 2017 · 283 posts · 123 votes
9y
As a hard money lender with no seasoning requirements, you can finance the acquisition with us (or another lender) and cash-out refi as soon as the project completes for the new value up to 75%. Works the same way if you had paid cash originally. This requires non-owner occupied and in an LLC.