Is this really a BRRRR???

21 Replies

Can you refinance out of an initial funding via long term loan into another long term loan and still benefit from BRRRR strategy? I.e Obtain an FHA loan and refinance out after 18 or 24 months? (Intent, will be to get rid of the PMI- is it even possible?)

If not applicable to FHA loan, is it applicable to conventional loan?

Does BRRRR only make sense for initial funding being either a short-term private loan or hard money lender, then refi into conventional loan?

Thank you!

@John Adeyi

I did this with my personal residence I currently have on the market.

Was a simple flip with significant equity. Refied after 6 months for some cashout equity and to get out of PMI. Bought it with FHA, have had roommates the last two years. Selling after two years of owning as a personal residence.

This would be some sort of BRRRR property but the third R in BRRRR is rent and if you did and FHA you technically should be attempting to live in the property.

@John Adeyi Yeah I knew from the minute I got the offer accepted I was going to live in it for 2 to 3 years then sell it so I wanted the longest amortization. I think a 30 year is the best way to go since you can always pay more than the minimum but not less. If you get a 15 or 20 year you have to pay that minimum. You can turn a 30 year into a 20 year but not vice versa.
@John Adeyi what you're describing is more of a "live in flip" than a BRRRR because you're not renting it out after renovations. You cant use an FHA for a BRRRR because that would require you to live in the property. The reason most people use a short term/Hard money loans is because, 1) They will lend on a property that will not pass a conventional lender's inspection, and 2) They will fund the rehab as well as the purchase.

You would also be subject to capital gains if you intended to sell in less than 2 years. I basically did something similar as a live in flip with FHA loan here in california and sold after 2 years and went and bought another home without needing an FHA loan this time thanks to the equity earned from appreciation.

@Jason D.

Mhm makes sense! What if I intend to house hack? Just like  @Alexander Flores did. Buy and rehab a multifamily home while leaving in one of the units, then refinance out of the FHA loan to conventional loan as soon as possible (i.e 6 months) . Unlike Flores, I may not even intend to flip the property, the intent may be to cash out refi for another investment, continue to rent out property for extended period of time while I also get rid of PMI.

@Andrew Neal Do you recall the percentage(on the profit made on sale) of capital gain you had to pay ? Also is this only subject to selling the property within two years? 

@John Adeyi If I didn't make a dumb investment in different area than real estate I would be renting out my house for 4 years, then sell it before the 5th year ends to make more money from cash flow and still pay no taxes. I want the equity now to reinvest into more real estate.
@John Adeyi my wife and I sold the house two years almost to the date so we didn’t pay any on our sale since oir profit was less than $500k (asa married couple). However I was told that if we were to sell prior to 24 months they would essentially figure out what percentage of that 24 months you were in the house and then pay capital according to that so you aren’t paying the entire amount.
@John Adeyi a house hack is a great plan! But why refinance out of the FHA? Just to get rid of the MIP? Before you do that, I would compare payment to payment because an FHA loan will most certainly have a lower interest rate, so it may end up not being worth getting into a conventional loan.

Can you refinance out of an initial funding via long term loan into another long term loan and still benefit from BRRRR strategy? I.e Obtain an FHA loan and refinance out after 18 or 24 months? (Intent, will be to get rid of the PMI- is it even possible?)

If not applicable to FHA loan, is it applicable to conventional loan?

Does BRRRR only make sense for initial funding being either a short-term private loan or hard money lender, then refi into conventional loan?

Thank you!

 Hey John

Here are a couple tidbits to chew on regarding FHA.

  • The minimum expected time to live in a property with a mortgage guaranteed by FHA is 1 year.
  • With FHA, you have upfront MIP and monthly MIP that never goes away unless you refinance out or sell the property. New FHA rules keep the monthly MIP on for the life of the loan regardless of the loan to value
  • The conventional version of FHA is Freddie Mac's Home Possible. I've attached a link to a fact sheet from Freddie Mac. http://www.freddiemac.com/singlefamily/factsheets/...
  • PMI will be less expensive in the long run going conventional, but you need 5% down instead of 3.5%.
  • Because there is no upfront MIP requirement, you are financing a true 95% instead of 96.5% + the 1.75% upfront MIP or a total of 98.25%

Just some thoughts before you jump. Get a good mortgage broker and they'll walk you through the process.

Best of luck

Stephanie

You can, the biggest problem is that long term loans won't cover all of your expenses up front, so you'll need money and, more importantly, long term loans generally come with fees that you'll have to absorb. Usually BRRRR is done with cash/LOC or a private loan. But it can be done with two long term loans.

@Stephanie P.

That's very informative, thanks for sharing the latest revision on FHA guidelines, as well as the link.

I may be wrong but if I follow your math on the last bullet correctly, an FHA down-payment required, may include 3.5% + 1.75% (upfront MIP), thus, lender financing up to 94.75 vs 5% down-payment conventional enabling a 95% financing. In order words 5.25% down payment for FHA vs a 5% down payment conventional?

Would you also say that the 203k loan that allows lending rehab cost in FHA may be an advantage to go FHA vs conventional?

@Jason D. Good point! It really is a numbers game at this point.

Originally posted by @John Adeyi :

@Stephanie Potter

That's very informative, thanks for sharing the latest revision on FHA guidelines, as well as the link.

I may be wrong but if I follow your math on the last bullet correctly, an FHA down-payment required, may include 3.5% + 1.75% (upfront MIP), thus, lender financing up to 94.75 vs 5% down-payment conventional enabling a 95% financing. In order words 5.25% down payment for FHA vs a 5% down payment conventional?

Would you also say that the 203k loan that allows lending rehab cost in FHA may be an advantage to go FHA vs conventional?

@Jason D. Good point! It really is a numbers game at this point.

Not quite. Disclaimer. I don't do FHA financing, but I am pretty well versed in it.

The down payment requirement is 3.5% so your loan will be at 96.5%. Then ADD 1.75% to the loan amount and your loan is based at 98.25% plus monthly MI (so even though you've put down 3.5%, your loan amount will only reflect a 1.75% down payment because of the FINANCED upfront MIP. So your monthly cash flow is based on a payment at 98.25% + monthly MIP vs a payment at 95% plus either monthly MIP or financed or lender paid or however you choose to do your mortgage insurance (get with a broker that is well versed in mortgage insurance).

If you're comparing the 203K vs the Homestyle Renovation loan, the Homestyle Renovation loan works better for single family, but FHA is your best bet for a 4 unit.