I'm assuming if you're reading this post you already know what the BRRRR method is (Buy, Rehab, Rent, Refinance, Repeat). I am wanting to discuss the Refinance R. I have listened to a podcast or two about this method and read a few blogs, but I don't feel like I've gotten all of the details.
After buying, rehabbing (if needed), and renting then it’s time to refinance. My question is fairly simple : Where does this money come from and how does it work? Is a bank giving you money based off the equity on the home? The total value of the home?
Getting started in REI is slightly intimidating to be honest, so I want to make sure I am confident with my knowledge and know what my game plan is.
Thank you for your time,
@Daniel Curtis , there are a lot of different types of financing. If you own the property in your own name you could be looking at a Fannie/Freddie conforming type loan. You could also be looking at private money to refinance.
My BRRRR properties are owned within an LLC and I have been using commercial mortgages from local community banks. These are portfolio loans (they are loaning their own money, not reselling the loan). I can generally expect to get a loan at 75-80% LTV (of the appraised value) on a 15-20 year variable rate mortgage at prime + .5-1% interest.
One thing to ask about when talking to a lender are about their seasoning requirements. They will likely require you to own the property for a period of time before basing a refinance on a new appraisal. This period might be 6-12 months. Before this time they would typically value the property at the price you purchased it for plus your rehab costs. So, waiting for the seasoning period to pass will allow you to refi out more money.
It comes from the bank. Most banks want you to own the asset for 6 months, with a lease in place.
They'll send out the appraiser and give you 75% of what it appraised for.
There are different nuances out there but by and large, that's how it works.
@Kevin Sobilo Thanks for the quick and helpful response! I was originally wanting to get into REI with a realtor friend of mine. We talked about starting a LLC. But now I am leaning towards getting started on REI on my own because he seems to be dragging his feet. (I can still use him to help me find deals though) I can start a LLC that's only 1 person (Me)? Sorry, I'm a financing amateur. I understand the basics, but this is new territory for me.
@Ernesto Hernandez Thanks for the quick response! I appreciate how easy your response is to understand.
The refinancing generally comes from a bank because they will have the best rates. You buy the property with private lender money or your own cash and then rehab it and get renters in. Now the property should be worth more than what you originally paid for it, so you go to the bank and tell them you would like to refinance the property and take out a 30 year mortgage. If you had a private lender they bank will pay them directly so they remove any rights to the property and then give you any additional cash up to about 75-80% of the new value of the home. Essentially refinancing is just like going out and buying a house with a mortgage from the bank, except in this case you already own the property.
@Daniel Curtis , yes I would start the LLC first and purchase the property within the LLC.
A single member LLC is sort of a special thing. With only 1 member, the LLC does not need to file a business tax return. The IRS considers it a disregarded entity and everything just shows up on your personal taxes which is simpler.
Setting up an LLC is simple enough you may be able to do it on your own (as I did). However, for a few hundred bucks you can likely find a lawyer who will do it for you and give you a little added guidance and advice.
Its always good to establish relationships with folks you will need going forward. If you establish a relationship with a law office you may be able to quickly get questions answered and advice likely at no cost on an ad hoc basis when you need it in the future. They usually only try to charge if they need to generate a "work product" for you or spend any considerable time for you.
@Kevin Sobilo Thanks yet again Kevin. I appreciate the guidance. And ~$100 to start a work partnership and have that asset is a bargain. Something I wouldn’t have planned to look into at a networking meet up that I will now! Thanks again Kevin.
The last R comes from a bank. You just have to find a bank willing to lend to you on appraised value (most will have at least a short seasoning period, say 6 months before they will do this), and one willing to do cash out refinances (most will). They usually lend 75% (sometimes 80%) of the appraised value of the property. At appraised value, your amount of equity doesn't effect how much the bank loans.
@Andrew Syrios Thank you for taking the time to read and respond to my post. Good information here, I appreciate it!
Good info above, I would just add to call 10-15 banks/lenders and talk to them about your plan.
I’ve used a few different lenders based on my time frame and the values
Some of them vary in the time they need to use the NEW appraisal vs the purchase price, wether you’re using a rehab included with your hard money lender, and if you want to just do a rate an term or if you’re wanting to do a cash out.
@Daniel Curtis The only thing I would add is that the ârehabbing' piece of the BRRRR is a critical step of the strategy so that the refinance even makes sense in the first place. It can't be overlooked unless you bought well below market value. By rehabbing, you are adding value to the property and increasing the money you can pull out. After the rehab, you stabilize it by renting it out at market rate and then go for the refi. You may need to âseason' it for a few months also.
When you go to refi, the bank will order an appraisal. They then give you ~70-80% of the appraised value. If you don’t do the rehab piece and haven’t bought well below market value, you will be shooting yourself in the foot when the appraisal comes in low and you can’t pull out the amount of money you were hoping for.
Hope this makes sense.
@Kyle Smith Thanks for the extra information! Good to know how critical the Rehab part is to create the value in the property above what was paid. This is good to know.
@Daniel Curtis i’ve briefly read over the replies here.
the money comes from a bank. the loan that they give you is 65-75% (maybe 80%) of the appraised value .
you will use that money to pay off whatever loans you have against the property and closing costs and whatever is left, if any, is for you.
i did a BP blog about this. i went over all these details in a real life deal that i did. check it out!! i’m working on my third brrrr now too.
@Ryan Deasy Awesome information. I appreciate the comment. I’ll look for your blog. I’m still new to navigating on the App.
@Daniel Curtis if i am understanding your question correctly, there is no set amount.
you do your rehab. you rent it. you pray (and i do mean pray - appraisals are a PAIN) that your appraisal will come on high. the bank will base it's max LTV off the appraisal and if it covers your closing costs and loan payoff, then great. if not, you have to back out or come to the table with a check.
@Ryan Deasy thanks again for the quick response.
So let’s throw some numbers out there. Let’s say the property is $100k. $10k is rehab. Appraised for $120k. That’s $10k in the green and after closing costs you should still come out better than where you started so the bank would give you 65-80% of the $120k (so $78k to $96k). So technically you didn’t make all your money back. So really you’d want the appraisal to come in around at a minimum around $140k that way your 65-80% comes out to ($91k to $112k). It’s not just important to “break even” from your original loan amount so you get your money back, but this is also a chance to make more profit so that you come out with more money than you started with when you put $100k down for the original loan. Correct?
@Daniel Curtis , now you are understanding more I think!
Not every property makes a good BRRRR project. You need to be able to increase the value through rehab well more than what you invest to get your money back out. You also want it to rent for enough after refi for it to generate positive cash flow.
So, for me an average scenario might:
- - Purchase a distressed, vacant, uninhabitable property for $20k
- - Invest $25k in rehabbing it into a decent B class rental ($45k all in)
- - Rent for $875 (enough to pay the refi mortgage, expenses, and to generate some cash flow)
- - Refinance out $52,500 with an appraisal of $70k and a 75% LTV (recoup MORE than your total investment
This is a very doable scenario in my area and you are able to cash out MORE than your investment to keep adding properties to your portfolio.
@Kevin Sobilo Sounds like I am understanding the process after your example. The one thing that is blowing my mind about your example is purchasing a property for $20k?! I have never heard of a property anywhere near that cheap around me. This out of state investing sounds more and more appealing. Or at least in other markets other than mine.
@Daniel Curtis you are basically right in your example to me. however, that would be a terrible deal in my opinion. that is way too thin to waste your time on. furthermore, i’ve done two refis this year and both had about 10k in closing costs so don’t forget to factor that in too.
Depending on your credit profile and patience, going with a bank may not be the best option for you. My company funds these rental refinances for clients in several states, and while we're not bank financing, we do provide competitive rates in the 5-6% range with super-simple underwriting guidelines.
So long as you meet our minimum qualifications (650+ FICO, no BK or FC in the past 5 years, or felony convictions) the remaining metrics are all property-based. We assess value and lend against the PDTI and LTV - asset based rental lending.
Feel free to get in touch with me at Stephen at fullforcefunding.com and we can discuss your next project.
@Ryan Deasy I was going for the bare minimum amount to make it proditable. And even though the deal doesn’t make you a ton of cash, you’re still getting the cash flow front the rent meanwhile building equity, correct?
@Stephen Herbert thanks for the comment! Some great information and I’ll be sure to reach out so we can talk specifics when I find a property.
Can you elaborate on what BK or FC stands for?
@Daniel Curtis , yes I can understand that buying a property for $20k might seem crazy in many parts of the country. Where I am investing is a generally C class area with lots of older housing stock. It isn't a bad area by any means, but it is working class.
The concept can working in other areas as well where houses are more expensive. The strategy is very solid.
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