Charlotte, NC · Member since 2019 · 22 posts · 10 votes
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.
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
6y
@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.
Flipper/Rehabber · Member since 2019 · 45 posts · 21 votes
6y
@Daniel Curtis it sounds like you've got the basic concept. Often banks will only loan 75% of appraised value. So to get all of your money back out of the deal, you want to keep your acquisition + rehab costs to < 75% of ARV. Plus a bit more for closing costs.
On refinancing, there are lots of threads on this topic. What your loan terms are can vary widely depending on your loan product, and the added requirements of any particular bank. The 6-month minimum seasoning requirement is true of a conventional cash-out refinance loan. However if you're paying cash or with hard money, you may be able to be able to refinance prior to 6 months if you qualify for delayed financing.
It's also my understanding that if you get a hard-money loan to acquire the property, a bank can to a rate-and-term refinance(as opposed to cash out) without having to wait the 6 months. You would want to get your loan for 75% of ARV to get most/all of your money back.
Brockport NY · Member since 2019 · 1 post · 0 votes
6y
I would like to piggyback on this and ask if a Refi usually requires income verification or is the built in equity and current tenant lease enough for the bank?
Lender · Farmington, CT · Member since 2015 · 542 posts · 321 votes
6y
@Jared Mesiti every refi i have done requires income verification. if you’re getting a good solid loan with a low interest rate, i would expect to be ready for this
Rental Property Investor · Baltimore, MD · Member since 2019 · 67 posts · 4 votes
6y
@Kevin Sobilo hi Kevin. I purchased a house in Baltimore for 14000. I put about 35000-40000 into it. At this point should i try to refinance into a conventional loan or should i llc the property and then go to a community bank and try for a commercial financing? Is having 1 home considered a portfolio or do i need multiple?
I also Have 2 homes in NY with mortgages. My family lived in my homes so i had no rental income for those 2 homes until this year. Family left and i found tennants therefore no income stated on my taxes untill the 2019 tax return. Qualifing for a mortgage appears difficult untill i can show rental in come on my 2 ny properties. Any ideas. My goal is to refinance 1 home in ny and pull 150000 of eguity and purchase more property in Baltimore. My main goal is to BRRRR The property in baltimore and continually repeating the process. Thanks in advance for any advice you may have for me.
Rental Property Investor · Baltimore, MD · Member since 2019 · 67 posts · 4 votes
6y
@Kevin Sobilo 1 more question. Does my personal finances matter if i llc my baltimore property and go the commercial route. Basically does my DTI come into play when qualifying for a commercial loan?
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
6y
@Joseph Brown, there isn't just 1 way to go about the same thing. Both of the approaches of owning a property in your own name versus an LLC and also using fannie/freddie conforming loans versus commercial mortgages or private money are valid.
In my opinion, the key is to know understand the reasons for each choice and to consider what your short and long term strategy is.
For example, if you are partnering with someone an LLC might be a very necessary vehicle to manager your business relationship.
Fannie/Freddie conforming loans are great because they can be longer term fixed rate loans. With current low interest rates you can lock in that low rate and get better cash flow month after month. However you are limited to 10 such loans.
With an LLC you get a veil of liability protection, but ONLY if you run it like a business and adhere to corporate formalities. If you own properties in your own name you can alternatively just buy an additional blanket policy to protect you from liability.
I can't tell you what is the right approach because there are too many factors. I recommend doing more research and learning why people make each of these choices and then look at your own situation and your goals.
For your last question, yes your personal finances matter even if you own property under an LLC. The debt will be owned by the LLC so it will not appear on your credit report. However you will be required to personally guarantee the loans (like a cosigner).
They aren't looking at your DTI like they would a loan for a primary residence, but they do want to know they are dealing with someone solid. When I meet with a commercial lender, I bring a personal financial statement. It is sort of a financial resume. It shows in 1-2 pages my complete financial picture so they can quickly scan it and know what my situation is.
They will look at the LLC and how it meets its obligations. So, if you have existing rentals they will look to calculate the debt service coverage. They want to know the LLC will bring in enough to pay the mortgage (and then some) even after all expenses are paid.
Investor · Denver, CO · Member since 2017 · 94 posts · 42 votes
6y
To further elaborate on what @Josh Norell mentioned, the Delayed Financing model typically allows you to refinance immediately after purchasing, but will only provide around 75% of the purchase price or appraised value. The Cash Out Refi typically has a 6 month seasoning period and therefore you can factor in the After Repair Value if you rehab the property.
@Kevin Sobilo do you have a template or can you refer me to a template for the "financial statement/resume"? Also have you found a portfolio lender that offers a fixed rate or have all of your commercial loans been variable rate?