Brrrr / Refinancing

10 Replies

I have been researching the Brrrr strategy recently and it seems like the biggest pitfall would be not being able to refinance. I'm new to investing, so what would be some of the reasons an investor would not be able to refinance? Are there outside variables or is it just based on how comfortable the bank is with you as a borrower?

The major concern I have seen is Loan to value and debt to income. You will most likely be signing as a recourse loan and banks will most likely be concerned on those numbers at your personal level too. Also there are some banks we have found in our area who do not like to loan to properties in certain neighborhoods. If your ratios are good you will just have to search for the right bank.

Refinancing is easier than getting a loan to buy.  My two sources are about the same in every way except interest rate and seasoning.

31 day seasoning, 6.99%
6 month seasoning 5.1%

...so, I use both for each property to take advantage of each program's benefit. 

@Jamey Newman ,

Along the same lines as @Irfan Raza , I would say that the appraisal is the biggest factor in the cash out refi.  No matter what you paid, or how much you spent on the rehab, the appraisal (along with the banks loan to value ratio) will determine how much you can get back out.

I totally agree with @Craig Wilcox . I tried getting a loan on the house I bought free and clear, but the appraiser had issues. The AC unit (heat works fine) that wasn't working when I bought the place and I hadn't bothered to remove it bugged him and the bank (SunTrust) asked me to fix it before they'd continue forward. There were a ton of little things before this point and I decided to heck with 'em and walked away. So the house never got financed or refinanced.  This was in 2013.

It's something I know I'll have to deal when I get ready to sell.

I'm sure I could have eventually found someone else to put a loan on that house. But I found a unsecured loan that was less of a pain since I only really needed $20K.

I have a bit of a twist on this approach. I am approved for a commercial blanket loan for several properties I'm doing the BRRRR strategy on. So I take a group of 10 concurrent properties (2 rehab and 8 with established renters) and get a blanket commercial loan from a very small, local and very aggressive bank (you know aggressive as far as banks go). This also lets you "cash out" some of the forced equity while recouping at least some of your cash investment (rehab, holding costs, closing costs).

The 2 critical keys are 

1. Buying the right deal up front for well under retail

2. Getting that appraisal for the target ARV

Curious if others have opted to go commercial with blanket loans??

My follow-on question to the community is would it be worth getting an appraisal per property before acquisition? This can be pricy but $500-600 (or whatever the going market cost is) could well be worth avoiding the cost, time and pain of a bad deal from the beginning.

Thoughts?

I have not opted to get an up-front appraisal but I'm considering it for future projects.

if your bank is selling to Fannie Mae: you can only do a cash out refinance if you will own 4 financed properties or less. You can only take out more than the purchase price if it is owned for one year or longer. The more properties you own the less loan to value you can get. If the property is owned by an LLC you cannot do a cash out refinance. I just got this information today from a local bank. Please fact check me but this is what I was told.

Those are the banks restrictions.  From the current FNME Selling Guide.

If the mortgage being delivered to Fannie Mae is secured by the borrower’s principal residence, there are no limitations on the number of properties that the borrower can currently be financing.  If the mortgage is secured by a second home or an investment property, the borrower may own or be obligated on up to ten financed properties (including his or her principal residence).

Look into Delayed Financing Exceptions when looking at cash-out refinances, there are a few things that will affect your ability to pull equity out. Investor and second home borrowers with five to ten financed properties are ineligible for cash-out refinance transactions unless all of the delayed financing exception requirements are met.

Most lenders do not link the LTV to the number of properties you have. Your DTI will be the bigger issue.

FNME will not lend to LLC's, but there are lenders out there that will.

Talk to a broker or two that uses multiple lenders...and hopefully invests in property themselves.

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