Brrrr Refinance?

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Brrrr Refinance?

Aaron Millis
Rental Property Investor · Montgomery, AL · Member since 2016 · 179 posts · 188 votes
Hi everyone, I am new to bigger pockets and recently learned about the brrrr method. I understand everything about it except the refinance part. I actually just don't think I know exactly how refinancing works... So if I got a loan for a house that cost me $50,000 and then put in $20,000 for rehab that's $70,000 I spent right there. Let's say the house ARV is $100,000... After fixing up the house I can go refinance it for probably a better rate since its in good living condition I understand that. I don't understand how it puts money in your hand. Especially since I've heard you can get it refinanced for up to 70% of ARV. What about the other 30%? How is the only money coming out of pocket the possible closing costs that would follow? Again sorry I'm new to this so its probably an easy concept I don't understand yet, any help would be appreciated!
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Alex Saleeby
Rental Property Investor · Beaumont, TX · Member since 2015 · 161 posts · 77 votes
10y
Hello Aaron Millis in the example you gave, the 30% is equity the you have earned yourself from having completed that brrrr. To answer your question about "money in your pocket", suppose you found a lender to give you a loan at 75 or 80% LTV, then the extra 5 or 10% could be cash you pull out of the deal. This doesn't necessarily mean that you should. A lower loan amount should translate to higher cash flow from your rental, so more money you get to keep each month. Also, keeping the 70% used in your example, suppose you did a better job negotiating the purchase price and got the property for $35k, put another $20k in rehab. That's a total of $55k all in. With an ARV of $100k & 70% LTV, you could pull out $15k cash out of the deal. Again, it's up to you to decide if you want to pull this cash out or keep it as equity in the deal. More equity translated to higher net worth. Run your numbers and decide what's best for your situation. Hope the helps and good luck.
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  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    10y

    From my experience having done 10 BRRRR deals in my career and knowing other people who have, typically the purchase of the property is done through a cash purchase, hard money, or private money.

    This is because to be able to get the property cheap enough you will likely be buying a property that a bank will not finance on the front end because of its condition. 

    I am not saying it isn't possible to BRRRR a property bought with a conventional bank loan, I have just never known anyone who has done it.

    2Reply
  • Alex Saleeby
    Rental Property Investor · Beaumont, TX · Member since 2015 · 161 posts · 77 votes
    10y
    Hello Aaron Millis in the example you gave, the 30% is equity the you have earned yourself from having completed that brrrr. To answer your question about "money in your pocket", suppose you found a lender to give you a loan at 75 or 80% LTV, then the extra 5 or 10% could be cash you pull out of the deal. This doesn't necessarily mean that you should. A lower loan amount should translate to higher cash flow from your rental, so more money you get to keep each month. Also, keeping the 70% used in your example, suppose you did a better job negotiating the purchase price and got the property for $35k, put another $20k in rehab. That's a total of $55k all in. With an ARV of $100k & 70% LTV, you could pull out $15k cash out of the deal. Again, it's up to you to decide if you want to pull this cash out or keep it as equity in the deal. More equity translated to higher net worth. Run your numbers and decide what's best for your situation. Hope the helps and good luck.
    10Reply
  • Aaron Millis
    OP
    Rental Property Investor · Montgomery, AL · Member since 2016 · 179 posts · 188 votes
    10y
    Alex Saleeby thank you that was helpful. So I am guessing that before you even make the initial purchase on the property you want to fix, you should find a bank that is willing to refinance it afterwards. Is it possible to come to them with a scenario and tell them your plans just to make sure you don't get denied when it is crunch time and you need the refinancing? Also if I got a hard money loan for the $70,000 that I spent, I'm guessing that when I refinanced after the rehab- that would be the time where I could pay them back?
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  • David Slovak
    Realtor · Mcallen, TX · Member since 2015 · 28 posts · 14 votes
    10y

    @Aaron Mills (sorry it won't tag on my mobile)

    Getting your money back on a refinance would mean that you would at least get your original money back (70%), meaning the property still has equity when sold or cash flow after the refinance. You get your money back and you own the property whilst paying back the person that loaned you the money to begin with. Just keep in mind, there will be closing costs that come with a refiinance to my understanding from everything that I've read. I don't see why you'd struggle to refi if you have fair/good credit even if you already had a loan of sorts (conventional perhaps) for that property so long as you have held it for a year should that be the scenario. If you currently do not have any sort of bank financed loan and have never refinanced, just keep fees in mind if you are looking to get cash back. Hope this helps. Hop on those free webinars! They're amazing and this guy talks about the BRRRR strategy often. Seems like a great way to go if you can make it work.

    1Reply
  • Jibu V.
    Investor · Philadelphia, PA · Member since 2014 · 133 posts · 49 votes
    10y
    When you purchase a property with conventional financing, the bank will finance a percentage of the lower of purchase price or appraised value. However, when you refinance, the bank will lend a percentage of the appraised value, which should now be higher (i.e. ARV). So, if you're all in at 70k and the bank is willing to lend 70% LTV, the bank will lend 70k (assuming the appraisal comes back at 100k).
    1Reply
  • Alex Saleeby
    Rental Property Investor · Beaumont, TX · Member since 2015 · 161 posts · 77 votes
    10y

    Yes, it is certainly advisable to talk to HML and conventional or commercial lenders (depends if using LLC or not) ahead of getting into a deal to find out their terms, qualification requirements and the whole lot.

    The brrrr is a terrific and seemingly simple concept, but the devil is in the details as they say. 

    HML money can be quite expensive so you will need to factor in origination points and loan fees. You'll likely need to make monthly payments along the way. Until you have a track record borrowing from HMLs you'll likely need to invest some some of your own money in the deal to have some skin in the game. Rehab costs can be tough to estimate sometimes and going over budget is not unheard of. So building in some additional buffer is a good idea as well. Another factor to account for is any seasoning requirement that that the conventional lender might have before being able to do the refi which would extend the time of the HML loan. As you learn more you'll be able to add all these variables into the equation as you analyze potential deals.

    An alternative source of funding for a deal is private money that you might wish to explore further as well. 

    3Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    10y

    Hey @Aaron Millis, I've done a few BRRRRs, and refinanced with conventional loans. First thing first- you HAVE to know your numbers, understand the financing and be sure that you will still have cash flow that will be sufficient for you. Getting cash out (cash out refi) with up to four mortgages is relatively easy, just find a banker or broker who understands what you are doing and what the Fannie Mae and Freddie Mac regs are. You'll get a different LTV based on the property and how many mortgages you have. After four, your only option for conventional refinancing is delayed financing:

    https://www.fanniemae.com/content/guide/selling/b2/1.2/03.html

     After 10 total mortgages, you are looking for private money or portfolio loans. I'm not there yet, but hope to be soon. Best of luck!

    2Reply
  • Shawn Coverdell
    Investor · Clatskanie, OR · Member since 2014 · 212 posts · 233 votes
    10y

    This strategy works Best for the DIY investors I have found. If you do most of your own work, you can easily get all your cash back as well as enough to pay for the work you did and still cash flow as if you had financed it to begin with. Use that to go again. Takes us 5 months total to complete the process from start to finish (mostly waiting on others, banks, getting rented etc...) so we will be doing 2 at a time. It seems to me that the terms at least in our case are about the same. 30 years, 4.24 APR etc... Yes, after 10 I will have to find one of those portfolio lenders.

    0Reply
  • Jerry PadillaBusiness Member
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    10y

    @Aaron Millis

    No matter how you initially finance the property whether it be cash or hard money or conventional, you can cash out refinance the property after 6 months based on appraised value, with a conventional mortgage as long as the house is in livable condition. 

    A SFR is 75% LTV and a MFR is 70% LTV on the first 6 mortgaged properties.

    The condition of the house doesn't affect your rate. 

    Your credit score, term, down payment, SFR vs MFR affect your down payment.

    [email protected]585-204-6923
    PrimeLending 4.8582 Reviews
    WebsiteView Page
    7Reply
  • Aaron Millis
    OP
    Rental Property Investor · Montgomery, AL · Member since 2016 · 179 posts · 188 votes
    10y

    @Jerry Padilla thank you that was very helpful.

    1Reply
  • Ryan E.
    Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes
    10y

    @Michael Noto And @Corby Goade

    In your experience doing BRRRR have you ever run across a problem on the refinance with your debt to income? I'm looking to brrrr with a combo of HELOC and possibly hard money but am curious if I might run into dti issues on the refinance. I have excellent credit, good income, and only two mortgages so I think I'll be good. I'm just wondering if I use debt (HELOC and hard money) to acquire a property if it will throw my dti out of whack and keep from being able to refi even if my all in is below 70-75% ARV.

    0Reply
  • Tyler Turpin
    Investor · Long Beach, CA · Member since 2016 · 45 posts · 19 votes
    10y

    @Ryan E. I would actually like to see the answer to your question as well. I cant get another loan because of my DTI. I would hate to get stuck with hard money financing.

    0Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    10y

    @Ryan E. is the property you are looking to refi located there? If you guys want information on the programs they have for BRRRR landlords PM me and I will get you over some information.

    1Reply
  • Ryan E.
    Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes
    10y

    @Michael Noto thank you! That's perfect. On its face the refinance portion seems very straightforward but now that I'm pursuing this strategy I just want to dig deeper and make sure I can be as prepared as possible before actually getting a property under contract. 

    0Reply
  • Tyler Turpin
    Investor · Long Beach, CA · Member since 2016 · 45 posts · 19 votes
    10y
    Michael Noto Thank you. I suppose I knew that from research on the forums and pod casts but it still makes me nervous! The property I am actually looking in to is located in Columbus, OH, not CA.
    0Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    10y

    Hi @Ryan E.- Yes, I have come across problems, mostly related to my DTI. I don't have a ton of W9 income and you don't get 100% credit for rents, so it can get tight. My advice would be to find a lender to really knows the regulations and understands what you are doing. There are banks and credit unions out there who have underwriting that understand BRRRRs and will work with you, but it will take effort to find them. Once you have 5 mortgages, many banks won't lend you any more, so be sure to ask them up front.

    0Reply
  • Ryan E.
    Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes
    10y
    Corby Goade thanks for the info! Sounds like the whole DTI thing is definitely something to keep in mind/plan for but can be works around with the right people and of course the right deals.
    0Reply
  • Shekeira Ward
    Attorney · Austin, TX · Member since 2015 · 40 posts · 5 votes
    10y

    @Jerry Padilla thanks for the insight! I pretty much had the same question as @Aaron Millis

    However, I've hit a wall based on the last part of your reply post regarding down payment. From the way I'm reading folks explain in the forums and how @Brandon Turner lays out the BRRRR analysis in his webinars, it seems like there is no down payment from the borrower on the refi. Am I incorrect in thinking this?

    To get it straight in my newbie mind: It seems like what's happening is that you achieve that high ARV to get a great LTV, in order to (1) pay back your HM/PM guy and/or (2) pull some cash out for the "Repeat" step in BRRRR, and (3) roll any points/closing/fees into your refi, keeping the skin you had in game with the HM/PM guy from the original acquisition/repair--the same. All this while leaving some equity in the property (the remainder of the LTV) which keeps the bank happy.

    Where does a new downpayment on the refi come into play? I'm struggling with this because my thinking is, if a down on the property's refi based on the new ARV is required (in addition to maintaining 6 month cash reserve for PITI under the Fannie/Freddie regs), my purse strings would be very tight, and I'd be running around trying to find new lump sums of cash every time I want to refi a new BRRRR property! Yikes. Please help.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Shekeira Ward, my understanding is that if 70% of your Lenders' new appraisal completely covers your original costs, then they will re-lend you that amount with no need for a down payment (because, you ALREADY have their minimum required equity in the property).

    So, you get to pay out your HML if that's where all your original funds came from, and get to re-use any of your own cash that you (should really have) had to begin with! Find bargains! All the best...

    1Reply
  • Jesse Kindra
    Rental Property Investor · Newcastle, WA · Member since 2016 · 86 posts · 39 votes
    10y
    So, I've used the BRRRR method on the last two single family rentals I've purchased and the banks go up to 75%. Instead of refinancing, has anyone just obtained a Heloc - I've got a credit union in the Seattle area that will got to 85%. So, easier than a refinance and can get more funds back for the next deal. Has anyone used this approach vs refinancing and any thoughts/concerns?
    3Reply
  • Jesse Kindra
    Rental Property Investor · Newcastle, WA · Member since 2016 · 86 posts · 39 votes
    10y
    Let me clarify that I'm referring to a bank owned home that is purchased using conventional financing (no hml). So, for example, 220k property financed through bank with 20% down and then another 30k out of pocket for rehabbing/repairing and an ARV of 330k. In the past, after6 months, I've refinanced to pull out funds for next purchase. Looking at Helocs, one may be able to pull more out. Hopefully, that makes sense!
    1Reply
  • Dustin D.
    DMV, VA · Member since 2016 · 21 posts · 5 votes
    10y

    @Aaron Millis

    Ditto on what everyone has already said about the Brrrr strategy. I would recommend that you really run the numbers and make sure that you have multiple exit strategies when looking into the Brrrr strategy. The last thing you want is to have to come out of pocket for a large amount of money, not be able to refinance, sell the property, or have to extend the hard money loan ect..... It's all about running the #'s and making great buy's.  Good luck!  

    0Reply
  • Shekeira Ward
    Attorney · Austin, TX · Member since 2015 · 40 posts · 5 votes
    10y

    @Brent Coombs gotcha! Thank you!

    0Reply
  • Jacqueline Coombs
    Rental Property Investor · Grand Rapids, MI · Member since 2016 · 262 posts · 205 votes
    10y
    Hi, all! I am in escrow for property #2 and am just beginning with the BRRRR strategy. The seller is out of country and by my analysis, it is about 15k under value ( PP 55k, value 70k). Property #1 I bought recently from a wholesaler for cash with a partner for 32k ( value 60k). My cash will be all tied up once #2 closes and I am thinking ahead to what my next steps are. Both properties are rentable but value can still be added, just waiting on current leases to be up. Could I refi #1 or do I have to wait for 6 months' seasoning? Is it possible to do multiple refinances at once if I wanted to do them both in the spring? Also, would anyone who has implemented this strategy successfully be willing to counsel me a bit on how to meet my future goals with BRRRR? Thanks for the great info!
    2Reply
  • Garrett M.
    Rental Property Investor · Philadelphia, PA · Member since 2015 · 180 posts · 66 votes
    10y
    Corby Goade Shawn Coverdell I heard someone on BP refer to this magic idea- And I'm wondering if it's true... Is anyone on this thread familiar with the idea that once you have 10 conventionally financed (i.e. with a bank loan) properties you can package them and refinance the whole group into its own loan? The idea being that you then have a clean slate to purchase more conventionally financed properties. Sounds like a unicorn! But maybe?!
    1Reply
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