Tampa, FL · Member since 2014 · 169 posts · 164 votes
BRRRR works, no doubt. I've completed two but am now stuck waiting three months until I can cash-out refi on my third. So here's my question-- how the heck are all these investors doing it-- BRRRR-ing 5-10 properties per year?!
Since Fannie Mae's seasoning requirement is six-months for a cash-out refi, these investors would need a LOT of capital to continue to acquire properties while they wait for refi funds. For investors like me, who only have the capital to purchase + reno one property at a time, that limits me to two BRRRRs per year (if I do it perfectly). I'm currently looking for additional funding at local banks and credit unions, but with so much money tied up in the current BRRRR, my DTI ratio and credit score have taken a real hit.
SOOOO-- Brilliant investors out there in BP Land-- how are you doing it-- funding multiple BRRRRs simultaneously?! Are you relying on partnerships or, if you're a solo investor like me, how have you built-up your property acquisition fund? Are you using some combination of hard money / HELOCs / PLOCs / credit cards / family & friends / partnerships / flip profits?
@Mark J. I invest in SFR in St Louis. I have completed 3 BRRR method rentals in the last 6 months and am working on my 4th (just got it under contract).
The way I do this is through a HML and gap funding lender so that I am $0 out of pocket with a rehab budget as part of the HML. It then takes me about 6-8 weeks to rehab and refinance with a "terms refinance". This is different than a cash-out refinance as I am not getting cash out (though I can get 2% of the loan up to $2k in cash), rather I am refinancing the HML into a 30year fixed rate loan. I end up being about $5-$8k out of pocket after the refinance given a good ARV calculation (the goal is $0 out of pocket, but those are almost impossible to find).
The only caveat to this strategy is that I have to put all these loans and houses in my personal name. After 3 payments though, I quit-claim deed the house to my LLC, then only have the mortgage in my personal name (bank could technically call the loan, but 99.9999% of the time they don't - my bank even told me they wouldn't as long as I was current on payments).
Hey @Mark J., I do a cash out refi as soon as the rehab is complete and the property is tenanted, which is why we start marketing the rental while the house is being renovated. If I can only fund one BRRRR at a time, from the day I close until the day I cash out, it shouldn't take more than 3 months and it almost always takes less time than that.
I do a "delayed financing" option with my lender, pay cash for the property and then do the cash out at the new value without a seasoning period.
@Jennifer Slaughter - With the delayed financing, your loan amount is limited to the purchase price and closing costs which were paid all cash, correct? So how do you pay for the rehab costs and is that expense frozen in the property?
@Neil Sinha, good question, and no, I cash out the purchase price plus the rehab cost. I know my lender lends in many states but I can't think of all of them off the top of my head, I use him in Tennessee and Colorado. As long as we did the math right and no surprises come up, I get back every dollar that I put into the house, minus my closing costs. Feel free to DM if you would like his info.
I know people like their local banks too but I haven't made a presentation or gone that route...yet.
@Jennifer Slaughter this is what I've seen on Fannie Mae Delayed Financing Exception:
The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value).
If your lender is refinancing both purchase and rehab, do you know if that's a portfolio loan they keep in house? Because if it's being resold to Fannie, I don't see how the above paragraph doesn't prevent them from lending your rehab costs back.
@Andrew Syrios -- I've looked into that briefly, but as you noted, the amortization is shorter which would make the monthly payment higher and cut into my cash flow.
I've explored commercial loans a little last year, but what I found was that they required more the cash down (25% or more), which would quickly drain my reserves, and have higher interest rates-, which again would mean a higher monthly payment and cut into my cash flow?
If I use commercial loans for my next few properties, should I plan for lower cash flow and rely more on appreciation?
Appreciate your thoughts on this...
The better way to think of it is that you will have to buy better deals or create more value so that your cashflow will be same or better than prior.
Plus portfolio/commercial loans can package multiple loans together too so you can do 5 BRRR's at one time and cash out refinance as soon as you get a lease agreement with a "blanket," loan that ties together 5 trust deeds/properties into one mortgage. This allows you to get more a scale on the financing end.
@Andrew Syrios -- I've looked into that briefly, but as you noted, the amortization is shorter which would make the monthly payment higher and cut into my cash flow.
I've explored commercial loans a little last year, but what I found was that they required more the cash down (25% or more), which would quickly drain my reserves, and have higher interest rates-, which again would mean a higher monthly payment and cut into my cash flow?
If I use commercial loans for my next few properties, should I plan for lower cash flow and rely more on appreciation?
Appreciate your thoughts on this...
The better way to think of it is that you will have to buy better deals or create more value so that your cashflow will be same or better than prior.
Plus portfolio/commercial loans can package multiple loans together too so you can do 5 BRRR's at one time and cash out refinance as soon as you get a lease agreement with a "blanket," loan that ties together 5 trust deeds/properties into one mortgage. This allows you to get more a scale on the financing end.
I would note that community banks are willing to loan on multiple properties at once as well. I'm in the midwest so it will differ by state and price-point, but generally they want to do at least $250,000 when loaning to us (our financials are complicated). The biggest loan we did was 25 houses for $1.5 million. So loans on portfolios don't necessarily have to be with a commercial lender.
@Andrew Syrios -- I've looked into that briefly, but as you noted, the amortization is shorter which would make the monthly payment higher and cut into my cash flow.
I've explored commercial loans a little last year, but what I found was that they required more the cash down (25% or more), which would quickly drain my reserves, and have higher interest rates-, which again would mean a higher monthly payment and cut into my cash flow?
If I use commercial loans for my next few properties, should I plan for lower cash flow and rely more on appreciation?
Appreciate your thoughts on this...
I would recommend to use Fannie when you can and use community banks the rest of your time. Yes, it will cut into your cash flow, but it will allow you to continue building and you will be paying down principal faster along the way. Regardless, once you hit 10 with Fannie, you won't have a choice.
Of course 10 includes your primary residence, so for many people that is actually 9 investment properties. And in my experience the down payment requirement changed to 25% after property number four. The other thing is that underwriting requirements for those 9-10 properties will require 6 months of reserves to pay all the payments. In other words if you have 10 investment properties, each at $1000 per month payment, they want to see $60K worth of accessible funds. Very few people would be approved to write 10 Fannie loans in their first year investing.
The OP asked how do you do 5-10 per year, so the answer is not with Fannie. You will need either commercial or hard money pretty quickly if you want to move at that pace.
@Joe Splitrock, can you provide a source for that information? The 6 month reserve would be a difficult requirement to meet. Thanks!
I've spoken with multiple different local banks in my area about the Fannie requirements and I've been told that you can have 10 investments PLUS your primary home, and I've not been made aware of any 6 month reserve requirement. Only that your DTI can handle another loan (granted you can use a signed lease to increase your income from your rental properties).
So, it seems the 10 limit includes your primary residence, but the reserves requirement is:
6 months PITIA on the property in question + 6% of the unpaid principal balance on all other investment properties and vacation homes. The open balance on your primary residence doesn't count against your reserves requirement, but it does factor into the # of allowed open properties.
@Joe Splitrock, can you provide a source for that information? The 6 month reserve would be a difficult requirement to meet. Thanks!
I've spoken with multiple different local banks in my area about the Fannie requirements and I've been told that you can have 10 investments PLUS your primary home, and I've not been made aware of any 6 month reserve requirement. Only that your DTI can handle another loan (granted you can use a signed lease to increase your income from your rental properties).
I am relaying my experience when going through underwriting on properties the last few years. I currently have six properties on conventional mortgages - all investment. My primary and two others are paid off. There is a maximum 10 including primary and a minimum reserve beyond your DTI. Your lenders are misinformed. Realistically how many lenders have clients more than one, let alone 10 mortgages? Even my lender was surprised by some underwriting requests. The rules are on their website and as I stated, I experienced it first hand. The bank has no power to avoid underwriting rules, so your banker is not making binding statements. They will just say "oops" or blame it on "new requirements". Many closings have been held up by misinformed lenders, but it scary you found so many.
As far as quantity of properties. The maximum is 10 including your primary residence. There are other qualification standards, such as properties 7-10 require a minimum credit score of 720:
As far as minimum reserves, there is definitely a requirement beyond DTI. It appears the 6 month requirement is only for the subject property (not what I was told last time I financed, but it could have changed). Then they add 2% of your unpaid balance if you have up to 4 properties. Then 4% if you have 5-6 properties. Then it goes to 6% for 7-10 properties. The reserves need to be near fluid, but it can include vested retirement funds or stocks in addition to cash.
For real world example, lets say you have 9 properties and each you owe $100K. Then you purchase a 10th property with PITI of $800. Cash reserves requirement would look like this:
Here is another source that explains both the 10 maximum and reserve requirements. It appears to just be a bank summarizing the Fannie Mae and Freddie Mac policies, but may be easier to read:
So, it seems the 10 limit includes your primary residence, but the reserves requirement is:
6 months PITIA on the property in question + 6% of the unpaid principal balance on all other investment properties and vacation homes. The open balance on your primary residence doesn't count against your reserves requirement, but it does factor into the # of allowed open properties.
I think the 6 months on each was previously a requirement. The rules are continually changing. Back in 2011 or 2012 when I was purchasing there was a 4 property limit, which was raised to ten a couple years back. They are starting to loosen up some of the post-crash rules.
@Joe Splitrock something important to note, your primary residence might count in the nine for when you hit the cap or when the breakpoints in 2%/4%/6% hit, but it doesn't count in the total principal to apply that percentage to. So, in your example, if your own personal home is one of the nine acquired before you apply for mortgage ten, the reserves would be $48K + $4800 = $52,800.
@Mark J. I invest in SFR in St Louis. I have completed 3 BRRR method rentals in the last 6 months and am working on my 4th (just got it under contract).
The way I do this is through a HML and gap funding lender so that I am $0 out of pocket with a rehab budget as part of the HML. It then takes me about 6-8 weeks to rehab and refinance with a "terms refinance". This is different than a cash-out refinance as I am not getting cash out (though I can get 2% of the loan up to $2k in cash), rather I am refinancing the HML into a 30year fixed rate loan. I end up being about $5-$8k out of pocket after the refinance given a good ARV calculation (the goal is $0 out of pocket, but those are almost impossible to find).
The only caveat to this strategy is that I have to put all these loans and houses in my personal name. After 3 payments though, I quit-claim deed the house to my LLC, then only have the mortgage in my personal name (bank could technically call the loan, but 99.9999% of the time they don't - my bank even told me they wouldn't as long as I was current on payments).
I hope that helps you! Good Luck!
Great post! So since you use HML and a Gap lender, in essence there are two loans... and since you got a low purchase price, having 2 loans wasn't a big deal? What interest did you have on both loans, if you don't mind me asking. Also who did you use as your gap lender? Was it a bridge loan from the same HML lender? Can you explain that a little more please?
@Erin Elam and @Bo S. Yes, that is correct, I used 2 loans for $0 out of pocket initially. And yes, since I got the property at a price that was under 75% ARV even with rehab, I was able to work in the interest and fees into my 75% mortgage loan from the bank when I refinanced the property.
The gap lender I used is no longer doing gap loans - too high of a risk for not much profit was their reasoning (I was always quick to pay them back - I guess others weren't). Their fees for me came to about 10% on ~$5,000. The HML I use is Longhorn Investments. Their rates starting out are 4pts and 15% annually over a 6-month loan with no prepay penalties - I think those are their current rates, but get a quote from them if they do loans in your state. They lower your rates the more you use them.
Now it is important to note, that in my market at least, properties that fit these criteria are now anomalies. Over 2018, I was not able to purchase 1 house that fit this mold via the MLS, Zillow, or wholesalers. The only way to get properties like this in St. Louis is through direct to seller marketing - at least until this market settles down.
It is also important to note that none of the properties I purchased ended up being $0 out of pocket when I refinanced. I averaged about $3-$5k out of pocket with a 75% loan. I was ok with this because annual rent would cover that in the first year or 2. It is possible to use this process to have $0 out of pocket, however, those properties are hard to find.