POTENTIAL OBSTACLES OF BRRRR
Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 916 votes
Malabute & Company CPAs527 Reviews
POTENTIAL OBSTACLES OF BRRRR
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesOriginally posted by @Jason Malabute:
What are potential obstacles when trying to BRRRR? For example:
1. Are there cases when you can't refinance ?
2. If you buy the property in cash can you refinance?
3. Do you have to have a W2 job to refinance? Do you have to make a certain amount from your job or business to refinance?
4. Can you always pull out 75% of appraised value in cash? Are there cases when you can't pull out the full 75%?
5. Does your yearly income and wages affect how much you can pull out from the refinancing ?
6. How soon after purchase and rehab can you refinance and pull out cash?
Answers:
1 - Yes. There are limits in number of loans, and loan ratios that still must be followed.
2 - Yes, but that is considered a "complete cash out refi". That means you would need to wait 6 months from closing.
3 - a) If the loan is in your personal name, then yes. b) Yes
4 - a) No, b) Yes...and the amount (%) a lender allows isn't always 75%.
5 - Yes
6 - 6 months
33 Replies
- 8yGreg GaudetPro MemberInvestor · Pukalani, HI · Member since 2017 · 414 posts · 291 votes
Originally posted by @Ana Coello:
@Michael Noto Is your refinance lender different from your original loan lender? Can they be a 2 in 1 or are they typically different? Newbie here...Ana there aren't really rules on this.. you can use whoever you want. I'm sure a lot of investors use the same bank for a bunch of deals, then move on to another bank. Just depends who offers the best terms and who is willing to work with you to grow your portfolio.
- 8yCorby GoadeBusiness MemberInvestor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
@Jason Malabute- obviously, if you make good money, your DTI will be less of an issue. For most of us, we are here because we didn't or don't make good money. Keeping your DTI low is actually simple- don't borrow money for things that aren't real estate. Don't have a car payment, don't have credit card payments, don't rent furniture, don't finance a jet ski, etc, etc. Basically, if you have a monthly payment on it and you don't need it to live, get rid of it!
Good luck!
- Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 916 votes8y
Originally posted by @Matt P.:
@Jason Ma For sure keep your personal expenses down. I also wouldn't open any new credit lines in order to keep my credit score as high as possible. I didn't have a huge income when I pulled my first deal off either as long as you don't have tons of other debt that shouldn't be a problem.Thanks so I shouldn't worry about finding new job before first purchase?
How much were you making when you got your first deal and how much was your first deal (if you dont mind me asking)?
Malabute & Company CPAs527 Reviews - Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 916 votes8y
Originally posted by @Greg Gaudet:
Originally posted by @Jason Malabute:
Originally posted by @Michael Noto:
@Jason Malabute More important than anything with a BRRRR make sure you have a refinance lender lined up before purchase so you know the timetable you will be working with from a seasoning perspective, LTV amount, etc. going into the project.
Even if you are not going refinance until 6 months-1 year later? What if you're currently
trying to find a new job while you purchase so you are sure you actually qualify for refi?
Also, if you are a long distance investor does the. lender have to be located in market you are investing in?
Jason changing jobs can make things tricky... if you are staying in the same industry/type of job then it shouldn't be a problem. But if you go from being a teacher to a salesman then the bank will probably not give a mortgage until you've been at your new job for 2 years.
If you're investing out of state you will typically need a lender in the state that you are purchasing in. Some lenders are licensed in multiple states.
Again, this is all just based on my experience getting mortgages... you should definitely sit down with a lender and go through everything and takes notes so there aren't any surprises when you're ready to do a deal. I've had issues with lenders assuming that I know all their secret little rules lol like on my last deal, I brought a third loan to my lender (I purchase long term rental BRRRR condos here on Maui) and he said "oh sorry, we don't give more than 2 loans in a given condo building". The funny thing about this was that he had just given me a prequal letter to purchase two units as a package deal... so if he wouldn't fund another unit, then why did he give me a prequal letter saying that he would fund 2 more!? lol So make sure you ask them everything!
Thank you. So assuming I'm going from a CPA job to a higher paying CPA job how long should I have this job before I refinance?
Malabute & Company CPAs527 Reviews - Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 916 votes8y
Originally posted by @Greg Gaudet:
Originally posted by @Jason Malabute:
Originally posted by @Alexander Felice:
Originally posted by @Jason Malabute:
What are potential obstacles when trying to BRRRR? For example:
1. Are there cases when you can't refinance ?
2. If you buy the property in cash can you refinance?
3. Do you have to have a W2 job to refinance? Do you have to make a certain amount from your job or business to refinance?
4. Can you always pull out 75% of appraised value in cash? Are there cases when you can't pull out the full 75%?
5. Does your yearly income and wages affect how much you can pull out from the refinancing ?
6. How soon after purchase and rehab can you refinance and pull out cash?
1. yes, all the time. Talk to your lender about the refi BEFORE YOU PURCHASE the house to ensure your debt strategy will work
2. yes
3. you'll need to have some stabile way to prove repayment. You're lender can confirm you meet requirements for refi
4. 75% is fannie mae guidelines for investment property. It's a very common LTV, but it's definitely not always
5. yes, the bank is going to look at your capacity to repay as a function of what's on your tax returns
6. 6 month seasoning is standard but can be much faster if you use delayed finance (which can be complicated). I do a full BRRRR flip in ~9 weeks
Thank you. This might be a silly question, hypothetically speaking, but assuming your only debt are credit cards (less than a $1,000), your gross salary is just below 40k, but you have a $100k in the bank would you have trouble refinancing assuming the ARV is under $200k?
If yes, what amount of gross salary will I for sure have no problem being approved for refi? For example if I got my salary up to $100k will I be approved every time (assuming everything else stays the same)?
I thought I'd explain DTI a little further since I don't think anyone else has yet.. I believe most banks don't want you to have any higher than 43% DTI. So all of your fixed debt expenses, including the mortgage you're applying for, should not exceed 43% of your gross monthly income. For example - let's say you earn $4,000 a month before taxes; that means you have $1,720 a month to use towards debt in the banks eyes (4k x .43 = 1,720). Now let's say your car payment is $200, your rent or current mortgage is $500 and you have a personal loan payment of $500 a month. That would leave you about $520 of available income to use towards debt, so you should be able to pay a total of $520 a month towards a home (including taxes, insurance and PMI if applicable. You should be able to count your positive cash flow towards your income, once you have done your first BRRRR and have a tenant and a lease (the bank will probably want to see the lease, my bank is reviewing my leases right now and using them to help approve me for the deal I'm working on)
Disclaimer - I'm not a banker, so someone correct me if I'm wrong!
I also thought I would mention to keep in mind you typically will need to have about 6 months worth of reserves for each property and as you scale the bank may require more. So if your total payments on each property are $500/month and you have 2 properties, the bank will probably require you to have $6,000 cash in the bank that you're not using. You can usually use retirement accounts, but you must be able to access the funds and the banks will typically count 70% of those funds due to the penalties you pay to withdrawal from 401k's. But as you acquire more properties, you grow your monthly cash flow, which can make it easier to save a little extra money.
If any of this is discouraging, go talk to your local banks! Start with the small local credit unions, tell them your plans and tell them you want to build a relationship with them. Make sure you know your numbers going in, so you can present some hypothetical deals/situations to them and show them that you know what you're talking about so they can see you're going to be successful and realize that they should want your business. They is always a way to make it happen. If you need hard money to make the deal happen then do what you gotta do, as long as the deal still makes sense.
Thank you. I didn't know about 43% rule. This is a big help.
Malabute & Company CPAs527 Reviews - Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 916 votes8y
Originally posted by @Corby Goade:
@Jason Malabute- obviously, if you make good money, your DTI will be less of an issue. For most of us, we are here because we didn't or don't make good money. Keeping your DTI low is actually simple- don't borrow money for things that aren't real estate. Don't have a car payment, don't have credit card payments, don't rent furniture, don't finance a jet ski, etc, etc. Basically, if you have a monthly payment on it and you don't need it to live, get rid of it!
Good luck!
thank you for clarification
Malabute & Company CPAs527 Reviews - 8yGreg GaudetPro MemberInvestor · Pukalani, HI · Member since 2017 · 414 posts · 291 votes
Originally posted by @Jason Malabute:
Originally posted by @Greg Gaudet:
Originally posted by @Jason Malabute:
Originally posted by @Michael Noto:
@Jason Malabute More important than anything with a BRRRR make sure you have a refinance lender lined up before purchase so you know the timetable you will be working with from a seasoning perspective, LTV amount, etc. going into the project.
Even if you are not going refinance until 6 months-1 year later? What if you're currently
trying to find a new job while you purchase so you are sure you actually qualify for refi?
Also, if you are a long distance investor does the. lender have to be located in market you are investing in?
Jason changing jobs can make things tricky... if you are staying in the same industry/type of job then it shouldn't be a problem. But if you go from being a teacher to a salesman then the bank will probably not give a mortgage until you've been at your new job for 2 years.
If you're investing out of state you will typically need a lender in the state that you are purchasing in. Some lenders are licensed in multiple states.
Again, this is all just based on my experience getting mortgages... you should definitely sit down with a lender and go through everything and takes notes so there aren't any surprises when you're ready to do a deal. I've had issues with lenders assuming that I know all their secret little rules lol like on my last deal, I brought a third loan to my lender (I purchase long term rental BRRRR condos here on Maui) and he said "oh sorry, we don't give more than 2 loans in a given condo building". The funny thing about this was that he had just given me a prequal letter to purchase two units as a package deal... so if he wouldn't fund another unit, then why did he give me a prequal letter saying that he would fund 2 more!? lol So make sure you ask them everything!
Thank you. So assuming I'm going from a CPA job to a higher paying CPA job how long should I have this job before I refinance?
I believe it depends on your pay structure. Since you're not changing careers you should be able to use your past income to qualify; and I'm pretty sure that if your new higher pay is a salary then you should be able to start using that amount to qualify right away... but double check this with a lender. I don't believe they need the 2 years of seasoning to count a pay increase when you didn't change industries. Unless you went from salary to commission.
And regarding the 43% DTI, that's kind of the general rule as far as I know. Again, double check all of this with a lender. I'd ask a few local investors who's the most investor friendly lender, get 3-4 of them and schedule meetings with a few so you can find out exactly how much and when you can qualify for and how you need to structure your deals.
And keep in mind, if you have too much debt, or otherwise just can't qualify for what you need, you could always partner with someone that maybe can qualify for more, but doesn't have the money. I'm about to partner with someone because I have a deal and I know how to do it but I don't have the cash. She has the cash, but doesn't know how to, or want to, do the work involved in the deal.
- Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 916 votes8y
Originally posted by @Greg Gaudet:
Originally posted by @Jason Malabute:
Originally posted by @Greg Gaudet:
Originally posted by @Jason Malabute:
Originally posted by @Michael Noto:
@Jason Malabute More important than anything with a BRRRR make sure you have a refinance lender lined up before purchase so you know the timetable you will be working with from a seasoning perspective, LTV amount, etc. going into the project.
Even if you are not going refinance until 6 months-1 year later? What if you're currently
trying to find a new job while you purchase so you are sure you actually qualify for refi?
Also, if you are a long distance investor does the. lender have to be located in market you are investing in?
Jason changing jobs can make things tricky... if you are staying in the same industry/type of job then it shouldn't be a problem. But if you go from being a teacher to a salesman then the bank will probably not give a mortgage until you've been at your new job for 2 years.
If you're investing out of state you will typically need a lender in the state that you are purchasing in. Some lenders are licensed in multiple states.
Again, this is all just based on my experience getting mortgages... you should definitely sit down with a lender and go through everything and takes notes so there aren't any surprises when you're ready to do a deal. I've had issues with lenders assuming that I know all their secret little rules lol like on my last deal, I brought a third loan to my lender (I purchase long term rental BRRRR condos here on Maui) and he said "oh sorry, we don't give more than 2 loans in a given condo building". The funny thing about this was that he had just given me a prequal letter to purchase two units as a package deal... so if he wouldn't fund another unit, then why did he give me a prequal letter saying that he would fund 2 more!? lol So make sure you ask them everything!
Thank you. So assuming I'm going from a CPA job to a higher paying CPA job how long should I have this job before I refinance?
I believe it depends on your pay structure. Since you're not changing careers you should be able to use your past income to qualify; and I'm pretty sure that if your new higher pay is a salary then you should be able to start using that amount to qualify right away... but double check this with a lender. I don't believe they need the 2 years of seasoning to count a pay increase when you didn't change industries. Unless you went from salary to commission.
And regarding the 43% DTI, that's kind of the general rule as far as I know. Again, double check all of this with a lender. I'd ask a few local investors who's the most investor friendly lender, get 3-4 of them and schedule meetings with a few so you can find out exactly how much and when you can qualify for and how you need to structure your deals.
And keep in mind, if you have too much debt, or otherwise just can't qualify for what you need, you could always partner with someone that maybe can qualify for more, but doesn't have the money. I'm about to partner with someone because I have a deal and I know how to do it but I don't have the cash. She has the cash, but doesn't know how to, or want to, do the work involved in the deal.
thank you again
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