Is it worth doing a BRRRR with higher interest rate?

Question

I found a house that needs maybe 20% more renovation needed to be able to rent it out, but the mortgage officer said that would require a renovation loan instead of a conventional loan because the state of the house is “unlivable” at the the of purchase. He also discouraged me from buying it because the renovation loan would mean higher interest rate. If I go with this option, it would probably also take 2-3 months to complete renovation. Is it worth it? You can just refinance it to a conventional loan after right?

Greg Scott · Answer

Sounds like you need a new mortgage broker.  One that understands investment real estate would never make that statement.  They might discourage you from buying for other reasons, but not because you are going to take on a short-term loan at a high interest rate.  Find someone that knows what they are doing.  They can help you through the process and this person probably cannot.

Yes, once the rehab is done, you should be able to to a rate & term refi into a conventional mortgage. Yes, rates are high right now. Do the math on what the loans will cost you. If the deal still makes sense, do it.

There is a saying, date the financing, marry the property.  If the numbers still work and you buy the property, guess what?  If rates come down in 2 or 3 years, you can refi again, lower your interest rate, and jack up your cashflow.

Robin Simon · Answer

Think you need to take a step back and run the numbers - doing the calculations on cash flows, renovation costs, refinance costs, etc. can seem intimidating, but its not super-complicated once you learn how to do it.  Absolutely crucial step before you embark on a BRRRR project - know the numbers, especially on the financing side of the equation and then let the numbers determine if its "worth it" or not.

I also second @Greg Scott here, you probably need a new mortgage officer, ideally one that specializes in BRRRR deals which is typically more on the hard money / nonQM side than a bank or conventional path

Erik Estrada · Answer

Hey Lina,

Sounds like a fix and flip loan could work for you. Then you can refinance into a conventional (if you qualify) or DSCR loan. Best of all is that there are lenders that can finance 100% of the rehab costs.

Jared Hottle · Answer

Getting this question alot. I am going after BRRRs right now but not because prices are really coming down but because it seems like we are shifting to an environment where contractors need work that we didnt have last year. The BRRRs are not as good but can get them done cheaper and quicker and the time value of money make it worth it to me. Of course refinancing as soon as rates go down but I say its a good time to buy.

Frank Greg · Answer

By your own admission, if 80% of the property is uninhabitable with the remaining 20% requiring renovation to get it in any sort of livable condition and you went to a traditional/regular bank, the response you got from the mortgage officer is sort of accurate.

Regular banks do not typically make conventional loans on a property that is not habitable and most do not have products to address rehabs. You would need a specialty lender whose business focuses on financing rehabs who will in fact charge a higher rate than conventional due to the obvious risks.

So the mortgage officer doesnt necessarily have his or her facts wrong; might be they just don't have the solution that you seek.

Nick Belsky · Answer

@Lina Vezzani-Katano

Yeah, sounds like a new broker who doesn't understand investments.

Rate for fix and flip loans is not usually a factor unless you are undertaking a heavy rehab that will take a long time to complete.  Then your carrying costs can become more significant.  Typically these lenders will charge between 1-3 origination points on top of fees, totally normal for that loan type.  As others have pointed out, pencil it out month by month and see how the numbers work out.  If it works, it works.  If it doesn't, it doesn't.

On your exit strategy, Fannie and Freddie have title seasoning requirements... so you can't purchase a property, rehab it, then cash out refi to conventional until 6 months of title seasoning (Freddie will be changing to 12 months in 2023).  You can do a rate and term, however, you won't be able to take advantage of the value you've added.

Many DSCR lenders will waive seasoning with rehab or have shorter seasoning periods around 3 months.  Then you can get into a perm loan and cash out on the value add to recoup your capital much faster.  Contrary to what many think, DSCR loans are fairly similar in cost to conventional loans.

Cheers!

Dylan M. Davis · Answer

You need a bridge lender that will issue you funds to draw down on an complete the renovations. Once the work is completed after 3 months seasoning you can do a cash-out refinance into a 30 year product to stabilize or if rates scare you, do a bridge cash-out but leverage is reduced. You can also extend the 1st  bridge mortgage 6 months at a time. The mortgage officer probably is discouraging you from seeking private money because he won't get the business but high rates can be dealt with if you have the right lender.

Dustin Street · Answer

@Jhenyn Aquino Sure do! Shoot me a message so I can find out a little more about what you're looking for. But Merchants is a company that does a lot of work for investors here in KC

Eliott Elias · Answer

Going to need some numbers to give you any feedback.

Jhenyn Aquino · Answer

Hi Dustin,

Would you have any recommendations for Rehab loan? Appreciate any information!

-Jhena Funtila

Is it worth doing a BRRRR with higher interest rate?

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