BRRRR... overwhelmed by lending options.. advice needed!

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BRRRR... overwhelmed by lending options.. advice needed!

Christian Scully
Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes

Okay BP, help a confused rookie out... I'll give some quick background on my property and what I'm trying to do. 

In 2017 I purchased a home sold as a duplex for a total of $207k including about $23k of 203k funds to make repairs. This was an FHA loan with PMI.

Since then we have cosmetically renovated the 2 units with our own cash. I also took out a $35k personal loan to build the attic into a legal 3rd unit. Cliche story: our contractor underbid the job, took a lot of our money and left us to figure out how to finish the project and fund it. We managed to fund the rest of the project, replacing a lot of what the original contractor actually did, and we also put some money on credit cards. Now the project is just about wrapped up and I am looking at refinancing options since the value of the home is greatly increased. 

I am struggling to figure out the best way to go to achieve my goals. 

Goal 1: Refinance into a conventional mortgage without PMI.

Goal 2: Pay off the rehab loan and credit card debt.

Goal 3: Leverage the remaining equity to fund another property. 

My problem is that each lender offers different numbers on everything : LTV, rates, HELOCs, terms, intro specials... I'm getting lost in the numbers and can't tell which combination is the most cost efficient while achieving my 3 goals.

Here is the basic info for the property: 

Purchase price: $183k + $23k in 203k rehab funds

Current mortgage: $202,000

Additional rehab costs: $60,000

Estimated current appraised value: $325,000

Current interest rate: 4.375%

Rehab loan balance: $31,000

Credit Card debt at 13%-20%: $8,500

Credit Card debt at 0% for another 15 months: $19,500

Desired minimum equity available to use for next purchase: $25,000

And here is the best offerings I've received rom local banks and credit unions for each category: 

Best fixed LTV for Cash-Out Refi: 75%

Best 30 year fixed rate: 5.875

Best 10/1 ARM rate: 4.125 (but this bank's max LTV for the loan is 65%) or 4.625 (cash out LTV of 75%)

Best HELOC LTV: 95% at intro of 3.49 for 1 year then prime +1.25

I imaging the rates would go down if I weren't cashing out any equity. And then there is the option of just a home equity loan, which I can get a rate around 5% for 15 years with a max LTV of 95%.

I would so desperately appreciate any advice from people who have done this before. This is my first property and my first time trying to leverage the equity to move to the 2nd property. A lot was riding on the refinance part of this as we were attempting our first BRRRR.

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Anthony ThompsonPro Member
Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
7y

@Christian Scully I could be mistaken but looking at the #s and options you laid out, the only option which has any chance of doing what you're looking to do is the HELOC that will do 95% LTV.

Generally I agree with @Jason D. and would be very careful about getting adjustable rate financing in this environment, and strongly lean toward fixed rate.

HOWEVER you mentioned about 28K of credit card loans at high rates, so even a HELOC/ARM adjustable rate is going to be a lot better than unsecured credit card rates, so I don't think you can go wrong using the former to pay off the latter.

If you did the 95% LTV option you should net out about 45K after paying off your credit cards and rehab loan balance, which would give you enough for a down payment on another property.

What you didn't post though, and is really the other side of the story, is what your income/financial situation is and whether you'll be able to handle all these payments. Especially when you figure on "surprises" like evictions, needed repairs missed on the inspection, boilers/HW tanks going, etc.

It sounds like you over-extended yourself on the first rehab and I would urge you to be careful about getting involved in another major project when it seems you stretched yourself pretty thin for the first one.

There are times to "buy everything you can get your hands on" (like 2012) and times to be more cautious (I'm kinda feeling like that's now, or close to it).

These days, I pay more attention to LTV and debt service coverage ratio than I do cap rate and cash on cash return. So I'd urge you to consider risk/safety equally alongside the desire to aggressively expand your portfolio.

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  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Christian Scully what are your long term goals for the property? If you plan on keeping it longer than 10 years, I would secure 30 year fixed financing. It my opinion that interest rate may never be as low as they are now, so securing low interest, long term debt is part of my strategy.

    I assume that you are living in the property? I would look for 80% LTV if the rental income can support it. If not, 75% is a decent LTV and sub 5% interest is pretty good.

    2Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y

    @Jason D. thanks for the response. Our plan is to hold this property indefinitely as part of a retirement plan. That's a noted point about the rates.

    We do occupy one of the units currently. I haven't been able to find 80% for a multifamily property, though they will do it for a single. I am wondering if they will do it if I don't cash out and use the rest of the equity in a LOC.

    I'm trying to figure out the best combination of refinanced mortgage and HELOC or HEL to accomplish these goals.

    0Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y

    If anyone from Rhode Island has input and experience with local lenders that would be great too. I'm not sure if I'm missing something or should be looking elsewhere for lending.  

    0Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    7y

    @Christian Scully You should take HELOC for right now. The reason being no closing cost and will serve your purpose. Your credit score may be lower right now because of max out credit limit. I understand you are paying PMI but your interest rate is way lower what other lenders are offering you. Do the comparison how you are saving more by cash out or HELOC.

    3Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y

    @Harjeet Bhatti thanks for your advice. My credit score will likely be around 650-670 in the next few weeks when I want to take action on this. Do you also feel strongly about sticking with a 30 year fixed as opposed to a 10/1 ARM? One option is refinancing the 202k to the 10/1 ARM at 4.125% with no pmi and not cashing out. Then opening a LOC for $100k at 3.49% for the first year then prime+1.25.

    0Reply
  • Anthony ThompsonPro Member
    Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
    7y

    @Christian Scully I could be mistaken but looking at the #s and options you laid out, the only option which has any chance of doing what you're looking to do is the HELOC that will do 95% LTV.

    Generally I agree with @Jason D. and would be very careful about getting adjustable rate financing in this environment, and strongly lean toward fixed rate.

    HOWEVER you mentioned about 28K of credit card loans at high rates, so even a HELOC/ARM adjustable rate is going to be a lot better than unsecured credit card rates, so I don't think you can go wrong using the former to pay off the latter.

    If you did the 95% LTV option you should net out about 45K after paying off your credit cards and rehab loan balance, which would give you enough for a down payment on another property.

    What you didn't post though, and is really the other side of the story, is what your income/financial situation is and whether you'll be able to handle all these payments. Especially when you figure on "surprises" like evictions, needed repairs missed on the inspection, boilers/HW tanks going, etc.

    It sounds like you over-extended yourself on the first rehab and I would urge you to be careful about getting involved in another major project when it seems you stretched yourself pretty thin for the first one.

    There are times to "buy everything you can get your hands on" (like 2012) and times to be more cautious (I'm kinda feeling like that's now, or close to it).

    These days, I pay more attention to LTV and debt service coverage ratio than I do cap rate and cash on cash return. So I'd urge you to consider risk/safety equally alongside the desire to aggressively expand your portfolio.

    6Reply
  • Nelson Taylor
    Rental Property Investor · Providence, RI · Member since 2018 · 75 posts · 35 votes
    7y

    What rents are you getting on the two other units?  And how much would your unit rent for if you bought another multi to house-hack?

    0Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y

    @Anthony Thompson I appreciate your input. We certainly took a shot and got overextended because of the contractor issue that set us back $20k. We've been able to weather the storm with our current full time income and the rent from our 1st floor unit. Now that we will be adding income from the 3rd floor unit it will be even better. Would you recommend refinancing to remove the PMI and getting the rest of the funding from a HELOC? Or staying in our current mortgage and getting all the funding from a HELOC? Or a HEL at a lower rate?

    @Nelson Taylor We run our first floor unit as a STR and averaged $2,800/month. It was an experiment that worked well for us. We will be trying to do the same on our new unit and expect to be somewhere around $2,000/month. If we rented the units out to a regular tenant I would expect something like $1350, $1350 and $1000.

    0Reply
  • Nelson Taylor
    Rental Property Investor · Providence, RI · Member since 2018 · 75 posts · 35 votes
    7y

    STR is AirBnB? What about third floor? and what neighborhood is this in?

    0Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y

    @Nelson Taylor A mix of Airbnb and VRBO in the West End.

    0Reply
  • Anthony ThompsonPro Member
    Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
    7y

    @Christian Scully any time you can get rid of PMI is usually a win. Just make sure that you'll hold on to the property long enough to recoup the closing costs, from the refi that gets id of the PMI. Also if your rate will go up, take that increased payment into account also.

    But almost always, getting rid of that PMI is a real win. Think about it this way, you worked super hard to increase the value of the bank's collateral, which means they now have a safer loan. I think it's only fair you get a chance to remove the PMI :)

    If it were me, I'd probably spend hours creating different "scenarios" in Excel for the different options you have here. But usually after doing so, a few things end up standing out (e.g., paying down those adjustable, high-rate CCs is a priority). I can certainly see why you're feeling overwhelmed though.

    (If you do that, I've found it's often helpful to highlight or group together, key assumptions you might want to tweak, such as assumed rents, or assumed interest rates, etc. That way you can target those for tweaking or creation conservative/aggressive variations.)

    3Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    7y

    @Christian Scully You may have higher payment on credit card compare to what your payment will be for HELOC. In that case stick with HELOC and work on your credit. If you are getting 10/1 arm and line of credit and solve your problem to pay off credit cards go with that option.

    2Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y

    @Anthony Thompson Thanks Anthony, that's helpful. And I'm glad to know this isn't a simple dilemma, my brain is maxed out! 

    I think it is ridiculous that you can't get rid of PMI on FHA loans. Otherwise I would definitely stay in the current mortgage and get a good HEL or HELOC to lower the rates I'm paying on the rehab loan and CCs.

    0Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y

    Running more numbers it seems like with current interest rates and our PMI rate of .87%, it actually might make more sense to not refinance and stay in our current mortgage. I could then get a fixed rate home equity loan to cover the rehab loan and CCs at somewhere between 4-5% for 10 years for a manageable payment that we could pay extra on over time. Then open a HELOC for the remaining available to have at hand if we find an opportunity. This would decrease our current monthly payments by around $800 and provide the equity line if we need it. I had not considered that paying PMI might actually be cheaper over 30 years than paying an extra 1.5% interest rate. At some point over the next decade we will be able to start paying extra payments anyways and can reduce our PMI expense that way for a best case scenario.

    0Reply
  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    7y

    @Christian Scully Would that put the HELOC in the 3rd position? Existing mortgage, 2nd position "home equity loan", and then a HELOC? Don't think most HELOC lenders will take a third position, at least not with that credit score and LTV, unless its a niche product at a very high rate.

    0Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y

    @John D. good to know, I was unaware of that. I was just working through the numbers. hmmm. back to the drawing board. I will ask the local lenders about that also. 

    0Reply
  • Wesley I.
    Investor · San Diego, CA · Member since 2019 · 286 posts · 135 votes
    7y

    @Christian Scully After shopping for HELOCs I have to agree with John, they always want second position. I had a Hero (energy efficient home improvements) loan that I took out years ago that I pay through my property taxes and I have to pay that loan off to get approved. I'm currwntly d ciding to pay it out of pocket or roll it through the HELOC loan.

    0Reply
  • Luciano A.
    Developer · Houston TX · Member since 2018 · 423 posts · 400 votes
    7y

    @Christian Scully

    First thing you should do while you live in the property is to contact your lender. As owner occupied you might be able to remove PMI just with an appraisal. I think you have to be around or under 70-80% value. It's been a while since I house hacked but was able to remove after two years just by getting new appraisal.

    Now if you are going to try doing a BRRRR the best thing to do is rent third unit with a written lease. To maximize rent roll you should get a competent realtor to give you market rate for your unit. Take that to a lender so they can use rents to help with appraisal to get you highest price. Calculate total you would need to payoff debt, cash for next property and take out only that amount to help maybe give you a lower LTV thus better rate.

    I no longer use traditional lending do commercial but I like that you both stuck with it and now trying to get to next property. I’m sure getting your hands dirty on this one gave you a lot of experience so that next project you aren’t taken advantage of and know what to look out for.

    To become a landlord and BRRRR effectively, use the numbers to figure if a property will cashflow after expenses, rehab, mortgage,etc not just purchase price and ARV. Banks will look at different factors including DCR (debt coverage ratio) to see if property can cover its own debt to protect themselves from refi on a property that can't pay its own expenses.

    All of this with assumption that when you buy next property it will be for you to move into and house hack during the rehab then rent out and refi.

    Best of luck

    0Reply
  • William C.
    Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes
    7y

    @Christian Scully the LTV you are going to find on an Owner Occupied cash out refi is going to be between 75-85% depending on who you call and a host of other factors. The key being the "cash out" part of the refi. Living there helps raise the LTV, but pulling cash lowers it. Now if you don't pull any cash, and just pay off the debts, you may be able to see a higher LTV. At least that's been my experience, any mortgage guys out there feel free to correct me if I'm wrong.

    The way I'm reading the numbers tells me you have $260k into the property, total. If we assume a typical 80% LTV loan, with a value of 325k, that is 260k, the exact amount needed to pay the current loan, and renovation debt. I don't see enough equity in the home to pull out cash above that 260k.

    Are you robbing peter to pay Paul by taking a higher interest rate in order to drop PMI? These lenders should each be experienced and educated enough to be able to sit you down and compare their loan against the other loans apples to apples and show you which one is going to best accomplish your goals. Most consumers will get lost in the numbers, it's their job, and why we pay them so much money, to educate you. Bigger Pockets is great and all, but when it comes to finances and loans there are COUNTLESS variables that are specific to YOUR situation that affect the loan type, interest rate, PMI, etc, etc, that only the lender knows and why you may find 100 different opinions on this thread by the end of the day.

    0Reply
  • Paul Rumsey
    Member since 2018 · 4 posts · 2 votes
    7y

    Have you considered a HELOC in first position? refinancing all the debt into one HELOC loan will provide several advantages. We often times pay more attention to the % symbol than the $ symbol, and you'll find in many cases that the simple interest structure of a HELOC- even at a higher/variable % rate- will result in less $ expense in interest. I put ALL my income in and then pull out what is required for bills once a month (the daily interest rate reduction is greatly accelerated). Google a Simple Interest calculator and plug your numbers in to see specific results.

    It provides quick access to your equity (for your next purchase, but also providing a 'emergency fund' for any future events such as you contractor issue). 

    Also, there are lenders that will provide HELOC loans with no/little closing costs.

    Ensure it's structured properly and a 1st position HELOC seems to be a win/win/win for your three (3) goals.

    1Reply
  • Ana Coello
    Rental Property Investor · Rockville, MD · Member since 2018 · 56 posts · 28 votes
    7y

    The interest rate that you got on the 203k loan is 4.375?! How long ago? Which lender are you working with? I spoke with a lender yesterday and he said for a rehab loan (similar to 203k but not Fannie Mae) interest rate right now is 5.6. 

    0Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y
    @Paul Rumsey this is good to hear, thank you, and is what I'm now leaning towards. Can you clarify what you mean when you say you "put all your money in"? I'm not clear on that section of your post.
    0Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y
    @Ana Coello this was in August of 2017.
    0Reply
  • Christian Scully
    OP
    Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
    7y
    @Luciano A. I appreciate your advice and will definitely be taking that into future purchases. Our current house we made up as we went along because we were not planning to BRRRR. We found out after we did rehabbed one unit, that the 2 family we bought actually is a 3 family in the building department records. So knowing that we wouldn't need a variance to turn the attic into a 3rd legal unit, we gambled and took out the rehab loan to maximize the potential of the house. Certainly screwed up in a lot of ways and learned a lot in the last year. Once our finances are settled with a good plan moving forward I'm looking forward to a nice breather before collecting my learned lessons and doing it again.
    0Reply
  • David Sisson
    Architect · Providence, RI · Member since 2016 · 258 posts · 195 votes
    7y

    I’m pretty sure it’s going to work out for you. Just find the best refi or equity loan  option, and also be safe on the $ so you don’t get over extended. More important to solve this immediate problem than to get $ for the next one. 

    0Reply
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