Title Representative · Denver, CO · Member since 2020 · 126 posts · 66 votes
I started searching for all-in-one loan, but that's a HELOC strategy and not what I'm talking about.
BRRRR: Is there a name for the type of loan where you get the rehab loan, then refinance upon appraisal? Or is this just a custom arrangement every time with lenders? (And do you know lenders who do it?)
I know I've heard of some lenders agreeing to do the refinance quickly and accept reduced fees for the double transaction. This simplifies the process and number of people I have to find/involve, and dodges hard money.
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
6y
There is no special program or Fannie Mae guideline or any of that. It's a word made up by the folks on this website.
It's just two mortgages. A purchase mortgage. And then, six+ months later(1), a cash out refinance.
Or it's just one mortgage. A cash purchase. And then, a day or a month later, a cash out refinance.
(1) Quick note on this. Lots of folks starting out balk at that, "omg why do I have to wait six months, I plan to finish in 2 months!" Let's talk about that timeline... the reality is it's going to fall into one of two camps. Either it's just minor cosmetic stuff and it does finish in 2 months, but the value isn't there in terms of the appraisal for the cash out refi. Or, it's major stuff, and that "2 months" becomes 8-24 months because we live in the real world, but hey at least the value is there on the cash out refi. In either case, that six month wait from Fannie isn't what will actually hold you up, in the real world.
Rental Property Investor · Perry Hall, MD · Member since 2016 · 586 posts · 598 votes
6y
There really isn't a "BRRRR" loan. The loan at the end of the process is called a "cash out refinance" and many, many lenders will do them. If the property is titled in your personal name, any conventional lender would. If not in your name you're talking about commercial/portfolio lenders. It's a completely separate process/loan from your initial loan that you used to purchase the property (assuming you used a loan to purchase) that requires a new application, underwriting, appraisal, the works.
Though I haven't heard of a lender that will give you reduced fees if you use them for both the initial loan and the cash out refinance that doesn't mean that they're not out there. If you use the same lender, they'll at least already have a lot of the financial info that they need from you so the process would be a bit easier the second go-round.
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
6y
There is no special program or Fannie Mae guideline or any of that. It's a word made up by the folks on this website.
It's just two mortgages. A purchase mortgage. And then, six+ months later(1), a cash out refinance.
Or it's just one mortgage. A cash purchase. And then, a day or a month later, a cash out refinance.
(1) Quick note on this. Lots of folks starting out balk at that, "omg why do I have to wait six months, I plan to finish in 2 months!" Let's talk about that timeline... the reality is it's going to fall into one of two camps. Either it's just minor cosmetic stuff and it does finish in 2 months, but the value isn't there in terms of the appraisal for the cash out refi. Or, it's major stuff, and that "2 months" becomes 8-24 months because we live in the real world, but hey at least the value is there on the cash out refi. In either case, that six month wait from Fannie isn't what will actually hold you up, in the real world.
So it's just an arrangement individuals have with lenders to take a reduced fee. Got it (unless someone else chimes in with other info).
I'm not sure where you are getting that reduced fee thing. Cash out refinances, across the board, have fees that are typically 0.625% to 1.125% (those are % of the loan amount) higher, or a bumped rate (your choice). This is directly from Fannie.
Nothing in the BRRRR loan structure comes with a "reduced fee." Not processing, points, or rate.
@Chris Mason laid it out very well as he usually does, but let me take it a step further.
Here's how the BRRRR process works from a lender's perspective.
If you find a property that's a mess, you should be able to buy it for a fair market value which is well below the fair market value for a property that's renovated, up to date and beautiful. Let's say you find a mess of a property that had an old lady with 50 cats in it, but she died and the cats ran the house for a week. You pick that property up for $100K in a 200K neighborhood. You spend 2 months cleaning it out, using an ozone machine to get the smell out, repainting it with oil based Kilz, sanding the floors and replacing some of them, updating the kitchen and two bathrooms, putting on a new roof and new HVAC. Fortunately, it's not that massive, so your total renovation cost was about 40K.
You could use hard money for that purchase at 80% loan to cost so 80K for the purchase money and 32K for the renovation money. 10% interest only and 4 points.
Now the renovation is done. You spend another month getting it rented and your tenants move in at the end of month 3. You start shopping for a conventional lender to do the refinance and eliminate your hard money loan. You're looking for at a $200K value at max 75% loan to value or $150,000 loan amount. It's a totally separate lender than the original hard money guy. This lender is going to charge you around 3.5% interest in this market at a cost of maybe a point with an admin fee and an underwriting/processing fee.
You're all in for about 28K in initial acquisition cost plus the closing costs and points and processing fees of about 10K, so your total is about 38K. Then you'll pay for the refinance. Out of pocket cost is the appraisal and then you'll pay the closing costs of about 5K.
So you've put out about 44K. Your rent is $1800 per month. Your mortgage is about $1000. Your net, not counting money of pocket is about $800 per month. Over time, you'll make money.
Just an aside, if you sell before refinancing it, you could make the most bang for your buck up front; if it sells for what you need it to sell for without discount.