Refinancing after HML on buy and hold property
Hello,
I am new on BP, but I have already learned a lot just from reading different things over the past couple of days. This website is a wealth of knowledge, and I really appreciate all of you who are willing to help out those of us that are new and considering getting into real estate investing.
One thing that I have read that is particularly interesting to me is the BRRR method. From what I have been reading, after a hard money loan is granted (seems to be maybe around 40-65% of the ARV for a new investor - I do understand that this is very variable based on different HML lenders), the investor then uses the HML along with the additional cash that they provide in order to rehab the property and then rent it. Then, it seems typically that after a seasoning period (6-12 months typically from what I have read), the investor can then refinance with a typical 30 yr fixed rate mortgage from a traditional lender at typically around 75% of the new appraised value (hopefully more than the HML that was borrowed). This is then used to pay off the HML and possibly recuperate some or all of the investor's cash that was used. Please correct me if I am not understanding this process correctly or my numbers are a ways off for a new investor with no prior experience.
I did have a couple of questions on the refinancing process.
1) Is there still a down payment typically required by the traditional loan lender for 20% of the loan amount? I am thinking that there is not so long as the HML amount is not greater than 75% of the new appraised property value. For example, say a property was purchased for $50,000 and needed $10,000 worth of renovations and has an ARV of $100,000. The HML lender is willing to loan you only $40,000 because you are new. You take them up on this and supply the remaining $20,000 to get the property rehabbed completely and then rented. After 6 months of paying interest and points to the HML lender, you refinance with the traditional lender. The new appraised value is indeed $100,000. Will they lend you $75,000 (75% of value), $55,000 (75% of value minus a 20% downpayment on the $100,000 value), $60,000 (75% of value minus a 20% downpayment on the $75,000 loan), or just the $40,000 that you owe to the HML lender? From what I have read, it seems like they will loan you the $75,000.
2) Do the traditional lenders give better rates if the property is already rented and generating income or is it purely based on the value of the property.
Sorry for being long-winded. This is very interesting to me, and I just want to make sure that I am understanding it correctly.
Thank you in advance,
Geary
You need to make sure your lender will do a refinance based on appraised value. If for example the home appraises for $100k and your all in loan is for $70,000 then you should not have to bring any additional finds to the transaction as your closing cost will be rolled into the loan.
Your rate will be based on current market rates mostly. I purchased all of my rental homes using this strategy.
Good luck
Thank you for the reply Curt. That makes sense. Just being curious, what else would the lender possibly refinance based upon?
That's cool that you have used this strategy on all of your rental homes. It seems like a very efficient way to utilize your cash as you can keep using the same money over and over again to scale more quickly.
Being that you typically need to use this method on distressed properties, do you have a general contractor that walks through the house initially with you and gives you a repair estimate or do you have a good idea from experience or how does that work?
Thanks again,
Geary
I walked would estimate my renovation myself but would always bring my contractor by to firm up the quote.
Excellent post Geary!
I plan on using this exact strategy for my first rental. Lots of good info here.
@Curt Davis how likely is it that a hml would loan to somebody with no experience? Obviously having a few deals under your belt would be great but is this strategy possible for people starting out?
It is possible but they might require some skin in the game. They might also require you to provide a pre appraisal and more info on the home.
Good luck