BRRRR Financing Problems
Rental Property Investor · Los Angeles, CA · Member since 2016 · 130 posts · 69 votes
BRRRR Financing Problems
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Investor · Lehi, UT · Member since 2015 · 435 posts · 300 votes
9yHello @Etienne Martel
I have done 3 BRRRR's in Memphis. what Andrew said is correct. So what is going to get this done for you is a lender that specializes in real estate investments. The lender I used was Aaron Chapman with SNMC, our clients have also had success with Joe McBreen with Guaranteed rate. The both specialize in investor loans and can direct you on your best path to refi.
Anyways the only way for the fannie freddie loans to work is if you have a stable w-2 income.
I do know that if you wait 6-12+ months the more the lenders would let you refi out of the property.
Anyways hit me up if you have any questions or need any property management, or if you need some more BRRRR deals we can help you out with that.
22 Replies
- 9yLevi T.Pro MemberRental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
I've never seen anyone in my circles that could do that any sooner, beyond a random favor now and then. I'm on commercial side, and they require 12-24 months from what I've been told. You could try hopping on over to the commercial side and seeing if a local bank will let you lean on the equity vs refi'ing it, that's more common with commercial lending, and cheaper.
- 9yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Etienne Martel and @Levi T. this is one of the most common topics of discussion when it comes to financing on Bigger Pockets. The answer is YES! you can absolutely get cash out of your property on DAY 1. However, there is a better strategy to do what you are trying to do so please let me take a little time to explain this process.
When purchasing a home with cash or a HELOC you are allowed to get cash back with a "conventional" loan. Conventional loans are the loans that are governed by Fannie Mae and Freddie Mac (if you recognize those names). You can find a conventional loan in almost any bank. Fannie/Freddie allow cash out refinancing when buying cash or with a HELOC under thier "Delayed Financing" rule but there are two really important elements:
- You are limited to receiving either your purchase price + closing costs....or
- 75% of the After Repair Value....whichever is the LOWER amount.
For example, if you buy a home for $70k, put $10k into renovations and the home is worth $100k, then you would be limited to receiving back $70k + your closing costs when you purchased the property. Because the purchase price is lower than 75% of the ARV. Under that same premise but changing the value to $90k instead of $100k then you would be limited to $67,500. I hope you are following me on this math. So if you purchase a home and want to get cash back as soon as possible with a conventional loan, then those are the numbers you will want to use. If you can wait until the 6 month mark, then you can get 75% of the ARV...no other strings attached.
BUT, here's where it gets screwy. They bank doesn't have to follow these rules. Banks will sometimes put extra rules on top of Fannie/Freddie loans. The extra rules are called "overlays". And an overlay can be anything from tax returns to credit score...and "seasoning". Seasoning is an overlay. So your mission is to find a lender that has no overlays...or at least very few overlays...so that you can get your money back out of these properties.
Now, if you are planning on doing this strategy again, the proper method is to create an LLC that lends a mortgage on the properties. I'm sure this might create more questions so feel free to ask away!
- 9yRyan MurdockPro MemberRental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
Any good local commercial portfolio lender will loan on these on Day 1. Usually 75-80% LTV.
- Investor · Lehi, UT · Member since 2015 · 435 posts · 300 votes9y
Hello @Etienne Martel
I have done 3 BRRRR's in Memphis. what Andrew said is correct. So what is going to get this done for you is a lender that specializes in real estate investments. The lender I used was Aaron Chapman with SNMC, our clients have also had success with Joe McBreen with Guaranteed rate. The both specialize in investor loans and can direct you on your best path to refi.
Anyways the only way for the fannie freddie loans to work is if you have a stable w-2 income.
I do know that if you wait 6-12+ months the more the lenders would let you refi out of the property.
Anyways hit me up if you have any questions or need any property management, or if you need some more BRRRR deals we can help you out with that.
- Rental Property Investor · Scranton, Boston · Member since 2013 · 101 posts · 40 votes9y
Brrr requires 6 months of "seasoning" Otherwise you can borrow the amount of the purchase price as already mentioned.
If you hold this property in an LLC, you will need a commercial loan as 99% of banks,credit unions etc. will not touch this.
Also, the LTV guidelines vary widely from 60 to 70 % which is market specific.
If you do not live in the same state as your Brrr property you will get more bank grief.
I just went through this with an out of state rental cash out refi. The bank offered a commercial loan at 65% LTV, ordered an appraisal (which came in artificially low) and lent on that low appraisal number. So in reality, due to the low appraisal, the bank really is loaning at about 55% LTV.
Be careful and do your research.
- Rental Property Investor · Fort Lauderdale, FL · Member since 2015 · 64 posts · 38 votes9y
Hi @Andrew Postell,
Can you provide more details on the Proper Strategy?
Creating an LLC that lends a mortgage on the properties...
Thank you
- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes9y
@Etienne Martel From my experience doing several of these deals, your best bet if you want to cash out prior to 6 months would be one of the national asset based lenders.
- 9yDouglas SkipworthBusiness MemberRental Property Investor · Memphis, TN · Member since 2014 · 1k+ posts · 1k+ votes
Hi, @Etienne Martel.
Congratulations on your recent purchases! My friend John Phillips at Brighton Bank can help you. Send me a private message if you want me to introduce you to him.
Investor's Guide to Memphis Real Estate - 9yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Eric Martel the strategy to use your LLC to lend will allow a SIGNIFICANTLY better term for you to recoup your money. Let's assume that you borrow money from a hard money lender to buy a property and complete the rehab. Once the rehab is complete you then refinance into a traditional mortgage. With this we get to refinance immediately at 75% of the ARV on the property. Since you didn't buy with cash...there's no delayed financing rules. We are just refinancing. So what if we just replaced the Hard Money Lender with your LLC? So instead of buying with cash, your LLC puts a mortgage on the property for you and we then refinance you out of that mortgage. You can then get back 75% of the ARV and not have to be subject to the "Delayed Financing" rules. Does that make sense? I'm sure this spawned more questions. So please keep tagging me so I will get notified to keep answering. Thanks!
- Investor · Pittsburgh, PA · Member since 2015 · 1k+ posts · 1k+ votes9y
@Etienne Martel KEEP SEARCHING. I buy 4-5 properties a month and have been doing this for 25 years and I am still looking for a better bank. The search will never end. As long as you have good credit and a stable income and financials then you should be able to find a bank. Most want at least 6 months of seasoning which is having the property rented and performing. But I have found banks that will do just a few months of seasoning and some as long as 1 year. It may be best to try some smaller local banks and a GOOD mortgage broker. They will help you find a home for your properties
Good Luck
- 9yJames WachobBusiness MemberReal Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 890 votes
@Etienne Martel What are the homes valued at? The banks usually do not lend on the lower priced homes. I have a lender in Memphis who will do portfolio loans, if the numbers make sense. My team is here to serve if you have any questions.
- Investor · Memphis, TN · Member since 2016 · 549 posts · 286 votes9y
@James Wachob I would be interested in hearing about portfolio loans. Are you doing coffee with investors this week?
- 9yJames WachobBusiness MemberReal Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 890 votes
@Jason Hopkins yes sir. 7:30am every Wednesday we meet for a Bigger Pockets networking event!
- Rental Property Investor · Fort Lauderdale, FL · Member since 2015 · 64 posts · 38 votes9y
@Andrew Postell Thank you Andrew. That answers my question.
- Rental Property Investor · Huntsville, AL · Member since 2015 · 181 posts · 136 votes6y
Originally posted by @Andrew Postell:
@Eric Martel the strategy to use your LLC to lend will allow a SIGNIFICANTLY better term for you to recoup your money. Let's assume that you borrow money from a hard money lender to buy a property and complete the rehab. Once the rehab is complete you then refinance into a traditional mortgage. With this we get to refinance immediately at 75% of the ARV on the property. Since you didn't buy with cash...there's no delayed financing rules. We are just refinancing. So what if we just replaced the Hard Money Lender with your LLC? So instead of buying with cash, your LLC puts a mortgage on the property for you and we then refinance you out of that mortgage. You can then get back 75% of the ARV and not have to be subject to the "Delayed Financing" rules. Does that make sense? I'm sure this spawned more questions. So please keep tagging me so I will get notified to keep answering. Thanks!
Andrew, looks like Freddie and Fannie solved this by requiring that a person hold the property in his own name for 6 months before the refinance.
- Dexter, MI · Member since 2017 · 12 posts · 3 votes6y
Originally posted by @Peter McDonough:
Originally posted by @Andrew Postell:
@Eric Martel the strategy to use your LLC to lend will allow a SIGNIFICANTLY better term for you to recoup your money. Let's assume that you borrow money from a hard money lender to buy a property and complete the rehab. Once the rehab is complete you then refinance into a traditional mortgage. With this we get to refinance immediately at 75% of the ARV on the property. Since you didn't buy with cash...there's no delayed financing rules. We are just refinancing. So what if we just replaced the Hard Money Lender with your LLC? So instead of buying with cash, your LLC puts a mortgage on the property for you and we then refinance you out of that mortgage. You can then get back 75% of the ARV and not have to be subject to the "Delayed Financing" rules. Does that make sense? I'm sure this spawned more questions. So please keep tagging me so I will get notified to keep answering. Thanks!
Andrew, looks like Freddie and Fannie solved this by requiring that a person hold the property in his own name for 6 months before the refinance.
Did they changed something recently? I'm trying to execute this strategy and my lender is not aware of it but said something changed in November. They said I could only get 75% of the purchase costs, and that if I were to try and get 75% ARV that there would be a seasoning period. Is that just over lay or did FM change something?
- Rental Property Investor · Huntsville, AL · Member since 2015 · 181 posts · 136 votes6y
It's been 75% of purchase immediately, or 75% of ARV after 6 months for quite a few years.
What Andrew was suggesting was a way to get around the 6 month requirement, but Freddie and Fannie seem to have changed the rules on this. - Dexter, MI · Member since 2017 · 12 posts · 3 votes6y
Originally posted by @Andrew Postell:
@Etienne Martel and @Levi T. this is one of the most common topics of discussion when it comes to financing on Bigger Pockets. The answer is YES! you can absolutely get cash out of your property on DAY 1. However, there is a better strategy to do what you are trying to do so please let me take a little time to explain this process.
When purchasing a home with cash or a HELOC you are allowed to get cash back with a "conventional" loan. Conventional loans are the loans that are governed by Fannie Mae and Freddie Mac (if you recognize those names). You can find a conventional loan in almost any bank. Fannie/Freddie allow cash out refinancing when buying cash or with a HELOC under thier "Delayed Financing" rule but there are two really important elements:
- You are limited to receiving either your purchase price + closing costs....or
- 75% of the After Repair Value....whichever is the LOWER amount.
For example, if you buy a home for $70k, put $10k into renovations and the home is worth $100k, then you would be limited to receiving back $70k + your closing costs when you purchased the property. Because the purchase price is lower than 75% of the ARV. Under that same premise but changing the value to $90k instead of $100k then you would be limited to $67,500. I hope you are following me on this math. So if you purchase a home and want to get cash back as soon as possible with a conventional loan, then those are the numbers you will want to use. If you can wait until the 6 month mark, then you can get 75% of the ARV...no other strings attached.
BUT, here's where it gets screwy. They bank doesn't have to follow these rules. Banks will sometimes put extra rules on top of Fannie/Freddie loans. The extra rules are called "overlays". And an overlay can be anything from tax returns to credit score...and "seasoning". Seasoning is an overlay. So your mission is to find a lender that has no overlays...or at least very few overlays...so that you can get your money back out of these properties.
Now, if you are planning on doing this strategy again, the proper method is to create an LLC that lends a mortgage on the properties. I'm sure this might create more questions so feel free to ask away!
Does this still work or have the FMs changed the rules?
- Queen Creek, AZ · Member since 2018 · 10 posts · 1 vote6y
I have been told the same thing that Andrew has said. Also I was told that if you lets say have another business loan you the money for the rehab as a second then you could in fact refi all the "LOANS" out up to the required % of the ARV. So lets say you get a loan from business A for the purchase 100k...and a loan from business B for the rehab 25k...then the house appraises for $200k then you could refi out for the 125k...or business B that you own ups the loan amount to 50k...you then could refi 50k. I have yet to do this but Ive been told that it is possible. Im working on finding my first deal as we speak.
Originally posted by @Andrew Postell:@Eric Martel the strategy to use your LLC to lend will allow a SIGNIFICANTLY better term for you to recoup your money. Let's assume that you borrow money from a hard money lender to buy a property and complete the rehab. Once the rehab is complete you then refinance into a traditional mortgage. With this we get to refinance immediately at 75% of the ARV on the property. Since you didn't buy with cash...there's no delayed financing rules. We are just refinancing. So what if we just replaced the Hard Money Lender with your LLC? So instead of buying with cash, your LLC puts a mortgage on the property for you and we then refinance you out of that mortgage. You can then get back 75% of the ARV and not have to be subject to the "Delayed Financing" rules. Does that make sense? I'm sure this spawned more questions. So please keep tagging me so I will get notified to keep answering. Thanks!
- 6yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Peter McDonough thanks for reaching out. Fannie/Freddie require 6 months if you BUY WITH CASH. Since we aren't buying with cash....we are buying with a loan, our loan....we don't need to wait at all! We can refinance right away. No seasoning what so ever. This post was from 2 years ago and I actually wrote a more detailed post about this strategy that you can find HERE. Now, admittedly, I cannot speak for every bank. And I know I wrote about this above but I want to emphasize this again...this is where it gets frustrating.
While Fannie/Freddie don't have seasoning on a "no cash out loan" and lender could STILL require 6 months or 12 months. This is because Fannie/Freddie allow lenders to put rules OVER their own guidelines. In the industry we call these OVERLAYS (key the dreaded OVERLAY music). You might hear things like "we require a 680 credit score"....well Fannie/Freddie don't require that. Or sometimes "you need to have your rental income on your tax returns"....Fannie/Freddie don't require that. And even "we require you to be on title for 6 (and I've even seen 12) months before you do a "no cash out loan"....and you know the story on this one too. These are ALL overlays - and there can be more too. And don't stress over this. These are there for business reasons. This is not about you personally. Investment properties foreclose at a higher rate than primary homes...so maybe I want to limit my risk to that. So I put OVERLAYS in place to limit that risk. It's business. And this is mainly why we preach to work with smaller, local lenders. Smaller lenders usually have less....or NO overlays. So how do you know as a consumer? You ask questions...but you have to ask the right questions. So I made a list for you to ask to help you identify if the lender has overlays. Here's the list:
Questions for Lenders
- When do you start using rental income to help me qualify? (the answer needs to be immediately)
- When do you start using “After Repair Value” on my property? (also needs to be IMMEDIATELY)
- How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
- What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
- How many loans can I have with you?
- Can I change title to my LLC?
- Do you sell your mortgages?
- What is your loan minimum?
- Can you explain to me what your reserve requirements are?
*WHEW* I know that was a lot but I hope this helps some. Thanks!
- 6yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Matt Eckler the 75% of purchase rule IS the delayed financing rule...actually whatever they are doing is WORSE than the delayed financing method. But that's the one we want to AVOID like the plague. The "borrower from your LLC" method is want we want. If that lender wont' do it, go to another lender. As mentioned above, this post was from 2 years ago so I wrote a better article on this topic that you can find HERE. Also read the post directly above this for a few more detail that be applicable too. Let me know if you have any other questions on it. Certainly willing to help as best as I can.
- 6yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Tristan White whoever told you about the 2nd lien is a pretty smart cookie! That's another great strategy that allow people to use Fannie/Freddie to get their out of pocket money back when using Fannie/Freddie loans. Awesome tip!
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