I am very interested in the BRRRR strategy but have a question.

19 Replies

So I have listened to several podcasts and read about the BRRRR strategy and it is something I would like to pursue.

I am a traditional financing expert and have been originating mortgage loans for over 30 years and I understand how you can add the contractor to the closing statement and pay through escrow and then do a rate term refinance and get the funds back to pay off the existing loan and the construction costs. My question is, if you are a newer investor and your hard money lender wants you to put 10-20% down. How do you get that money back out on the refinance?

well when you rehab it, the ARV increases and the hope is that when you refi the appraisal is close to what the ARV that you projected comes out to so this way you can get your $ back or more.

@Rebecca Wisner I have typically bypassed traditional financing on these types of deals and used our commercial lender on the backend refi.  They don't have seasoning requirements and we've been able to refinance and pull out our money as soon and we finish the rehab and get a signed lease.

Jason, Unless you are doing a cash out refinance instead of a rate term refinance which isn't priced as well. 

Bob, Can you use a commercial lender on a single family residence or is it just 5 units+?

@Rebecca Wisner You can use commercial lending for any asset type or number of units. SFRs and 2-4s included. The advantage is that they're underwritten more like a multifamily loan in the sense that its primarily based on DSCR rather than the borrower's personal income. The other advantage is that you can use them for SFRs once you've surpassed your 10 conventional loan limit. Happy to chat about commercial lending anytime.

@Rebecca Wisner The other advantage is that many commercial lenders won't require 6 months seasoning to use new appraised value for cash out refinancing.  I'm going to help you save some of your conventional fall out!

@Rebecca Wisner

Even prior to 6 months you go according to appraised value. You are capped out at a maximum of pulling out your initial cost on the closing statement - purchase price plus rehab - if on the closing documents and escrowed. 

@Alex Bekeza on commercial lending do you need a higher percentage down for a smaller multi-family home for 2 to 4. I have been looking to buy my first this year. And haven't thought about commercial lending to do so. Would like to learn more.

@Ryan Mitchell Not necessarily. Lenders vary but there are many that will still extend 80% LTV. I'd say 25% down is the most common though because of cash flow goals and there is usually a significant rate decrease going from 80% to 75% LTV. I even have one that will do 85% on 1-4 units for experienced investors if the deal will debt cover.

I have used a hard money lender that would lend 100% of the construction and purchase (If numbers worked out) but would have 10% held as a reserve to hedge their bets.  If the numbers all work out as planned and you are in at 75% loan to value on your conventional side all in then the entire 100% can be converted and you get your 10% reserve back.  

Originally posted by @Rebecca Wisner :

So I have listened to several podcasts and read about the BRRRR strategy and it is something I would like to pursue.

I am a traditional financing expert and have been originating mortgage loans for over 30 years and I understand how you can add the contractor to the closing statement and pay through escrow and then do a rate term refinance and get the funds back to pay off the existing loan and the construction costs. My question is, if you are a newer investor and your hard money lender wants you to put 10-20% down. How do you get that money back out on the refinance?

 HI Rebecca, 

Im down the street from you in Bothell, hows it going?

To address the above you can get a Rain city capital, merchants mtg, veristone, or many other local and regional HML outfits to structure the loan all inclusively (as one note 1st position deed of trust) to pay for the purchase, the rehab, and the carry costs. There is a strategy to fund 100% of the above mentioned items while putting down your 10-20% in a separate collateral account that will be released back to you upon the take out / refinance of the 1st position mortgage.

So when you go to refinance this 1st position note and pay it off you'll get your collateral account released back to you. This is in essences allows you to complete the entire project with out any of your original money. The key to this which you may be very familiar with is the take out appraisal and getting your value to come in so you can be at 75%-80% LTV rate/term so you dont have to bring in cash to close your refi.

To get this type of product just make sure to explain to the HML rep what you're trying to work with and it sound like since you're a lender you'll be fine with the take out after the rehab is complete.

Originally posted by @Jessica Trombley :

I have used a hard money lender that would lend 100% of the construction and purchase (If numbers worked out) but would have 10% held as a reserve to hedge their bets.  If the numbers all work out as planned and you are in at 75% loan to value on your conventional side all in then the entire 100% can be converted and you get your 10% reserve back.  

 Yes the key for the take out refinance at the end is the appraisal value since most lenders will only go up to 75-80% on a rate/term refinance. Merchants Mortgage lends in CO too and they do this strategy as well. I've noticed each lender does it different on the settlement statement. 

Originally posted by @Ernesto Hernandez :

Rebecca, listen to BP Episode 301. Also read his blog post.

Brokeisachoice.com episode 6.

 This the one where the guy front loads the settlement with purchase, rehab, and carry costs so he can do a delayed financing exception to get all his money back out on the refinance ? 

Originally posted by @Rebecca Wisner :

Jason, Unless you are doing a cash out refinance instead of a rate term refinance which isn't priced as well. 

Bob, Can you use a commercial lender on a single family residence or is it just 5 units+?

 Sure you can Rebecca, I use commercial on my portfolio all the time, lines, term notes, cross collateral/blanket loans, and substitution of collateral all the time.

The commercial, PML, HML, world allows so much more freedom than our typical agency 1-4 fannie freddie DU/LP findings.

@Rebecca Wisner the only way to get your entire down payment back out is to buy a great deal. If you buy a property around 30% below its ARV, and you can keep your repair costs in line, you might be able to get the entire down payment back out along with all of your costs on the refinance. When I completed my first BRRR on a four unit in Lyons, IL, I was able to get 33k out of my initial 47k investment back during the 7th month of owning the property.

The one issue a lot of newer investors have when I speak to them is that they think they can put no money down initially. This is very challenging to do. Most hard money lenders actually require more skin in the game than conventional or FHA financing.

The other issue I see a lot with newer investors is that they miss out on great opportunities because they want to execute the perfect BRRR where they get every single nickle out on the refinance. Sometimes a BRRR is a good deal that gives you 50% of your cash back at the refinance, but then still cash flows for many years after.