BRRRR - Stuck on financing step!!

19 Replies

My wife and I used cash to buy our first property. We have completed the rehab and have the property leased for 3 years at 1,100/month. House is worth $100,000 and we have $49,000 invested.

I have called 7 to 8 banks to discuss refinancing and pulling our capital out but no one will work with us inside the seasoning period of 6 months. However, we could go with a commercial loan program but the terms are not great. 70% LTV with 5/1 Arm @ 5.5% amortized over 20 years with an early payment penalty and ballon payment at 5 years. We could still cash flow with this deal but I just hate to go forward and shrink our cash flow with the possibility of a ballon payment after the 5 years. Is this common or is there another route to take with financing!? If we could get this refinanced we would already be onto the next property! Am I being too picky or should we go with it? Any advice would be greatly appreciated! Thanks

If the house is truly worth 100K, I can't imagine whey you can't do a cash out refinance through a credit union or local bank at say 30 or 35% LTV on a 20 years fixed at <5%.

@Jaysen Medhurst I’ve been back and forth on just waiting or pulling the trigger. My cash flow will still be positive with everything considered, but I would be able to turn and burn onto the next property if we go with the 5/1. It’s just hard to scale if we have to wait six months on the seasoning period for every deal.

6 months is typically what most banks or credit unions look for. You can find others that dont but rates might not be that great. I think the shortest ive found is 3 months but thats because i have a great relationship with the lender.

@Ivan Cole

Exhaust your conventional financing options first before venturing into commercial.  Check more local banks and credit unions. 

You can get a 30 year with a portfolio lender with little to no seasoning, but locking into a 30 year at 7% or so with points vs. waiting another month or two and taking advantage of some of the lowest rates in history should be a no-brainer (and I'm a portfolio lender/broker).  

Go portfolio when you can't go conventional.  Don't step over dollars to pick up dimes.

Stephanie

@Stephanie P. Thanks for the advice. I’ve actually called around to 10-12 banks at this point. The best I’ve found is a 5/1 @ 4.5-5% with 20 year amortization and no pre-payment penalties. Therefore I could refi I to a conventional mortgage when the timing is right. Believe me, I’d love to have the 30 year fixed but is it worth it to wait 3 1/2 months to do so? In my mind, I see the commercial mortgage giving me the option to turn and burn 2 to 3 properties in the amount of time I’d waste waiting on the seasoning period. I just haven’t had any luck on someone going to bat with me otherwise.

@Ivan Cole

Did you pay cash for the property? If you paid cash for the property you can use delayed financing, and pull out a max of your initial investment purchase price plus closing costs.

Another tip for the future, if you want to pull more money out at a faster rate;

If you include on your closing statements (which vary state to state - HUD-1/ALTA statement) the renovation costs - and have them charged at closing...... This renovation cost now becomes an initial closing cost and can be included with the max that you are able to pull out prior to 6 months. This is if you pay cash for the property, and follows all delayed financing guidelines. This is at the discretion of the underwriter.

@Ivan Cole Hi- on posts above many offered excellent guidance. I don't know the background of your investment journey but if this is your first BRRRR investing, mortgages companies and banks has guidelines on seasoning. My suggestions as you continue to seek lenders to refinance, it is best to continue to do your homework collecting information, getting to know your local banks, lenders etc and networking with them to build and nurture relationships to get a better idea and more prepared for refinance when it come after renting out your next purchase right property.

Follow the seasoning guideline and like other suggested,portfolio lenders are a good option to consider. Again, researching and doing your homework is the key.

Alex

@Ivan Cole

Do you currently own this property free and clear? And if so is it held in your name or wife's name or under an entity like an LLC. If you own it you could always sale it from one person to another or from an LLC to an individual. A advantage of this is it will allow the mortgage to qualify for a typical mortgage instead of a refi give it you a better interest rate and it circumvents the 6 month seasoning period.

@Jason Smith I've done a lot of research and i have not come across the idea of selling it to my self or to the company. I love the idea. I own the property free and clear. The property is in Indiana. My frustration is that I've read and read where people say just keep calling banks but I have only come across one that would work with me as a portfolio. Terrible terms, 5.5% @ 15 year fixed rate and 65% LTV. The commercial side is advantageous because they will refinance (5/1) 75% of the appraised value at 4.5-5% amortized over 20 years. This is the best route for now. I can buy properties in cash and they will refi into the LLC.

I appreciate everyone’s input! I love this whole process of learning about real estate.

@Ivan Cole I wrote an entire post on this subject and how to structure it properly.  The first 2 sections are the problems with buying cash (which you seem to already know) so if you want to skip to the 3rd section that is the solution step.  Feel free to ask any questions if you need.  Thanks!

https://www.biggerpockets.com/forums/48/topics/460294-how-to-cash-out-1-4-unit-property

@Costin I. thanks for the mention!

@Andrew Postell thanks for the reply! I can’t thank bigger pockets and you (everyone) who helps out new real estate investors on crucial steps during the process of investing.

I’m trying to understand step 3. I like to think I pick up on material quickly but I don’t understand how the llc would “finance” or loan the money for the property? This would require the llc to have sufficient amount of funds, right? Also, why or how would the lender refinance if the property still hasn’t had the proper seasoning period? I would’ve sent you a pm but I think this is great material for whoever may be in a similar situation. Thanks!

Don't go commercial, just wait it out and refinance after the seasoning period. Keep tabs on the tenant and make sure they don't destroy the property in the meantime. A few months goes by quick.

If you really want to, get a HELOC on the property. Some banks will do that on an investment property. But you would pay prime plus one.

@Ivan Cole this post was designed for people who are buying properties with cash. So if you have cash, the method is that you "borrow" it from your LLC. Theoritically, you are already "borrowing" this money from yourself anyway. We are just showing the paperwork for it.

The concept to think about here is what if you were a lender?  And you lent money to people to buy and renovate homes?  You would have your loan filed on the deed of the property - a lien would be filed.  So what if you lent yourself money?  You should do the exact same method - file a lien.  The difference here from being a cash buyer to filing a lien.....is one piece of paper.  Well, ok, so you have to have your company created and whatnot....but all we are doing is documenting our purchase funds by showing the lien on the property....just like if we were a lender.  And when you buy a property with cash....you are a lender...to yourself.  Once the lien is documented there is no seasoning to Fannie Mae and Freddie Mac.  No need to wait 6 months.  It's what we call a "rate and term" refinance.  We are just changing "rate" and the "term" of the pre-existing lien.  Just like if you borrowed the money from a Hard Money Lender or a traditional bank, etc.

I hope this makes sense how I am describing it.  

@Brian Ellis I hope this helps with the seasoning item.  No seasoning with this method.

Originally posted by @Andrew Postell :

@Ivan Cole this post was designed for people who are buying properties with cash. So if you have cash, the method is that you "borrow" it from your LLC. Theoritically, you are already "borrowing" this money from yourself anyway. We are just showing the paperwork for it.

The concept to think about here is what if you were a lender?  And you lent money to people to buy and renovate homes?  You would have your loan filed on the deed of the property - a lien would be filed.  So what if you lent yourself money?  You should do the exact same method - file a lien.  The difference here from being a cash buyer to filing a lien.....is one piece of paper.  Well, ok, so you have to have your company created and whatnot....but all we are doing is documenting our purchase funds by showing the lien on the property....just like if we were a lender.  And when you buy a property with cash....you are a lender...to yourself.  Once the lien is documented there is no seasoning to Fannie Mae and Freddie Mac.  No need to wait 6 months.  It's what we call a "rate and term" refinance.  We are just changing "rate" and the "term" of the pre-existing lien.  Just like if you borrowed the money from a Hard Money Lender or a traditional bank, etc.

I hope this makes sense how I am describing it.  

@Brian Ellis I hope this helps with the seasoning item.  No seasoning with this method.

 Yes it does, thank you. I’m speaking on my experience with going conventional and trying the brrrr method. It didn’t work I was unable to get enough equity. Worth a shot, though (limited capital). Also, hard money is another option where there is no seasoning.