BRRRR refinancing costs high

61 Replies

So 6 months back I bought a sfh with the intention of giving this brrrr thing a shot.  I wanted to end up having zero dollars of MY MONEY in the project.  Hasn't worked out that way mostly because of the refinancing part of the strategy.  

Bought the property for 62000 using a sofi personal loan. I estimated the ARV to be 100,000. (I got the loan for 100,000 because I intended on buying another foreclosure at auction for cash and did not know how much I would need) The targeted house did not make it to auction and I did not see any other houses I thought were good deals at auction. So now I had this 100000 loan and needed a place to buy.

I found a house that I'd had my eye on a while (since it was auctioned) and I bought it from another investor 

There were a couple unexpected cost over runs but nothing too bad.  Roof cost twice as much as estimated, and I had to put french drains in the backyard due to lack of adequate drainage, and a driveway had to be removed (it was buried).  So the project costs were about 3000 more than i anticipated on the project for a total of 16000

Got a tenant using the qualification standards that many other investors use and that has worked great.  Got the place rented for 1000/mo.  by a well qualified tenant who has is johnny on the spot paying rent.  She's been there since september.  

Im creeping up on the 6 month seasoning period so now I'm getting ready to refinance.  I've been paying 1590/mo on this 100000 loan since July.  The principle is now 78000.  (The sofi loan is a 7 year amortized loan and we paid a lump sum back that wasn't used in construction).

So, I start shopping for lenders for a permanent mortgage and am disappointed how much lenders want in fees, closing costs.  

Called quicken loans (that's who my personal home is with) and they wanted nearly 7500 in fees and closing.  This is for a 75000 loan.  3700 of that is origination charges.  2.5 points and then a bunch of fees.  And a rae of 5.5.  Well those terms looked terrible to me.  

So I went to a local credit union here and the fees were much lower, however, still higher than i anticipated.  Plus they want 6% .  Fees and origination were about 1700, but the overall closing costs and escrow are still going to be about 8000 because they want me to payoff the sofi loan at closing.

I still have one other bank to speak with about a commercial loan to see if the closing costs could be less, which I could have used this option immediately but it was a different amortization than I originally planned.  The commercial loan is a 20 year loan with a 7 year balloon.  

Seems any way I go, no way I get all my money back out of this project.  I'll own the house that cashflows (eventually) with 25% equity but I'll end up with several thousand of my own money in it. Its tbd how much but probably in the neighborhood of 5-7k.  

@Jeremy England what do you mean by eventually cash flow? Are you referring to when you refinance? If so the option to leave 5k of your money in the deal may be your best option, but you can continue talking to lenders until you find one that suits your needs.

Part of the costs are escrow deposits.  I'm curious if this is a requirement or is it bank specific.  about 1000 of the charges are escrowed taxes and insurance.  I've already paid the taxes for the year and owe one more payment to the insurance company for the year (up to august 2019).

Survey is in there too, is that necessary.  Thats 400 more dollars.  

Originally posted by @Joseph Akingbade :

@Jeremy England what do you mean by eventually cash flow? Are you referring to when you refinance? If so the option to leave 5k of your money in the deal may be your best option, but you can continue talking to lenders until you find one that suits your needs.

 I mean if I'm paying 5000 of my own money in it, then netting 450/mo in rents, itll be like a year before i'm in the black.

Originally posted by @Jeremy England :
Originally posted by @Joseph Akingbade:

@Jeremy England what do you mean by eventually cash flow? Are you referring to when you refinance? If so the option to leave 5k of your money in the deal may be your best option, but you can continue talking to lenders until you find one that suits your needs.

 I mean if I'm paying 5000 of my own money in it, then netting 450/mo in rents, itll be like a year before i'm in the black.

But your cash on cash is 100+% return on that 5k your first year? After that you won’t have a dime in the deal. 

Originally posted by @Jeremy England :

 I mean if I'm paying 5000 of my own money in it, then netting 450/mo in rents, itll be like a year before i'm in the black.

Here's an easy fix: get your mindset into big picture mode. 

You're focusing on small things that are clouding the success of your transaction. So what if it takes a year to get that $5k back? Are you not sitting on equity that you would not have had had you not done this transaction? You can also do a comparison...…what if you don't refinance and you sit on what you have for a year, how does that scenario compare to one where you refinance and leave $5k in the deal?

oh its successful, just not without cost.  Im not discouraged, just wasn't as successful as i envisioned.  

I like to view things as realistic as possible. In terms of equity,  the house appraised for 100k, not sure I could actually sell for tht much though.  Lets call it 95k.  Given all the rentals and rehab jobs in it.  Then i would need to pay  realtors to sell it.  So, assuming a price 95k, realtor cost of 5000, now i'm down to 90k, take away my costs of 78k and i'm down to realistically walking away from the deal with about 10-12k.  More like 10 because every month that I keep it my holding costs are going up via the sofi loan interst of approx 600/mo.

If compared to a traditional transaction, i would have paid 20% down and closing.  So im still ahead in that regard.  Just not hitting anything out of the ball park. 

looking back, If i target houses with more value, I think i may come out better.  The cost of financing a 120k deal isn't much more than a 100k deal.  In terms of taxes, insurance, prepaids, origination etc.  

I honestly don't know how anyone makes money doing this in the 60-80k range.  Financing costs eat up a ton of a percentage

Originally posted by @Ryan Johnson :
Originally posted by @Jeremy England:
Originally posted by @Joseph Akingbade:

@Jeremy England what do you mean by eventually cash flow? Are you referring to when you refinance? If so the option to leave 5k of your money in the deal may be your best option, but you can continue talking to lenders until you find one that suits your needs.

 I mean if I'm paying 5000 of my own money in it, then netting 450/mo in rents, itll be like a year before i'm in the black.

But your cash on cash is 100+% return on that 5k your first year? After that you won’t have a dime in the deal. 

That is true. CoC return is still very high

@Jeremy England you're not alone. It's just really difficult to get 100 percent of your money back in today's market, especially in higher end homes and multi family.

So many people talk about getting 100 percent of their money back and creating "infinite return". Many (not all) of the people that claim this are not really accounting for all holding costs, loan costs, and the time your money was tied up during seasoning.

In regard to your question about higher end homes being easier... NOT necessarily, because most of the loan costs are based upon points/percentage (yes there are a small portion of fixed costs like title transfer,etc). In addition, multi family homes (fannie Mae) have a max LTV of 70%.

Let's dissect... You land a sweet deal and get a Triplex for 300k that has a 400k ARV. You place 50k into the property for rehab. You let your hard earned money sit for 6 months (delayed financing is another story and has its limitations as well ). You go to refinance and you spend 12k in loan costs.

Your now in 362k, not including holding costs. With a 400k appraisal you will get back 280K. By no means is this a bad investment, but take what the other investors say with a grain of salt when they tell stories of stepping on cash mines.

Oh i get that. Im not talking about higher end. Im talking about high enough to get a better roi.  

i Think higher end is def more risky in this market.  Mistakes cost more money but less pct.  but i think cashflowing that high is unlikely.  To get adequare rents on a 300k house youd need like 2500/mo to make it worth it.  

The cost of rehabbing would have been the same for this house and a house worth 120. Refinancing a 120k house is about what a 100k house refis for. 

I think the 120 price range is that sweet spot where you get the biggest roi  with the least amount of risk

Another good point in todays market is whatelse am i going to do with the money. 

When i bought this place, stock market was doing great so there was an opportunity cost in using cash

Not so much now, and for the past 6 months. Stocks have taken a hit so if i make anything on this project this year its better than the stock market which is in the red for the year

Use it as a lesson learned going forward. I learned the same on my first BRRRR. I build the closing costs of refinancing into my initial numbers. I think I conservatively estimate $5k which includes the initial escrow for taxes and insurance.

And yes you are right that the proportion of the cost is higher for lower priced properties. Many of the fees are fixed costs, although some are variable with the total loan value.

@Jeremy England It looks like you made a couple mistakes here.... Looking back, the $100k loan was a bad idea, because most lenders will require you to pay that back with the proceeds, or they'll add that debt to you DTI. Second, you know what they say? You mae your money when you buy, and you paid way too much for this to BRRRR is. All in (purchase, rehab, 2 closings, holding), you should be less than 75% of ARV. But now that we're here, let's move forward.... Is the property in your name or an LLC? If it's in your name, 2.5 points is really high. Look at better mortgage. I just got a quote from them that was very reasonable. About 1.5 points and 5.125%, 30 year fixed. If it's in an LLC, what you're being quoted is about right. I suspect that you'll have to leave a bit of money in this deal, unless the appraisal comes back well above $100k. It's a learning process, and sometimes education costs a little. But having a casdflowing property means that you'll make that money back, and be able to continue towards your goal.

I agree that the 100k loan was mistake for what i used it for. 

The home is in my name. Im past quicken. They just are not competitive.  Which is strange because they offered the best deal on my personal res

Ofcouse i would have liked to get this property lower. I initially offered 57. Their asking price was 69.  

I have been in the same position. When I financed a couple properties for 130k the closing costs were close to 6k. I didn't find that to be worth it. I found a local bank who did a portfolio loan at a 1/2 point plus attorneys fees and it is not tied to my personal credit. Keep calling and calling until you find someone who will work with you on this. They are out there, sometimes a little harder to find.  

I would consider this a very profitable "lesson," where-in post people lose money with their first deal(s) on their journey to real estate success, you've earned money. What you might want to do next time, is shop around for a lender to cash-out refi with BEFORE you close on the deal, so you have more accurate numbers. That way you can have a better idea of what to offer on the property to know if it's worth your time.

@Jeremy England I’m actually really glad you posted about this issue. People forget to include 3 additional costs when they are doing the BRRR method or estimating profits for flipping a house: Buying costs: round 1 of closing costs, appraisals, Home Inspection fees Carrying costs: monthly payments on PITI while carrying the properties, utilities until place gets rented, In addition to any rehab costs Refinance/Selling costs: round 2 of closing costs, higher interest rate since the Fed has been hiking the interest rates every quarter for the past 3 years (or so it seems). I try to estimate 6% for closing costs. But on cheaper properties, that won’t hold because there are stable closing costs that may be higher than 6% of the ARV, especially when you are buying less expensive properties. (Im in the DC area so we are lookIng at higher home values. Which means that the 6% typically covers all the fees. 6% of 100k is different then 6% of $350k). That being said. Your returns are great. For your next deal see if you can run your numbers so that when you refi you take $5,000 more in addition to what you are already estimating to get back from your next property. Then you’ll even out and after 2 deals, you’ll have none of your own money in the deal.

Yea that is a good point. The market will change eventually.  Its been a sellers market here for a while. I dont know anyone who is buying all in (purchase, rehab, refi) for 75pct of arv without direct mail marketing

Ive thought of that but it seems its costly and you need time to answer those calls. I work fulltime.  Ive thought of marketing only to the neighborhood where i bought my rental property as thwre are numerous homes in there that need rehab and the rents are relatively high

I think i could have got another 100/mo given the response i had. I could be selective on the tenant.  

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