New to Real Estate · Peoria, AZ · Member since 2018 · 26 posts · 1 vote
I am just curious if anyone thinks that the BRRRR strategy would work with Air BnB? I know that to refinance into a bank loan you would need to show projected income on the property. Would this work similar with a short term rental like Air BnB? Any help is appreciated!
@Caryn Zallnick open an LLC to rent the unit as a LTR and have the LLC (which you would still own) run the operations of the STR. It's like you rent to yourself for benefits on both ends: refi with a stable tenant for the lender Long term and higher revenues with STR.
Hey @Caryn Zallnick, the short answer is no. Lenders don't usually lend on projected STR income. Now I can't speak for each and every lender out there, but the is the general answer.
What John said... Some will lend on an STR, but you need to be able show them history of it renting. Basically, it's probably quicker and easier to lease it for the first year. Get the refi and when the lease is up, start your Airbnb.
Very few if any would rent on projected STR income, especially in COVID times.
@Jeffery Wilen that's what I was thinking that it might be way more difficult. I'm just trying to think of a way to get the upfront money for purchase and rehab the way you can with a BRRRR.
@Caryn Zallnick open an LLC to rent the unit as a LTR and have the LLC (which you would still own) run the operations of the STR. It's like you rent to yourself for benefits on both ends: refi with a stable tenant for the lender Long term and higher revenues with STR.
@Matt Silverstone: trying to understand this strategy. Do you mean that you become the LTR of your own LLC and in turn actually STR it sort of like an arbitrage?
@Caryn Zallnick find an investor to finance remodel in return for 50% of profit from which property is pre sold to passive investor at pre determined price. Triple net lease property from passive investor for your STVR business. Use profits from remodel for Next brrrr,rinse repeat.
Key is finding passive investors to buy property at predetermined price before starting remodel.
When we refinanced the property it was right at the end of the renovation and after furnishing. The place itself looked like a million bucks and the appraisal came in great. I think its a great strategy!
I think for ours we supported the loan on our W2 income from our day job. But an alternative to consider if the banks are making it difficult is to establish medium term leases (month to month lease) with traveling nurses or other work related travel. This way you have a lease for refinancing and it would probably also be 1.5x - 2.0x long term rents and will help to support higher appraisal values.
@Katharine Gonzalez yes, think of it like opening a marketing company in an LLC that rents the property for you for $1,000/mo with a 12 month lease. Then that marketing company would furnish and rent out the unit STR on Airbnb.
You would still own both but reap the benefits of looking "traditional" to a lender while maximizing ROI with Airbnb via the marketing company you create while still putting the same $$ in your pockets.
On the BRRRR's we've done, all with conventional 75% LTV cash out refis, the lender did not ask for projected income. Six month seasoning and they will lend it based on the appraised value. If you're getting up higher in the # of conventional mortgages you have maybe that's when it would matter more. If they needed it, I imagine you could just use projections as if it were a LTR.
@Caryn Zallnick open an LLC to rent the unit as a LTR and have the LLC (which you would still own) run the operations of the STR. It's like you rent to yourself for benefits on both ends: refi with a stable tenant for the lender Long term and higher revenues with STR.
So kind of like rental arbitrage but I'd technically be renting it from myself. Do you think a bank would go for that? Sounds like something they would be cautious of.
Yes, you can. In my case, it involved 2nd (vacation) home loans; As opposed to an owner-occupied or investment loan product. STR isn't part of the conversation. Refinanced for cash-out on two vacation home properties concurrently (incidentally operated as STR's) which had each appreciated in value. Pulled a total of some $180,000 cash-out. Used some of the cash-out proceeds as down-payment on another vacation home, which was then outfitted and launched as an STR. Sometimes the same lender will give you both the cash-out refi on the existing real estate asset and also give you the new note and first mortgage on the newly acquired real estate asset. Other times, you may use some of the cash-out refi proceeds (or add some of your own cash as well) towards the down payment and use a private lender or hard money lender to finance the new note and first mortgage for balance of the purchase price for the newly acquired real estate asset. Hope this helps. Cheers & have a great week!
On the BRRRR's we've done, all with conventional 75% LTV cash out refis, the lender did not ask for projected income. Six month seasoning and they will lend it based on the appraised value. If you're getting up higher in the # of conventional mortgages you have maybe that's when it would matter more. If they needed it, I imagine you could just use projections as if it were a LTR.
Did you refinance from hard money? What do you mean by six month seasoning?
I guess that would make sense because it's not a requirement to have a tenant in place in order for them to fund the loan correct?
On the BRRRR's we've done, all with conventional 75% LTV cash out refis, the lender did not ask for projected income. Six month seasoning and they will lend it based on the appraised value. If you're getting up higher in the # of conventional mortgages you have maybe that's when it would matter more. If they needed it, I imagine you could just use projections as if it were a LTR.
Did you refinance from hard money? What do you mean by six month seasoning?
I guess that would make sense because it's not a requirement to have a tenant in place in order for them to fund the loan correct?
So an ideal BRRRR gets you all or most of your initial money (purchase + rehab costs) back through the cash out refi. In order to get the cash out refi to give you 75% loan to value on the appraised value AFTER you have rehabbed the property, conventional lenders usually require you to 'season' (wait) 6 months since the initial purchase. There are ways around that through delayed financing & including the rehab costs on the HUD statement but that's more involved; or commercial lenders also don't all require that 6mo seasoning either.
The way you bought the property initially (cash/hard money etc) doesn't matter, but yes the refi pays that off. In my experience, conventional lenders don't require a tenant in place to finance / cash out refi an investment property.
On the BRRRR's we've done, all with conventional 75% LTV cash out refis, the lender did not ask for projected income. Six month seasoning and they will lend it based on the appraised value. If you're getting up higher in the # of conventional mortgages you have maybe that's when it would matter more. If they needed it, I imagine you could just use projections as if it were a LTR.
Did you refinance from hard money? What do you mean by six month seasoning?
I guess that would make sense because it's not a requirement to have a tenant in place in order for them to fund the loan correct?
So an ideal BRRRR gets you all or most of your initial money (purchase + rehab costs) back through the cash out refi. In order to get the cash out refi to give you 75% loan to value on the appraised value AFTER you have rehabbed the property, conventional lenders usually require you to 'season' (wait) 6 months since the initial purchase. There are ways around that through delayed financing & including the rehab costs on the HUD statement but that's more involved; or commercial lenders also don't all require that 6mo seasoning either.
The way you bought the property initially (cash/hard money etc) doesn't matter, but yes the refi pays that off. In my experience, conventional lenders don't require a tenant in place to finance / cash out refi an investment property.
Okay that's all very good information! If I were to go with hard money then I suppose I would just have to account for the cost of interest when doing my analysis in order to let it season for 6 months. That might be a good route to go to at least get the first few. Thank you so much for your input! :)
@Caryn Zallnick open an LLC to rent the unit as a LTR and have the LLC (which you would still own) run the operations of the STR. It's like you rent to yourself for benefits on both ends: refi with a stable tenant for the lender Long term and higher revenues with STR.
So kind of like rental arbitrage but I'd technically be renting it from myself. Do you think a bank would go for that? Sounds like something they would be cautious of.
Wouldn’t tell them if they don’t ask. Banks have too many requirements and restrictions so less is more sometimes :)
@Caryn Zallnick Ive done 2 BRRRRnBs all the way to refinance, and am in the middle of rehabbing my 3rd. They’re all small-multi families (so residential mortgages, not commercial) and none of them have asked for leases. They just refinance using an appraisal based on comps, not income.
@Jean H. That is great to know!! Thank you so much for your input. I definitely want to get ready to do this within the next year. I want that financial freedom but I also just think it would be fun!
It seems that there are a lot of people that have already replied, but just to throw in my experience, I've spent the past month trying to figure it out, and finally came to a good solution. I purchased my first investment property at the beginning of December and am nearly done renovating it now, and I'm about to turn it into a STR in the next couple of weeks. A few weeks ago I started looking for someone to help me complete the cash out refinance. The property was relatively cheap (purchase price of $63k, ARV of $95k), and I was getting turned down by pretty much everyone because, they either didn't want to do STR (most) or the property was under $100k (also, most). I kept searching for lenders though, and to not waste time, I would usually point out the two reasons that I was being denied by other banks to not waste my time (or the lenders time), and even made some Bigger Pockets posts looking for a solution. In the end, I found a local portfolio lender who was willing to take me on. I should be closing in the very near future with enough cash out to make it a successful BRRRRnB. This property is about 1.5 hours from me, so my plan is to use it for learning over the next 6 months or so, while generating some income, and hopefully once I've learned more, and automated everything possible, I want to get my next STR somewhere further from me in a vacation destination that will generate a lot more income than what I'm expecting from this current property. I think it's definitely possible, but just be prepared for enough people to say no before you get to a yes; the yesses are out there, you just have to dig to find them.
This is a subject that I have been working on for months with my Realtor partners. It was a challenge before COVID, now even more so. One way we are looking to approach it it to acquire the property using hard money, get it all the way you want it, set up as a vacation rental, and add value, etc.
Then we have a specialty lender we work with who will refinance the property at up to 75% LTV on a long term 30 Year fixed loan using only the short term rental income for qualification. No personal income requirements or tax returns just a credit check and verification of the rents on the property. There needs to be a rental history to go on and it's tough to get one in the timeframe that you need to roll out of the hard money. If the property is already a short term rental when you buy it that helps. They are fine with LLC ownership.
This isn't an easy process, it's full of pitfalls, and it's expensive. Lots of fees and points and higher than market interest rates. If the property rents out well enough it could be worth it. Approach with a healthy sense of caution and skepticism though.
The other way is to finance it as a "second home" for yourself and get conventional financing based not upon rental income, but your own personal income and assets without getting any rent credit for the property. If you have a large piggy bank and a great 'day job' this can work as well. You will need to hold the property in your own name (no LLCs etc.) and occupy the property yourself as a personal vacation home for some part of the year. It also needs to be outside of your metropolitan area to be considered a vacation property so that probably means a third party property manager will need to be used and reduce your profits.
If there is a better solution, I am all ears because I am trying to find it also.