BRRR strategy confusion - Refinancing

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Originally posted by @Chris Bounds :
Originally posted by @Richard Fields:
Originally posted by @Chris Bounds:

@Hunter Groover,

Depending on how you finance the acquisition the benefits of BRRRR can vary.

Situation 1: Private Lender or Hard Money Lender agrees to fund 70% ARV which is $105k based on your hypothetical. They will withhold the $35k in repairs and release them to you in draws (so make sure you have a line of credit or cash to get work started). After the house is repaired you immediately file your refinance paperwork (I'd have it filed before hand, but the appraisal can't be ordered until the repairs are completed). There is no need to wait 6+ months to refinance. You can typically get up to 75% ARV on the refi. In this situation, other than closing costs, you have very little out of pocket expenses. Your ROI / CCR will be great and your cash flow will jump when you lock in the lower interest rate. I've used this strategy many times!

Situation 2: You do the same as the above except you use cash for the acquisition and repairs.  I have not done this before.  There may be some seasoning required (6-12mths)  before you can do a cash out refinance.  Once you refinance though, you will free up your cash to do other deals.  This may "save" you on costs by not using an acquisitions lender, but you are tying up your cash that potentially could have gone towards other deals (opportunity cost).

Situation 3: Instead of using a PL or HML, find a local portfolio lender. Some will lend 60-70% ARV and hold repair reserves just like a HML. The difference is their rates are usually much better than HML. I did this recently and the loan was about 4% with 1pt. It was much better than 12% with 3pts. Plus, you don't have to pay for two closings. However, many portfolio lenders will want to see skin in the game so you may have to put some cash down regardless of how cheap you buy it. They will also want good credit and experience.

In your situation 1; Where can you find a bank that will refinance you for 75% of the ARV AND without the seasoning period? This is EXACTLY what I want to do BUT it was my understanding that I had to wait that seasoning period and even then could only get about 70% of what I had into the property

 If you have W-2 income and decent credit then conventional financing will do it. Find a broker that works with investors. 

 Thank you for the response. I do have W2 income and a credit score of 820. So, with conventional financing, there is no seasoning period?

@Richard Fields , correct. As long as your debt-to-income (DTI) ratio is good, with W-2 income and an 820 score you shouldn't have any trouble refinancing conventional. You'll likely start getting capped out at 4-5 properties, but it's possible to secure up to 10 conventional loans before you'll need to look into portfolio / commercial financing.

I'm a little confused too. Why would Situation 1 not require seasoning but Situation 2 might?

My understanding is a conventional lender will require seasoning to loan on ARV.

A lot of this is turning over a bunch of rocks to find the right lender for your situation. I have talked with hundreds of banks and lenders for commercial properties.

Like anything banks vary with what they are lending on. Some want to only do vanilla homeowner loans. Others are investors themselves on the board and understand what an investor is trying to get for loan terms.

Where some banks see risk others see opportunity. You can't paint all lenders into one box and throw your hands up in the air and say you called one or a few so they all must be like that etc.

Is it worth it to call and get 40 no's for possible 7 maybe's and 3 yes's on what you want? I would think that is a great use of your time. There are a lot of banks out there selling crap loans and conditions passing them off to potential customers as (great deals). I have told presidents of banks before good luck with those programs but I am not even close to being a customer with those terms.

Some banks are in growth mode on certain types of lending and will  get aggressive to land business. Others might not lend at all in that category or already flush with loans in that space and will only do more on very advantageous terms to them as they do not want the additional business.

Just like anything you have to find someone who is motivated for what you want to do! lol    

It is my understanding that there are plenty of people implementing this (BRRRR) strategy using financing on the original purchase (not buying all cash).

The following hypothetical numbers outline my understanding of how this might work:

Purchase Price (-20% below market): $80K

Market Value: $100K
Cash Down (25%): $20K
Loan Amount: $60K
Rehab Needed (loaned): $10K

All In Cash: $20K  (down payment)
Total Loans: $70K (purchase + rehab)
Total Into Property: $30K (down payment + rehab)

ARV: $130K

Refi @ 70%LTV: $91K
$60K pays off existing loan, $10K pays off rehab loan, $21K is your cash out plus maybe part of the refi closing costs, which covers your down payment.

Sound about right?

If you do a cash out refi don't you pay % in interest on the cash you get back out of the refi? So your getting your own money back, but having to pay interest on it? 

Yes.  That's not the point.  You freed up money to move forward and buy another property with cash flow, that has enough cash flow to cover the added interest...and then some.  The net is you are ahead.