BRRR Strategy - Refinance Question

19 Replies

Hey there BP community,

I'm getting ready to tie up a house in phoenix with hard money and i'm having some issues with the refinance part.

Here's the deal:

Purchase price: 90k

ARV: 135K

Rehab costs: 5k

The issues that i'm coming up with after talking to a few lenders is that in order to lend on the ARV I need the property to "seed" for 12 months. Otherwise they will only lend on the purchase price which leaves with a lot of cash tied up and a high monthly payment for my hard money loan. The hard money loan will cost me about $850 a month and with my rental at $900 I'll probably be neg. cash flow with expenses and such.

In my opinion the numbers work well even with a flip strategy but i'd like to hold on to this for long term since the neighborhood is nice and my goal is to build my rental portfolio while I work my regular job. 

Please let me know if you have any suggestions on how to cash out refinance out of my hard money loan using the actual value of the house (ARV).

All your help is greatly appreciated. 

Cheers

@Michael L.

The lending industry is almost on a daily basis loosening its regulations. We refinance our properties way before 12 months of seasoning with B2R with their portfolio loan product. However, we do not recommend B2R because they are so difficult to work with. We are having a meeting with a company named Renovo tomorrow who will do one home at a time and do not have the 12 month seasoning requirements. 

You simply have to look around and you will find someone who will lend you on ARV before 12 months. There are actually quite a few. But be prepared to pull out your hair. Although the terms are relaxing, the document requirements and hoops you have to jump through are still incredibly many and dreadful.

@Michael L. I think every person who tries to do the BRRRR strategy ends up where you are right now. Why? Because the first place people think to go to get a loan is to a national or regional bank.

To refi within 6 months you will need to find a national portfolio lender like B2R or a small community bank in the state where you live that does portfolio loans. In CT it took us calling probably 30 banks until we found one that was willing to lend to a first timer. 

A lot of the portfolio lenders want you to have experience managing real estate before they agree to hold the paper on your properties.  It takes some navigating for sure, but get on the phone until you find a yes or find a good referral on BP who is doing what you are trying to do and maybe they can give you a warm hand off to a lender. 

My local bank does my cash-outs at 6 months, 75% of appraised value. I have mostly clear and a few financed properties.

Hi Michael

I was just speaking with another investor on this very topic the other day and @MichalNoto hit the nail right on the head. You need to go to the smaller banks, preferably if you drive by a bank and have never heard of it before thats a great place to start.

@Kevin Yoo Thanks for the heads up. 

I'm meeting with B2R tomorrow. I'll try and set up something with Renova. I'll keep you updated.

My concern - is that there really isn't that much repair to do. The house as it sits is in pretty good condition. I talked to a couple of lenders today and they said they might be able to give me a cash out refi after i put money into the house for repairs but really there isn't that much to do to make it rent ready. Even the little work that's needed would take me about 3/4 weeks to get done. I guess if the minimum "seasoning" i can get away with is 6 months i'll just have to calculate that into my expenses and see if the deal still makes sense.  

Michael. This is what I did. Bought a condo cash for 52k. Put 9 k on cash repairs. 6 months later I called all the credit unions in Arizona, about 8 of them. There were 3 that would do loans on investments properties. I just went with the best gut feeling after talking with the different loan officers because they were all very similar as far as interest rate. 

Application was a breeze and then the appraisal came in at 110k and they were willing to give me 75%. I decided to take a loan for $75k to make my monthly cash flow work. 

For reference. I used arizona central credit union. The loan officer is Jay Lopez. 

For my next property I plan to buy with a mortgage from the beginning. The 6 months of having the cash tied up was too long. But if you follow my math: I was able to get more cash out than I initially put in!!!!! I was all in 61k of my cash and then I got 75k out 7 months later. 23% increase of my cash in 7 months!!!!

Good luck. 

Hey @Andres Rossini

This is really interesting. Was this your first investment property? Was the credit union worried about experience at all? (this will be my first deal) 

Did you decide wait 6 months because that's when you just happened to finish your rehab or did you wait 6 months because that's what they told you before they would even consider lending to you??

Again thanks for your all the help!!

That was my first investment property ever. I had no track record and they never asked, unless hours of reading and listening to bigger pockets would count. 

It took me a month to do the rehab but the 6 months is the minimum you have to wait. Also, they didn't care how much money I put into or where any of the funds came from. All they wanted to see was that I had $4k in cash for emergencies, a copy of the tenant agreement (since it was a buy and hold) and the rest was your typical loan requirements ( credit score, income to debt ratio, etc). Iam glad to pass on this knowledge so let me know what other questions you may have.  

Thanks @Andres Rossini this has been a ton of help. Another quick question - did you present your deal in a nice way(cover page,financial data, etc.) to the bank like @Brandon Turner always recommends?

@Andres Rossini also one other questions did you have the condo under your name or an LLC?

@Michael L.

Do the repairs especially if it would cost you very little in time and money. It will help you in getting a loan and a tenant. 

And as @Andres Rossini is telling you, the best loans with the best rates are with your local banks probably around 4%. The problem is that they will have most likely seasoning requirements and will likely limit the number of properties you can finance with them. Non-traditional bank lenders such as B2R and Renovo will have easier seasoning requirements (some none) and will allow limitless properties but they are more expensive typically 6 to 7%.

And all lenders put a lot of weight on whether you have the cash now to be able to make payments and most everything else is secondary such as experience. Always present the deals with good window dressings. It can only help. But they will have their own forms to do this and you should follow this to the T.

Lastly, try not to do any business in your own name including owning the property. The banks and lenders, however, will make you personally responsible for the loan and the LLC is not very important to them. But with the rest of the world especially your tenant, it is best you have that layer of protection. However, the best protection is not the LLC. It is the insurance, specifically Homeowner's and Umbrella, policies that are your best protectors.

Michael, I think Brandon needs to do that since he already has multiple mortgages. I only had my personal home mortgage. So all I did is call them on the phone and asked if they would loan towards a condo investment property (some lenders don't like condos because of HOAs, so they might only lend for SFR). Then I filled out their application online and they called me the next day asking for a couple more items and then told me I was approved. My credit score was right over 750 and they gave me 4.5%. They also offered $400 discount on the appraisal.

And for your second question: I bought the condo on my name, no LLC. Just a lot of insurance like @Kevin Yoo mentioned.

On a side note. I just called them up again last week and asked if they could pre approve me for another mortgage ( I am shopping around for another buy and hold) and after 10 minutes of over the phone questions, I was approved. Having a W2 job and a good credit score seem to be working for me. I am sure that later on I will have to make the pretty folder with pictures and perfume to have them even consider me as a safe borrower, but for now its easy.

It's hard.

I deal with the "seed" situation a lot. Two things that have helped me are 1) I have a personal banker from a local bank [she also invests], and 2) we order appraisals in REPAIRED condition whenever possible to avoid the delay.

It doesn't always work, but at least twice I've been able to buy a SFH, rehab and rent and use the original purchase appraisal to leverage my next purchase (within 2-3 months). It takes a good relationship and some "strong talk" sometimes, and a sympathetic ear.

My banker is awesome, so I my situation may be rare.

FYI:

SFH-paid $26k and was appraised at $61k for purchase in Feb 2016. Rehabbed out of pocket and now rented (as of 4/1) for $825/m.

Contract on duplex at $92k, using $19k from previous prop, plus additional cash funds to close (hopefully! it's never done til you leave with the keys, lol) April 22.

Again, I know I may be rare with this, but the keys are a personal relationship and loyalty to a local financial institution and that initial appraisal (insist it be done in repaired market condition).

Blessings!

12 months seems a bit long, FNMA has no value seasoning guidelines, you can pull cash out at any lender, national or local, at the appraised value after 6 months title seasoning (prior you have to limit yourself to delayed financing guidelines of PP + Improvements) . Under 6 months would need to be a portfolio lender, but any place offering conventional loans allows at it 6 (unless you just ran into a couple with strict overlays)

do you get pre-approved by the local bank to refinance before you make the purchase? otherwise, is there a risk that you won't be able to refinance out and your cash will be stuck? 

@Michael L. , on my calculations, even a fairly standard mortgage will be costing you ~$800/m, which because of normal ongoing expenses, is NEVER going to be covered by a rent of $900/m!

ie. This one is NOT a BRRRR candidate! Even as a flip, the numbers look shaky. Rehab could easily blow out way beyond $5k, and sale price may well not see Offers above $115k? My 2c.

[Your thread is 3 months old. Did you come to the same conclusion? Still, look for deals!] Cheers...

@Brent Coombs I ended up flipping it. Closing this Monday with a sale price of 135k

Purchase price: 90k

Rehab: 12k

Closing Costs: 10450

Profit: 22,550

It turned out to be w good project for this market. I'll take this money and go get another one!

This was my first flip :)

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