BRRRR: Renting out before refinancing needed?

[Jason Sung]

I am about to try my first BRRRR. One question about this strategy is, do you need to rent out before cash out refi? Or, it is OK to do cash out refi first, then rent it out. I think I read somewhere that the latter is more desirable. I would appreciate any advice from experienced investors. Thanks.

[Eliott Elias]

I put a tenant in there before I pull the cash out and after they send an appraiser 

[Andrew Syrios]

The problem is that most banks won't do a cash out refinance unless it's rented, at least they won't do it at the appraised value instead of just the amount of cash you have into the property. If you can find a bank that will refinance at appraised value on a property right that's vacant, go for it. But most banks won't. 

[Andrew Postell]

@Jason Sung I would say to just speak with your lender about their requirements but most will want you to rent it out before if you are doing a refinance.

[Upen Patel]

@Jason Sung It also does depend on the type of loan you are doing:

Full doc - If you need rental income to qualify, then you need to get it rented for the loan can be approved. If you don't need the rental income, then it doesn't matter.
DSCR - This is based on rental income and most likely you will need to have it rented before the loan can be approved. I don't have an investor that will allow for DSCR loans using the rental income per appraisal rent comp analysis.

[Tarik Turner]

Depending on the lender you should be able to refi either with a tenant in place or with the property vacant (DSCR would be based on the market rent.) If vacant however the rate is usually a few ticks higher, also some lenders may require reserves to be held in escrow under those circumstances.

[David Kelly]

You can cash out on an investment property without a tenant. The only thing it will affect is the Debt to income ratio since you will be taking on the full mortgage payment against your DTI. If your income is fine, then there should be no issues. In some cases, I don't need rental income to qualify, I will leave out all that documentation to make it a smoother process for the client. It can however change some of the payment/cost factors in which case I will request the docs to lower the DTI.

[Steven Goldman]

Hi Jason: Almost all lenders will require a tenant prior to refinance. The lender will use the lessor of the actual rent as reflected by the lease or the appraisers determination of average rent for the property. So lease is $1450.00 projected rent from appraiser $1250.00 rent used $1250.00. This is important to understand because all lenders will do a debt service calculation to determine the maximum refinance amount for the property. Lenders use between 1.0 (funding companies) and 1.25 or above banks and others. They also reduce the income for possible repairs and vacancies some use 5 percent.

You should understand the max. out refinance based on rental prior to acquiring and committing to the rehab. It allows you to understand how much you will be able to draw out above the loan for the purchase and rehab.(Unless you are fortunate enough to working with cash) We advise our team mates to understand the math completely before committing to a project. Good luck.

[Nicholas L.]

@Jason Sung call a bunch of lenders and ask.  I just did this, and the lender's policy changed while I was finishing the rehab; they had told me it had to be leased, but then it changed and so I closed about a month before my tenant moved in.

[Matt Cartwright]

Hi Jason, we personally do not require a tenant to be in the property before refinancing and we are one of very few who have this option! We will take the market rents from the area and use that to qualify instead. If you'd like any additional insight just let me know. 

[Eric Goldman]

some use market rents, some need a lease. most of the competitive ones rate and LTV wise, want a tenant with a lease.