If you are planning to BRRRR read this first

[Art Shalomov]

Attention BRRRR investors: upcoming financing rules could affect your investment strategy. The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method is a popular way to recoup your initial investment by refinancing with a cash-out refinance loan. However, starting on April 1, 2023, (some lenders will impose these rules sooner) FNMA and Freddie Mac will require a 12-month ownership history for all cash-out refinances. This means that if you planned to buy a property and quickly refinance to cash out, you would have to hold the mortgage for a year before doing so.

But there is a workaround that can still enable you to use the BRRRR method. The trick is to structure the refinance as a rate and term refinance, which means refinancing the existing lien or liens that were acquired at the time of purchase. Here's how it works: let's say you're buying a $500k home with a hard money loan that covers 80% of the value, or $400k. The other 20% or $100k is usually brought in as a down payment. However, you can record that 20% as a second mortgage instead of showing it as a down payment. You record a note and a deed of trust for the $100k, which makes it a mortgage. So now there are two loans that were acquired at the time of purchase.

If you pay off both loans simultaneously, the refinancing is considered a rate and term transaction and not subject to cash-out restrictions. This means you avoid the 12-month ownership requirement, use the new appraised value right away, and without incurring pricing adjustments for cash out (which is hefty). Assuming your rehab boosts the property value to at least $600k, you can get a new $500k loan (combining the $400k and the $100k) and recover your $100k initial investment. Then, you can use that money to buy another property!

It's important to be aware of the new rules but remember the rate and term refinance workaround to keep growing your portfolio. Happy investing!

[Chris Henry]

Are you classifying that down payment as a loan at the time of purchase or at the time of refinancing?

[Art Shalomov]

That “down payment” needs to be. Recorded as a lien along with  NOTE at the time of purchase. 

[Joe S.]

Quote from @Art Shalomov:

That “down payment” needs to be. Recorded as a lien along with  NOTE at the time of purchase. 

Who would be considered the lender of the recorded lien on the second? 

[Mike Burns]

Great post Art! this is exactly what my company does for investors!  Fully managed

[Leslie Beia]

So helpful, thank you! Is rate and term only for commercial refi's, or conventional as well? The option had come up with my last commercial refi, but now I'm looking at trying to BRRRR my way to a primary home with some convoluted combination of hard money and conventional mortgages. I'm still figuring out the strategy, but it seems like being able to refi quickly out of hard money would be a great option for a lighter rehab. The trick with the 2nd mortgage is great and certainly makes the numbers work far better! Thanks.

[Art Shalomov]

Quote from @Leslie Beia:

So helpful, thank you! Is rate and term only for commercial refi's, or conventional as well? The option had come up with my last commercial refi, but now I'm looking at trying to BRRRR my way to a primary home with some convoluted combination of hard money and conventional mortgages. I'm still figuring out the strategy, but it seems like being able to refi quickly out of hard money would be a great option for a lighter rehab. The trick with the 2nd mortgage is great and certainly makes the numbers work far better! Thanks.

 This is only for conventional/ residential financing. Can be done on primary or investment home.