Hey everyone, my name is Aliyyah. I'm a licensed real estate agent who focuses solely on working with investors on their next flip or rental property in the Philadelphia area. I currently have a new investor who is ready to purchase their first rental property using the BRRRR strategy. She is worried about the process of refinancing once the property is rehabbed. I know to qualify for a refinance you need to have a decent credit score, stable income, and the property needs to appraise at a certain LTV. She is concerned, she isn't going to qualify since she is self-employed and her income varies.
What are some pros and cons of using the BRRRR strategy as a new investor? I want to share with her both sides so she can make the best decision that works for her.
BRRRR is really hard right now because with rates where they're at and prices more or less flat, it's very hard to hit that 1.2 DSCR that banks want without having to bring a substantial amount of your own cash to close. In other words, your LTV will likely be substantially below 75%.
Right now, the best plays for investors are equity deals (assuming they have cash) or house hacking IMO.
Hey Aliyyah - some advice directly for your client is have her engage a few lenders and explain her situation to them. They should be able to give her an idea of what her terms will look like for the refinance. Maybe engaging them early and letting the lender take a look at her info/situation would ease some of her worries.
More specially to BRRRR, there are a few pros/cons. I think the obvious pro is the ability to get into a rental property with little to no money invested (although unlikely nowadays). Some cons or risks rather would be: 1. Unexpected rehab costs causing budget to go over, 2. Appraisal value is less than expected, 3. Waiting the seasoning period in order to refinance allows rates to fluctuate (a con in today's environment since they have been increasing seemingly everyday)
There is a lot to learn with BRRRR and surely a ton to love and to be weary about.
BRRRR is really hard right now because with rates where they're at and prices more or less flat, it's very hard to hit that 1.2 DSCR that banks want without having to bring a substantial amount of your own cash to close. In other words, your LTV will likely be substantially below 75%.
Right now, the best plays for investors are equity deals (assuming they have cash) or house hacking IMO.
The primary advantage of the BRRRR method is the ability to extract your initial cash investment, keeping your investment cycle active. However, current challenges with this strategy mainly revolve around interest rates. Traditional loans now demand 12 months of seasoning, meaning you might need to extend your 12-month bridge loan with your Hard Money Lender (HML), typically incurring a minimum fee of 1%.
Most investors look to refinance using a DSCR loan. While lenders usually require 6 months of seasoning, some are flexible with no seasoning, provided you have proof of completed rehab. The maximum Loan to Value (LTV) for cash-out with most lenders is 75%, though some still offer up to 80%. Investors often need to refinance at 75% to 80% LTV to retrieve their entire initial investment, but remember, DSCR rates hinge on LTV and credit score. Picture an X and Y axis on a graph: as LTV rises, so does the interest rate, making it harder to qualify for DSCR and reducing monthly cash flow from the property.
Lenders are currently introducing no-DSCR options, which tend to be riskier for both the investor and lender; most still prefer seeing DSCR ratios between 1.0 and 1.1. Given these conditions, our buy-and-hold investors are increasingly incorporating fix-and-flip or wholesale projects. This approach helps avoid cash-out requirements at the time of refinancing and even enables buying down rates to maximize monthly income.
Hey Aliyyah - some advice directly for your client is have her engage a few lenders and explain her situation to them. They should be able to give her an idea of what her terms will look like for the refinance. Maybe engaging them early and letting the lender take a look at her info/situation would ease some of her worries.
More specially to BRRRR, there are a few pros/cons. I think the obvious pro is the ability to get into a rental property with little to no money invested (although unlikely nowadays). Some cons or risks rather would be: 1. Unexpected rehab costs causing budget to go over, 2. Appraisal value is less than expected, 3. Waiting the seasoning period in order to refinance allows rates to fluctuate (a con in today's environment since they have been increasing seemingly everyday)
There is a lot to learn with BRRRR and surely a ton to love and to be weary about.
Thank you for your advice. I will be sure to have her connect with a lender before finding a property to get a better idea of what the numbers will look like.
Hey @Aliyyah Carter! Your client could also look into getting a DSCR loan with a hard money lender. When doing these loans, I can qualify the property for certain LTVs based on its income and expenses. So as long as your client's property cash flows, there should be no problem with her concerns about being self-employed.
BRRRR is really hard right now because with rates where they're at and prices more or less flat, it's very hard to hit that 1.2 DSCR that banks want without having to bring a substantial amount of your own cash to close. In other words, your LTV will likely be substantially below 75%.
Right now, the best plays for investors are equity deals (assuming they have cash) or house hacking IMO.
Thanks Andrew! She has cash on hand but wanted to leverage OPM. I will have her compare with house hacking.
The primary advantage of the BRRRR method is the ability to extract your initial cash investment, keeping your investment cycle active. However, current challenges with this strategy mainly revolve around interest rates. Traditional loans now demand 12 months of seasoning, meaning you might need to extend your 12-month bridge loan with your Hard Money Lender (HML), typically incurring a minimum fee of 1%.
Most investors look to refinance using a DSCR loan. While lenders usually require 6 months of seasoning, some are flexible with no seasoning, provided you have proof of completed rehab. The maximum Loan to Value (LTV) for cash-out with most lenders is 75%, though some still offer up to 80%. Investors often need to refinance at 75% to 80% LTV to retrieve their entire initial investment, but remember, DSCR rates hinge on LTV and credit score. Picture an X and Y axis on a graph: as LTV rises, so does the interest rate, making it harder to qualify for DSCR and reducing monthly cash flow from the property.
Lenders are currently introducing no-DSCR options, which tend to be riskier for both the investor and lender; most still prefer seeing DSCR ratios between 1.0 and 1.1. Given these conditions, our buy-and-hold investors are increasingly incorporating fix-and-flip or wholesale projects. This approach helps avoid cash-out requirements at the time of refinancing and even enables buying down rates to maximize monthly income.
Thank you for breaking this down! Great information I can share with my investor.
BRRRR is a bullsh*t buzz word that people rave about to get you into real estate. It is one of the worst strategies. You do all the work to execute a flip, and your reward is no cash flow and no profits.
Most DSCR lenders such as ourselves look at the income of the property itself, the best rates being 1.10- 1.20 DSCR but we do have favorable rates at 1.00 or $1,000 payment & $1,000 rent. The big thing with BRRRR currently is to make sure the ARV is accurate as we are starting to see them come in lower, as long as that is there it shouldn't be problem and check that against a 80%LTV rate & term or 75%LTV cashout refi. When doing value add, for seasoning we do 6 months.
This is something I go over with my clients on every fix n hold deal as we do both fix n flip and DSCR, it gives the investor a good idea of where they will be so they can decide if theuy want to sell or to hold
basically agree with you. the primary thing you get with a well done BRRRR is equity, not cash flow, and you have to spend money to get it. closing costs. holding costs. financing costs. refi costs. etc.
i think 5-10 years ago they were more forgiving because the market was going up - so it was easier to get that high appraisal. that's not the case anymore - you really have to nail every step.
BRRRR is really hard right now because with rates where they're at and prices more or less flat, it's very hard to hit that 1.2 DSCR that banks want without having to bring a substantial amount of your own cash to close. In other words, your LTV will likely be substantially below 75%.
Right now, the best plays for investors are equity deals (assuming they have cash) or house hacking IMO.
Thanks Andrew! She has cash on hand but wanted to leverage OPM. I will have her compare with house hacking.
I doubt she could do a full BRRRR, but even when rates are good that's tough. So as long as she's willing to leave some money in the property, this is still a decent option
Virtually all my RE investments have been BRRRRs. I am not doing any now and it has little to do with the extraction of investment. It is due to the negative cash flow after the high LTV REFI. another way to look at it, if it is going to have negative cash flow when rented, why keep it? Why not flip it and spare yourself the negative cash flow?
by the way creative lenders can often work around seasoning requirements. If this is important to you, find one of these creative lenders. Or search BP forums on how to do it.
The BRRRR strategy can be advantageous for new investors, offering low purchase prices, increased property value, passive income, equity access, and investment control. However, it requires a significant time commitment, involves financial and refinancing risks, and may be challenging for self-employed individuals. To assist your client effectively, discuss her financial goals, risk tolerance, investment strategy, and refinancing options to determine if the BRRRR strategy aligns with her objectives and circumstances.