BRRRR with Multi-Family or SFR

[Kyle McAdams]

Hi BP community,

I'm a new-ish investor in the Sacramento, CA area and own a duplex (house hack/rental property).  

I'm interested in doing it again soon, either with another duplex or a single-family rental, this time using the BRRRR strategy. I'd love advice on how to secure the loan for the initial purchase and rehab, and the overall process behind it—especially since my first deal was straightforward with W-2 income. Any tips on lenders, underwriting, hard money/dscr loans, or pitfalls to avoid in a high-cost area like the Sac area?

Happy to share more details via PM. Thanks in advance for any insights or recommendations!

Best, Kyle

[Stacy Raskin]

There are options for hard money loans (HMLs) where you can get up to 90% of the purchase price and 100% of the rehab needed (done on draws). This will depend on the borrower's credit score and the property location. To get this process started a budget is needed for the rehab along with other details but the budget is a big factor. These funds can typically take anywhere from 7-14 business days or more to secure. Sometimes this can be shorter, it will depend on the property and the borrower. 

Once the property is rehabbed you can convert the funding to long term financing with for an example a DSCR loan. A DSCR loan has a shorter seasoning or waiting period between the first transaction of the property and the cash out refinance to be able to use the new appraised value on the rehabbed property which allows the investor to get more of the invested cash back faster. This can be three months or less but generally three to six months will get an investor more cash out refinance program options with different lenders. It's helpful to work with a mortgage broker who specializes in these types of loans that are experienced as they will have more options for better programs. Fix and flip and DSCR loans aren't regulated like a conventional loan and rates and terms can be changed up until closing so working with a broker with a good reputation can help avoid that.

As far as how DSCR loans are structured: DSCR loans won't use your income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals. Happy to connect to discuss further.