BRRRR Guidance needed

[Chuka Ok]

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[Stacy Raskin]

As far as overall BRRRR financing strategy, there are lending options in Alabama, where you can get a fix and flip loan for up to 90% of the purchase price and a 100% of the rehab done on draws depending on property location and borrower credit score. You mentioned having good credit so that helps.

Also, finding fellow investors at local meetups and other social networking sites besides this one can help in deal analysis. Besides this post, there's also a tab under "Real Estate Classifieds on the left where there's a tab for "Real Estate Events & Meetups." 

It's important to work with contractors that are recommended and that you have help with doing your line item budget for the remodel. Many newer investors who do BRRRRs will start with a remodel that is more cosmetic such as replacing the kitchen and bathroom finishes and flooring. This will help with you build your experience level. Also, investors will sometimes talk about getting a house with good bones where there's not major issues with plumbing or electrical. It might just be dated in how it looks and with the cosmetic remodel you can help bring value to the rental market while scaling your real estate portfolio. From experience, renters really care about how nice something looks and that can help with getting it rented after the rehab is done.  

You can then refinance the loan into a DSCR loan to pull out the cash out on the new appraised value as there''s less seasoning or waiting time between loans compared to a conventional or debt to income (DTI) based loan. From client feedback, a client recently bought a property for $60K, worked on the rehab and it then appraised for $85K in about a year later in Montgomery, AL. It's cash flowing well and has a high DSCR ratio so he was easily able to do the cash out refinance part of the BRRRR.

More on DSCR loans: 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. Happy to connect.