Commercial vs Conventional Loan for BRRRR?

Question

I’m finishing up renovations on a property I’ve owned for a little over a month that I intend to BRRRR. I’ll be all in around 77% ARV. As I look to refinance it, I’m debating on which option will make the most sense.

1. I go with a commercial lender with an adjustable rate mortgage locked in at 4% for the first 5 years. My local portfolio lender will do 80% LTV and it’ll take about a month to do the refi. They have no seasoning period.

2. I wait 5 months (because of the 6 month seasoning period) and go with a conventional loan at that point in time. I’d be able to do 75% LTV around 3% interest 30 year fixed.

I’d really rather go with option 2 because of the lower interest rate. Now is the time to lock in rates because of their historic lows. The conventional loan would cost significantly less in interest each month. But by going with a conventional loan, I’d also be locking my money up in this property for another 5 months. I won’t be able to take advantage of the velocity of money that David Greene talks about in the BRRRR book. This would also limit me to doing a max of 2 BRRRR’s per year which seems to really take the power out of the BRRRR strategy.

As I continue to weigh these pros and cons, I’d love to hear your thoughts on this. Which option would you go with?

Andrew Postell · Answer

@Dan Turkel I wrote an entire post on how to avoid this that you can find HERE. The first section speaks to all of the restrictions you have when using a Fannie/Freddie type of loan and the 3rd section is the solution phase.  Feel free to ask any questions on it if you need.  Thanks!

Andrew Postell · Answer

@Dan Turkel analyze your payment vs. how much extra you will get back.  For example, if your payment increases by $80 but you get $8,000 more money....that means it would take you 100 months of having the LOWER loan amount to even get to $8,000.  That's like 8 years.  In 8 years $8,000 won't even be worth $8,000 because of inflation.  So taking the higher loan, thus getting more money, would be mathematically superior now.  There's some analyzation like that in which you can do to see what works better.  Hope all of this makes sense.

Andrew Postell · Answer

@Dan Turkel if you purchased with cash you can at least get your purchase price + closing costs back.  But if that is not enough then a commercial loan would be more appropriate.

Whitney Hutten · Answer

@Dan Turkel Correct... you would be locking your money up for 5 months.  But that is still good velocity! Locking up conventional loans now is a great idea given the interest rates and terms on the GSE mortgages.  There are also 30 year fixed commercial products out there as well!

Dan Turkel · Answer

@Andrew Postell After doing some more research, it seems like 85% LTV is pretty uncommon. Curious to hear your opinion on which would make more sense. I have a feeling it will come down to which I personally value more - a lower monthly payment or more cash to pull out...

Dan Turkel · Answer

@Andrew Postell

I assume you’re referring to delayed financing? Either way, it does look like I’ll need to go with commercial financing like you mentioned. I have two portfolio lenders right now that are telling me I can get around 4% fixed for a few years and then it’ll be adjustable. One will do 80% LTV and the other will do 85% LTV. Is a higher LTV typically better for us as investors? Which would you go with?

Dan Turkel · Answer

@Andrew Postell

Andrew, I’m actually familiar with your post and I think it’s super helpful. I’ve shown it to several of my friends. I really appreciate you pointing me towards it now - thank you! Unfortunately, I came across it AFTER I purchased this first investment property. I fully intend to use the third strategy you outline in that post for my second deal.

With my current situation, I purchased the property with all cash from my own personal checking account so your third strategy is unfortunately not an option for me. The renovations should be complete by early next week so I’ll need to begin the refi then as well since I already have another potential deal lined up and will need the cash back asap to put into the next one. Given the timeframe, it seems like I’m left with no choice but to go with a commercial loan. Would you agree?

Dan Turkel · Answer

@Andrew Postell

Yes, I did

Andrew Postell · Answer

@Dan Turkel did you buy this property with cash by chance?

Commercial vs Conventional Loan for BRRRR?

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