Has anyone had any experience using delayed financing for the BRRRR method? What are the pros and cons to this versus a traditional re-finance? I understand there is no seasoning period, but does that mean that you also do not have any equity in the home after the cash is taken back out of the home with delayed financing? Or are you still able to get it re-appraised after the rehab is done and get the LTV ratio that you want with a BRRRR property after it is appraised?
Also, for rehab costs I understand that I need to put that money into some kind of escrow when I purchase the house. Is this correct? Any insights would be greatly appreciated. Thanks!
I guess what I am really wondering is if you are you essentially trading potential equity in a home for being able to avoid a seasoning period with the delayed financing route? Can I still take a delayed financing loan out while still retaining a certain amount of equity in the home if my appraisal after repairs is higher than the my initial investment in the property. Or is after repair appraisal value not even taken into account? Do you simply get every dollar that you put into the home right back out while not building any equity. I guess I am asking is the loan based on an LTV ration after rehab. Thanks again for any insights!
Hi @Sean Dawson, with delayed financing, the amount of cash you can pull out is equal to the LOWER of: 1) your total upfront costs (this includes closing costs, and sometimes also rehab costs) or 2) 70% of the ARV.
So, you will necessarily have at least 30% equity in the property afterward. To maximize your cash out, you will want to get the loan once the rehab is completed so the appraisal is based on the updated property. As far as being able to include the cost of the rehab and the amount that goes into your "upfront costs" for #1, I've seen people on here say they put the funds for the rehab in escrow and do draws, but I've seen other people say that the number that goes on the closing/HUD statement needs to be the amount already paid for the work (basically a receipt), suggesting you either do the work before closing (generally not possible) or pre-pay the contractor (terrible idea!)
If you haven't already, check out this blog post that explains using DF with BRRR in great detail (the comments are very helpful too) https://www.biggerpockets.com/...
The main pro of DF is being able to get your cash out before 6 months. Cons include the two restrictions on amount you can take out (with traditional cash-out, you can do 75% LTV, and upfront outlay doesn't matter), and also that you have to be able to trace back the source of the funds used for purchase as YOUR cash. I had a DF application denied since I was applying for the loan in my name, but had pooled funds with partners for the purchase. I believe this also rules out using hard money for the initial purchase, but I don't have experience with that and seem to recall one or two people saying they were able to do it.