BRRRR Financing

March 1, 2021
|
Real Estate
  • BRRRR = buy, rehab, rent, refinance, repeat
  • Do it in this order in order to borrow against the property at its highest value point. So first you buy it, then fix it up and increase its $ value, then rent it, and Then refinance it.
  • Things you need financing for: the purchase, the construction, and then the refinance

Purchase

  • HELOC
  • pros: fast (<10 days), no appraisal required
  • cons: no appraisal, so need 110% of ARV (After Repair Value) to preserve your capital. ties up your money
  • conventional loan
  • pros: easy process
  • cons: limited types of properties (good working condition, no tax/title issues) - knowing how to deal with these can be a competitive advantage! takes 30-45 days, need to put 20-25% down, seasonal slowdown of cash-out refinancing 6-12 months later
  • OPM (Other People's Money - hard money, private money)
  • pros: 90% of purchase price, 100% of construction, 10-15 day cash close
  • cons: not all cash, can't waive appraisal, rents have to cover expenses plus 20-25% cushion. have to use an LLC (could be a pro)
  • Tips
  • Keep the LLC a single-member LLC so you can refinance with a conventional lender if needed. Clear this with your lender first.
  • record purchase price + construction financing on the HUD (Dept of Housing and Urban Development). If not, will slow down refinance process
  • Line up your carry out lender ahead of time and run the deal by them

Rehab / construction money

  • all cash
  • pros: faster
  • cons: more capital at-risk, slower velocity of money
  • tips:
  • always have a professional inspection done. sewer scope, radon, termite inspection
  • decide on construction team/financing strategy before purchase
  • add a contingency for 5-10% cost overrun
  • OPM
  • pros: 100% financed (document on HUD). more likely to stick to budget.
  • cons: have to set aside reserves, have to save receipts, any upgrades must be paid for out of pocket
  • tips:
  • always get a professional inspection as well as your contractor's opinion
  • 5-10% contingency fund

Refinance

  • conventional loan
  • pros: familiar, backed by fannie/freddie, lowest rates and fees, no prepay penalties
  • cons: needs to be personally guaranteed, only up to 75% of LTV on refinance, stringent underwriting rules
  • tips
  • find an investor-savvy conventional lender, or find a broker who can work across multiple states
  • commercial financing
  • pros: underwrites it as an income property, up to 80% of LTV
  • cons: higher rates, prepay penalties, pseudo-personal guarantees
  • tips
  • many lenders will do both the rehab and commercial ("fix + flip") which will save time and money - some will even send back the same appraiser
  • the refinance step is the biggest wildcard of the entire BRRRR process. Plan this part ahead, BEFORE you buy!

Preparing for the refinance

  • Hold property in all cash
  • pros: no refi necessary, paying tenant, bump your net worth
  • cons: not a BRRRR. lots of personal equity tied up, exposed to creditors/lawsuits, low ROE, low money velocity
  • use a rate and term refinance (swap current loan for new one)
  • pros: refi immediately all costs that were on the HUD. if you used hard money you can immediately refi out your purchase and construction loans
  • cons: can't pull additional equity out of the property. if you purchased all cash you probably can't get construction costs out (since they weren't on the HUD at closing), have to wait for a seasoning
  • (seasoning: Borrowers must
    have made at least six payments on the FHA-insured mortgage that is
    being refinanced, at least six months must have passed since the first
    payment due date of the FHA-insured mortgage that is being refinanced, and at least 210 days must have passed from the closing date
    of the FHA-insured mortgage that is being refinanced. If the borrower
    assumed the mortgage that is being refinanced, they must have made
    six payments since the time of assumption.)
  • tips
  • line up your carry out lender strategy BEFORE you purchase the property! no surprises!
  • start the refi process as soon as the construction is done. some lenders let you close the refi before the lease is in place
  • cash-out refinance (try to pull additional cash out)
  • pros: you control cash flow with little to no money in the project! conventional lender may do a cash out at the 6-month mark (commercial in 3)
  • cons: may have to wait 3-12 months for seasoning of the title
  • tips
  • start the refi process a month before your title seasons so you can close ASAP