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Updated 10 months ago on . Most recent reply
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Financing options for a BRRRR + STR?
What are my financing options if I want to do a BRRRR + STR? I prefer to use conventional loan over DSCR for the refi due to lower rates and no prepayment penalty. Specifically:
- 1. Do I have to purchase the house and rehab using all cash to get around the 12 month loan seasoning requirement or are there hard money loans out there that can work (no mortgage on property)?
- 2. In order to get around the 6 month title seasoning requirement I have to meet the delayed financing exception. Under this exception, can the new loan amount fully cover initial purchase cost + rehab or only purchase cost?
- 3. Do conventional loans even allow STR or is it indifferent between LTR and STR?
I've read previous posts about this topic but some of them were dated prior to the 12-month loan seasoning requirement that was updated in April 2023, so wanted to confirm I'm understanding it correctly.
Most Popular Reply
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I'm biased, but I don't think conventional is the best product if you are doing a rehab. You mention using hard money for the rehab, which, in combination with a conventional loan, would require you to be in high-interest rates for a year until you can cash out refinance. With some DSCR loans, you can cash out refinance in as little as three months, and the rest you need 6 months. With conventional, this would mean you would be paying 6-9 months of high-interest rate debt before you can pull cash out.
If you decide not to do a DSCR loan, the second home loan is a popular option, but there are lots of drawbacks for investors as it is really a product made for regular home buyers. With second home loans, the mortgage must be for one unit (I do a lot of 2-4 unit STRs), the property must not be rented for more than 180 days out of the year (limits revenue), must function reasonably as a second home (usually limits out of state investing), rental income will not qualify as stable monthly income (projected AirDNA does not play into your DTI). There are a couple others, but you can check the Freddie guidelines yourself:
https://guide.freddiemac.com/app/guide/section/4201.15
For AirBnBRRRRs, I suggest structuring with a hard money loan to purchase and rehab the property and then doing a DSCR refinance using AirDNA projections. This gives you the most flexibility with investment properties. Also if the prepayment and rates are a deal killer, you can always structure the deal with no prepayment or buy down the rate to the 6's.