How to interact with the lender as it relates to BRRRR?

Question

I talked to a potential lender at a local bank today and was asking about the process of refinancing. He is familiar with the BRRRR strategy and works with investors who use it frequently.

As such, I was asking him about what happens when you go to refinance and, generally speaking, how that process works. He told me that the bank typically will refinance 80% of the appraisal value (although I know you should perform analysis with 70% to be conservative), however, he made it sound like, at best, I would be getting my money back and no more.

In other words, let's assume the following:

property: $30,000

rehab: $10,000

interest rate for private investor: 6%

interest after 4 months (on loan of 40k): $2,400 (by the way, is this usually just a flat $40,000 x 0.06 regardless of the time period, or is it 4 months x ($40,000 x 0.06) for a total of $9,600? I guess it can work however you want, but I'm wondering what would be typical in this scenario)

total owed to investor: $42,400

appraisal post rehab: $60,000

80% of appraisal: $48,000

So according to the BRRRR strategy, the bank should finance me $48,000 and I pay my investor back $42,400 while either using the $5,600 to invest into another property, or keeping it in the current property to build some equity.

However, the lender I was speaking with made it sound like he would not give me a loan for more than I was into the property (because that puts the bank at greater risk?). But - isn't that what the BRRRR strategy is all about? Creating a profit in this way? Or is it such that, the lender shouldn't know how much I'm into the property? Do I not have to tell him? What if he asks?

Kerry Boyle · Answer

@Lucas Mills just want to point out that your numbers are all wrong on the interest. In your example, you are using 6%/month in interest. This would be a 72% interest rate annualized. Try: Loan amount x Interest rate / 12 to get your monthly payments. Also in reference to seasoning, it is a fannie/freddie guideline. Portfolio or private lenders choose (or do not choose) to abide by seasoning requirements.I say it often, but there is (almost) nothing stopping a hard money lender or private money lender from refinancing you the day after you purchase/finance a property. THEY MAY have overlays that don't allow them to refinance within 6 months, but not all do.

Greg Scott · Answer

@Lucas MillsI think the lack of formatting in my note added confusion. I have no issues at all with using a portfolio loan for the right reasons. Hopefully this will clear things up. Here are your optionsBuy and rehab using a hard money or private loan then do a rate & term refiPay cash the cash-out refiRefi-out into a portfolio loanWait to season the loan then try to refiEach option has plusses and minuses

Lucas Mills · Answer

@Chris MasonPlease forgive my ignorance; I'm still learning all of these things and these concepts are very new to me. So, as I understand it, I can approach BRRRR in a few different ways:1. Get up-front financing from a friend, family member, or other private individual who wants to be my investor. I pay for the property and rehab with cash. After rehab, I go to the bank and refinance into either a conventional loan or a portfolio loan. If conventional, I MUST wait 6 months after the rehab(?) (or appraisal?) before the bank will loan on the ARV (referred to as seasoning?). The loan will be fixed rate for 30 years, and in my name (unable to put into LLC).If portfolio, the seasoning period is up to the bank and may be as immediate as upon completion of the rehab/appraisal. It will be a variable rate and a 20-year loan (most likely), but able to put into an LLC.2. Get up-front financing from a hard money loan. The hard money lender should lend me the full amount I need to purchase the property and do the rehab. When it's time for the refinance, do I refinance with the hard money company, or can I go to my local bank and refinance the same as number 1?Do I have it about right? Also, don't we as investors pretty much have to utilize portfolio loans if either:1. we use all 10 of our conventional loans or2. we want to put our properties into an LLC?

Chris Mason · Answer

No matter what, using conventional financing, you cannot go above your purchase price + refi closing costs unless you wait six months.The only theoretical hack around this that I can/could think of, I posted about a year ago, and only one of the hard money lenders that were on BP even understood the proposal.

Lucas Mills · Answer

@Greg ScottHi Greg - I'm a little confused. In your first example, you say that the hard money loan is then refinanced into a conventional loan. Then in number 3, you say to not go with a conventional loan. You seem to indicate that portfolio loans are a bad thing.So then if I don't use portfolio loans, how am I supposed to scale my acquisition of properties to any appreciable degree? As I understand it, I can only have 10 conventional loans, and they all have to be in my name. So, what do I do once I reach all 10, or what do I do if I don't want to use any conventional loans because I want to put them in LLCs? Aren't I then pretty much forced to utilize portfolio loans?

Greg Scott · Answer

The banking industry got hammered by creative financing that allowed people to do cash out refis, so many of those options are gone. A cash-out-refi typically requires seasoning of the loan and may not allow 80% LTV. That said there are other ways to go about doing effectively what you want.1) Start with a private loan or hard money loan. Those people will often lend against the ARV not the purchase price. Then after it is all fixed up, you replace with a conventional loan in what is known as a rate & term refi. In other words, you aren't changing the amount owed, just the interest rate and the amortization schedule. This strategy requires you to pay higher interest up front and be smart about your rehab costs and ARV.2) Pay cash for everything. Then you can do a cash-out refi. I have never used this strategy but I understand that if you pay cash, you can do a "delayed financing" withing 6 months and the bank pretends that it was the same as if you financed at closing. This one has some risk if the appraisal doesn't come back as high as you hoped, your cash may get stuck in the deal. I would only use this if I were very well capitalized.3) Dont go with a conventional loan. If you do a portfolio / commercial loan (meaning the bank holds the note and doesn't resell it) they basically make their own rules. They typically have higher interest and while you can get a 30 year amortization, they often have a 5-10 year balloon.Good luck.