Refi on a BRRRR to include repair costs?

Question

Hello BP!I'm a new investor and currently looking for a property to BRRRR. I plan on using the HELOC on my current home to purchase the home outright, then refinance with a conventional loan after repairs are completed. I've been searching for a lender to get prepared for the future refi. One lender, after I explained my goals and strategy said in an e-mail:"There is a 6 month seasoning requirement on a cash-out refinance. One exception is a “delayed purchase” refi which you can do when you pay cash for the house initially. The catch is you can only refi the amount your paid for the home plus closing costs/title fee’s for the purchase. You cannot include the rehab costs on this program."My understanding of the BRRRR Strategy to to recoop the purchase price, closing costs, and rehab costs as much as possible. Essentially getting a new loan for 75% of the new ARV. The line that stuck me from this lender is that I couldn't include rehab costs in the program. I would like to ideally recoup those funds from my HELOC so I can start looking for my second property sooner than 6 months. What am I missing? Do I just need to find a different lender? Thanks in advance! - Nick

Eileen McCue · Answer

@Nick Wilson Similar to @Peter LaBreck, we have had success with utilizing a commercial loan with a portfolio lender here in Maine. Essentially we start with a commercial loan that provides funds based on an "as completed" appraisal. So the appraiser reviews the property and takes into account your planned renovations (work to be completed within 12 months of purchase) and the lender provides you a mortgage on that amount, with 80% of the ARV becoming available at closing (they cut the check to the seller and you get the remainder). Closing costs are less than residential products, fewer hoops to jump through, and you can utilize the funds available to start needed repairs immediately. While the interest rate is a bit higher and becomes variable after 5 years, it is amortized up to 25 years, and the good part is that you can refinance out into a residential product at any time (no penalties at our lender). Transitioning to a residential improves our cash flow by lowering the monthly payment by increasing the term to 30 years and reducing the interest rate. Effectively, we see it as a BRRR, but without having to put our cash in up front and transitioning the debt service to our tenants more efficiently.

Will Pritchett · Answer

@Nick Wilson I agree with Evan Hutchins on this one. It may be a bit more hassle but inquiring on the ways you can get your rehab money included on the HUD and do draws can be a way around this. Call banks until you find one that understands what you want to do. I haven't done this myself but I have done a lot of BRRRRs and if I had known this earlier, I could have grown faster. Not all lenders are the same. Find a great one that knows investment loans! The seasoning period just slows things down. Some of the posters have good ideas with the Commercial lending but the terms are never as sweet as the conventional loans. I'd first try to find a way around those seasoning requirements for conventional before switching to Commercial if you can. Best of luck!

Peter LaBreck · Answer

@Nick Wilson Hey Nick, one suggestion I have is to use a commercial cash out refinance. Typically speaking there is no seasoning requirement and you can do 75% arv cash out refinance. I may have gotten lucky quick but I have a commercial lender here in Maine that will do a cash out refinance at 75% LTV with zero seasoning requirements or many questions asked. It was very simple, they ordered an appraisal after I completed my rehab in a month, then by month two he was depositing the cash out refinance into my business. Easy process and ended up with a 20 year term and average rate. Since then I have used commercial loans because the ease of use and benefits. Hope this helps!

Jaron Walling · Answer

@Tom Appel That's a great idea if you have connections with a private lender. Private lenders typically like the borrower to have skin in the game. This protects the lender just like hard money lenders from default. They typically loan to 80% of the ARV.You would have to negotiate out the terms (interest, points, term) but it could be more favorable than a bank REFI.

Mike McCarthy · Answer

@Nick Wilson my experience has been most/all conventional finance options require the 6-month seasoning. There are commercial options that have higher rates and shorter terms. I’ve also heard about local banks that sometimes hold loans privately, and can skirt around these requirements, but I haven’t found them yet. For me, but the time I compete the reno, get a tenant settled, I’m coming up to the 4 month mark and start on the refi - with a goal of closing at the 6-month mark.

Evan Hutchins · Answer

@Nick Wilson, Because you are essentially paying cash for the property, you could do a delayed finance, which like you mentioned is sooner than 6 months but only for the amount on the HUD statement from closing. In order to get all your money back...you can escrow the repair costs at closing which means the amount listed on you HUD closing statement is the purchase price plus your repairs. The funds for the rehab would then be dispursed from escrow as the repairs are completed. I hope that made sense! Im in the same boat right now on a property that I wish I had escrowed the repairs and didnt so I will end up leaving my repair in the deal in order to refi quickly

Nick Wilson · Answer

@Ken Barrett understood, thanks!!

Ken Barrett · Answer

I think you may be misinterpreting the meaning of the e-mail."There is a 6 month seasoning requirement on a cash-out refinance. One exception is a “delayed purchase” refi which you can do when you pay cash for the house initially. The catch is you can only refi the amount your paid for the home plus closing costs/title fee’s for the purchase. You cannot include the rehab costs on this program."The lender is saying that if you want to refinance through their institution that you must wait 6 months. The only exception to waiting 6 months is if you only want to refinance the purchase price of the home. So it sounds like you can still do the BRRRR method like you're imagining with this particular institution, you just have to wait 6 months to do it.

Nicholas Covington · Answer

@Nick Wilson Hello!There are plenty of lenders out there that will allow little to no seasoning for between 70-80% cash out. These types of deals normally have a bit of a higher rate, but for the most part of the numbers still work for you...then they still work. Normally people looking for these types of loan should work with a solid mortgage broker. I sent you a connect request, I can point you in the right direction.

Ken Barrett · Answer

No problem! Good luck!