Rental income after you refinance with a 30 year mortgage

[William D.]

BP!

When you refinance a BRRRR deal at a 30 year mortgage, how does the payment on the mortgage work? Hopefully the rental income covers the mortgage and generates cash flow. However it's a 30 year mortgage for xyz amount. When you refinance you don't need a down payment correct?

[Shavar G.]

"When you refinance a BRRRR deal at a 30 year mortgage, how does the payment on the mortgage work? Hopefully the rental income covers the mortgage and generates cash flow. However it's a 30 year mortgage for xyz amount. When you refinance you don't need a down payment correct?"

@William D. I'm going to expand on @Stephanie P.'s example to provide detailed explanation to your question

Example:

Purchase price: $100,000 

Rehab amount: $50,000

All-in Cost: $100,000 (Purchase Price) + $50,000 (Rehab Cost) + $5,000 (Misc. Expenses) = $155,000

ARV (After Repair Value): $230,000

70% of ARV: $161,000

NOTE 1: I called nearly 20 credit unions in my local area and found several that will refi up to 80% of ARV, with no seasoning period (which means you do not have to hold the property for a pre-determined period of time after it is rented and generating income). For the sake of this example however, lets use 70% or ARV or 70% Loan to Value.

NOTE 2: The above quote of 80% LTV with no seasoning period comes from the Business Services department of a local credit union as I refi my properties under my LLC. This is the commercial side of the house. The residential side of the house is willing to go up to 90% LTV with no seasoning period, but a higher interest rate.

Now that you've verified that you're all in cost are at or below the 70% threshold, its time to examine your rental income to determine if the Net Operating Income (NOI) will cover the debt service (or mortgage payment) at a ratio that is acceptable to your bank. My bank requires a 1.25 Debt Service Coverage Ratio (DSCR) in order to re-finance a property.

Example:

Gross Monthly Rents: $1,700 p/month / $20,400 p/year

MINUS Vacancy Reserve (10%): $170 p/month

MINUS PM Fee (10%): $170 p/month

MINUS Property Taxes: $100 

MINUS Property Insurance: $85 p/month 

MINUS Maintenance / Repairs (5%): $85 p/month

Gross monthly rents minus all other expenses = Net Operating Income of $1,090 p/month / $13,080 p/year 

The mortgage payment is determined based on the refi-amount of $161,000.  You can use a mortgage calculator and enter the amount you are refinancing for - $161,000, # of payments per year -12, interest rate - 5%, and total # of payments -360, and it will generate a mortgage amount of $858.91 p/month  or $10,306.92 p/year.  

NOTE 3: Your property taxes and property insurance have already been deducted from your gross operating income.

If you divide your Net Operating Income $1,090 by your monthly mortgage payment of $858.91 you get a DSCR of 1.27. In this instance the credit union would allow you to cash out refi on this property up to $161,000 because the rents will satisfactorily cover your mortgage. As far as a down payment is concerned, if you are BRRRRing, you already own the property outright, so there would be no down payment requirement, however there are fees associated with the refi process.