Why Rent before Refinancing?

Question

Hello!

I’ve been making some quick calculations, but was wondering why is BRRRR set-up so that renting is before refinancing?

Example:

- House = $100,000

- Downpayment = $20,000

- Loan #1 = $80,000

- Rehab = $20,000

- Rent = $1,000 / mo (Assume 1% “rule”)

- Re-evaluation = $150,000 (assume)

- Refinance (80%) Loan #2 = $120,000

- Pay off Loan #1, subtract rehab to see gains

- Gain = $20,000 for repeat on next down payment on property 2

But now you have to a loan of $120,000 rather than $80,000 and your tenant is still paying $1,000 per month from your previous calculation. A $200 per month difference.

Wouldn’t it be better to refinance before renting, at $1,200 / mo?

Or it’s because people wait for the original tenant to vacate to finally raise rents to $1,200?

Or it’s because you have to wait for a period of time before actually refinancing?

Nathan Blumanhourst · Answer

The reason the BRRRR has the rent before the refinance is so that you can show the bank/lender that you now have more income. If you did not have a renter in the unit you debt would be up but your income would not be.

And the 1% rule is from the value of the property. So if you think the ARV of the home is $150,000 then you should shoot for rent somewhere close to $1,500. For example if you buy a $100,000 property and put 50% down you would still rent it for $1000 even though you only have a loan for $50,000. Hope that helps.

Joe Villeneuve · Answer

What????  The loan amount has nothing to do with what you charge for rent.  If you wanted to charge $1200/month because the house has improved enough to warrant it (and the improvement won't impact it if the original $1000/month was the max in the area already), then charge $1200/month before you refi.

Jamie Bateman · Answer

As Nathan said, the reason "rent" comes before "refinance" is that you will likely not qualify for the loan without the rental income. And some lenders do require a seasoning period (6-12 months) so they can see this is a stable, income-producing asset (collateral).

Dana Oredson · Answer

In addition to what others said, when you refinance and pull money out, your cash flow is going to drop like a rock, due to the debt payment.

So use the seasoning period as an opportunity to build some reserves.

Theresa Harris · Answer

It takes time to refinance.  The house should be rented as soon as possible to generate income.

How much you rent it for depends on the local market, not how much you owe on it or how much the property is worth.  A good rental will rent for more than the expenses and make money.

Joe Villeneuve · Answer

...and the 1% rule is garbage.  The specific market the property is in sets the rent...not any arbitrary %Rule.  What are the rents in the area for a house that size?

Joe Villeneuve · Answer

Again, if you've already made the repairs, you don't need an appraisal to raise the rent.  Just raise it.

Erik Pilon · Answer

@Nathan Blumanhourst, awesome, thanks!

Erik Pilon · Answer

@Joe Villeneuve, no of course, but ideally the 1% “rule” while shopping for properties is applied to the market value of the home or after repair value?

Why Rent before Refinancing?

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