Rent-Refinance portion of BRRRR

[Account Closed]

Hey guys, 

Just wanted some clarification on how this section works. Lets say, using hard money, I purchase a property at auction for $35,000 that requires another $35,000 in repairs (included in the hard money loan). 80% LTV, so the loan amount is $56,000. After the property is rehabbed and rented out, then what? I have $70,000 dollars into a (lets say) $150,000 property. Does that $70,000 in equity act as a down payment for the new mortgage? 75% LTV would be $112,500. So, am I given that amount, I pay off the $56,000 loan and pocket the remaining $56,000?

Thanks guys

[Bill Gulley]

Not really, this comes from the reckless irresponsibility of one who has taken and old method of refinancing turning it into a BRRRR system, it's guru folklore full of assumptions.

Begin by buying, the rehab the place, borrowed funds or your cash, doesn't matter. Then you rent it, then refinance getting your cash back out, then repeat, sounds easy, but they left out general lending requirements because the author really isn't aware of financing pitfalls.

First, your example, 150K is in a dream land, 35+35=70 with a more realistic range at that auction price would be an after repair value of 87,500, certainly not 150K as it would likely sold at auction for a higher price. But, let's say you had a great day and the value was 100K.

You rent the place, great, you have an income.

You go to your bank, they say when did you buy it? You say 3 1/2 months ago, there are several things the bank can say;

we can't count your rental income because you have less than a year leasing the place.....

we can't count your rental income because you have less than 2 years as a landlord......

we will only refinance based off the purchase price plus costs of improvements because the property isn't seasoned......

(some lenders may go to 6 months when the market is active with new comps, if not, they may want the property to season for one year)    

sorry, we don't do cash out refinanced non-owner occupied properties, you can only payoff existing liens.......

we do cash out refis, but it will be limited to your actual cost and costs of improvements, you have 70 in it, you can get (75% LTV or 70% LTV) with a cash out, so you can have 75%=52,500 or 70%=49K, you're short.

Or, they may say, we will loan up to the costs to acquire the property plus improvements or the appraised value, which ever is less when the property is owned for less than that 6 month or 1 year period. Remember, the LTV of a cash out refi is more limited than a straight refi without obtaining cash, for non-owner occupied, that could well be 70% LTV.

In other words, best case, you get 70K maybe 75K out and you'll have loan closing costs.

Now, this is pretty standardized lending practice. What the advocates of this powerful system which is better than sliced bread with honey may say, is you can find a lender willing to do a cash out non-owner occupied refinance at 6 to 12 months strictly off the appraisal. 

My response would be horsefeathers, because that really wouldn't be prudent lending from an institution but don't ever say it can't happen, nothing is impossible.

How might that be possible? The borrower can show they don't need cash, they have high deposits, lots of experience in rehabs and leasing, have multiple income properties, cash flow from other sources.......these are called "compensating factors" by a lender, we will do it because he's a great customer!  Now, if that's you, great! If not, good luck!

Find out what your area lenders will do, the LTV on what types of properties and their requirements before you go to some auction, dump money in from some short term lending HML and then fall flat, losing your tenant and your property.

Might look at "systems" as ideas, not reality in just any market. :)