Conventional loan BRRRR Financing

[Eric Davenport]

Hello All, When learning about the BRRRR strategy, I have only heard of people buying and rehabbing with cash. Is it possible to first buy with a conventional loan and then refinance after a seasoning period? I could buy a deal with cash, but would not have enough for the rehab. If I could buy with a down payment, I would most likely have enough cash for the rehab. Thanks for any insight or response!

[Nick Gaines]

We had an (almost) BRRRR where we started with a conventional loan (25% down on $105k purchase) did about $10k in light rehab and got about 75% of our money back out when we refinanced at 6-months. But as @Andrew Syrios mentioned, paying loan fees twice really added up. Even though we have some cash in it, our cash-on-cash return is around 40% and the property has plenty of opportunity for both rent and resale appreciation, so I'm ok with it.

What we are doing instead now is getting an interest-only adjustable rate line of credit from a commercial lender for the rehab period based on an after-repair value appraisal, then refinancing with a conventional fixed-rate mortgage at 6-months. Our bank allows us to draw on the line of credit first and then, if needed, use our money last. If the deal is enough value-add that your after-repair value is 25% higher than your purchase price minus rehab cost and loan fees, you can be in it with no actual money out of pocket. We've also found that the loan fees for the commercial loan are lower than a conventional mortgage, not to mention the application process is way less cumbersome with a commercial lender. You need to make sure your conventional mortgage lender will refinance based on your after-repair value and agrees to refinance at the 6-month mark.

Buying initially with cash is always going to be the cheapest way to go when you factor in loan fees and interest for the rehab period. But you can also get creative on how pay for your rehab. For example, get a 6-month no interest credit card or an interest-only line of credit and then pay it off when you refinance. Or if you have enough equity in another property, such as your primary residence, take out a HELOC to pay for the rehab. Obviously this involves precise timing and risk, so make sure you have your numbers tight and that your bank is on-board with refinancing with a fixed-rate mortgage as soon as possible.