cash-out refi -- BRRRR -- delayed financing... A problem?

Question

I have pulled capital out of my existing properties to fund new deals. I have enough to cover cash purchase + rehab for a typical deal, and plan to recycle the funds for multiple deals. My objective it to BRRRR with cash up front and then to get a loan immediately after rehabbing and getting a tenant, to then proceed with the next property.

The "delayed financing" rule allows you to avoid the usual 6-month seasoning period before doing the cash-out loan. But here's the rub: It seems if the purchase was funded with assets drawn from equity on another property, the proceeds from the new loan must be used to repay the original loan. That defeats the purpose! Have you dealt with this?

A couple of twists here...

1. My funds are coming from two places: a HELOC on one property and a refi that's about to close from another. It seems to me, since the HELOC is a revolving credit line, I could pay it back and still have immediate access to the credit. Am I missing anything here? I wonder if I should put the brakes on my refi and do an additional HELOC instead?

2. Another possibility is to borrow from a private or hard money lender to make the purchase, and then use my equity funds to pay back whatever isn't covered by the new mortgage.

Opinions or advice?

Also... The last two Rs of BRRRR are Refi + Repeat. Doesn't this restriction make that nearly impossible without a 6-month wait?

Shiloh Lundahl · Answer

@Gary Parilis this is what I do. I purchase the home with a hard money lender and I include the rehab costs into the purchase as a credit on month sided of the HUD or Alta or settlement statement. For example. If I buy a 60k house that should have a value of 100k, then I put into the closing an additional 40k for rehab. The sale is then recorded at 100k. I use some of that 40k as rehab money, tenant the property, and then refinance it with a bank. The appraiser comes by and looks to see what it sold for and then appraised it at market value for 100k. The bank sees what it sold for and gives me a loan for 75% of market value. I may only have 75k into the property. Now of course I could have spent more on the rehab by putting in quartz countertops and golden plated toilets, but I decided that was overdoing it for the neighborhood so I went with basic materials rather than upgraded materials for the rehab.

The end result is I have have been able to BRRRR the property without waiting the 6 month seasoning period.

Brit F. · Answer

@Gary Parilis,

The delayed financing exception is what allows you to skip the 6-month seasoning period, and it requires that your purchase money isn't secured by the subject property.  So, you can absolutely use an existing HELOC as your source since it's secured by a different property that you already own.  And yes, the Refi lender will probably want to send money directly to the HELOC to pay it back.

Don't use private or hard money for long-term financing (not sure if this is what you were suggesting).  You could potentially use private money or hard money for the purchase and then Refi with a traditional lender using the exception, as long as the private/hard source funds aren't secured by the subject property.

Another potential downside for the delayed financing exception is that you can only Refi what you paid for the property.  Meaning, if you used a HELOC to fund both the purchase & rehab, when you Refi, it'll only cover the purchase, but the Rehab amount will still be outstanding.  This also forces you to park extra equity in the property, which you may or may not be comfortable with.

If you want to Refi and get both purchase & rehab costs back, plus squeeze out some the added value, you'll have to wait 6 mo's.

You can definitely use the exception with BRRRR, as long as you're willing to keep a little more equity in each property.  On the other hand, if you're an investor who wants to have max leverage on every property, the exception will work against you.

Brit F. · Answer

@Gary Parilis,

Yes, you're correct on #1 & #2.  As far as doing another HELOC vs the Refi, if you're thinking of doing a HELOC on an investment property, it's possible, but sometimes difficult to find a willing lender.  If/when you find one, hang on to them like they are your best friend.  Lots of threads on BP about HELOCs on investment property.  In contrast, if you're talking about a HELOC on a primary or secondary home, go for it.

And yes, you're correct, on the private/hard money usage with the exception.  But, by the same logic, you could use the cheaper option of a regular cash-out Refi from another property in the same way.  The downside is that it'll take longer to close the traditional Refi, and the loan terms won't be as flexible as private/hard money.  Point being: based on the high cost of private/hard money, just make sure you've exhausted all other options first.

Brit F. · Answer

@Eddie Gonnella,

My understanding is that Gary is weighing the difference between using a CO-Refi/HML vs HELOC from a currently owned property, in order to appear as a cash buyer to acquire a new property.  Following the BRRRR model, if Gary wants a conforming loan as permanent financing on the subject property, the lender must comply with the rules.The rules for conforming loans come from Fannie/Freddy.  Here's a link to Fannie's section B2-1.3-03, which covers CO-Refi's and the Exception.  To summarize:

• If purchase money is secured by the subject property, you have to wait 6 mo's before a CO-Refi.  There's no way around it with a conforming loan.
• The Exception that removes the 6-mo waiting period becomes an option when purchase money is documented cash, unsecured loan, or, in Gary's case, a loan secured by a property other than the subject property.
• In either situation, if any existing loan is used as purchase money, then the CO-Refi proceeds of the new loan must be used to repay the existing loan.  This requirement is clearly specified by Fannie.

If Gary wanted different rules for the permanent financing on the subject property, he'd have to find a lender who offers non-conforming loans (portfolio, private) with more underwriting flexibility, which will be higher priced to offset the risk.

Oliver Carey · Answer

Private Lenders can provide up to 80% Cash Out with a FICO over 700... no seasoning. For Fix & Flips 90% PP 100% Rehab - There are 100% financing options as well if you can secure a property under 65% LTV - You can also establish a LOC equal to 10x your liquidity up to $20M if you will be doing a lot of BRRR deals - PM me for options

Brit F. · Answer

Sure thing, I only mean to suggest that you could pay back a 30-yr mortgage early, just like how you expect to pay back a short-term private/hard money loan asap.  Most people don't because we think of 30-yr loans as permanent financing, but you could pay it back anytime (typically without a prepayment penalty).  In this way, you'd be using a 30-yr mortgage like a hard money loan.  Whether or not it makes sense depends on the cost of financing and terms for each.  It's an unusual application of a 30-yr mortgage, for sure.

To your other question:

"Has anyone actually purchased with HELOC funds and obtained a mortgage soon after, using the delayed financing exception? And if so, can you confirm that mortgage lender paid directly to the HELOC, then you still had full access to the HELOC with no consequences?"Yes, I've done it.  My Refi lender wrote a paper check directly to my HELOC bank, which I hand delivered to them and they applied it to my balance.  I used the HELOC again a short while later.

Annchen Knodt · Answer

Thanks for your post, @Gary Parilis!  Using HELOC funds + delayed financing for BRRRRs is a strategy I'm hoping to use so it's helpful to get some clarification on the nuances.

I wanted to add that from what I hear, lots of folks have had success doing the full BRRRR with the delayed financing exception by including the rehab costs on the closing statement.  Alex Felice in particular wrote a detailed blog post (https://www.biggerpockets.com/…) and spoke about it on episode 301 of the BP podcast - worth checking out!

You might also be interested in this post about another creative way to get around the seasoning requirements: https://www.biggerpockets.com/…

Gary Parilis · Answer

Thanks again,@Annchen Knodt and @Shiloh Lundahl!

@Corby Goade, check out podcast #310. Listen to five minutes starting at exactly 20:00.

Gary Parilis · Answer

@Eddie Gonnella Sorry the link didn't work for you. I have read in multiple places that when you use the delayed finance exception to get a loan on property B, you must document the source of the funds you used to make the purchase. If the source is equity from property A, you must use the new loan to pay back the property A loan.

See discussion with @Brit F. above. Have I misunderstood something, Brit?

Kenneth Garrett · Answer

@Gary Parilis

I’ve used private money for the purchase and rehab.  I have a mortgage or deed of trust and a note with the my private lender.  It’s a cash deal.  I have never had a seasoning issue with this strategy.  If you buy foreclosures some of the banks have seasoning requirements 90 days I’ve seen the most.  All funds feed through the title company.  It works great on BRRRR and flips.

cash-out refi --> BRRRR --> delayed financing... A problem?

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