Concerning BRRRR-why not finance before buy and then refinance?

Question

I understand that if you buy a property in cash, rehab it, and then take out a loan against the property, you take more money back out because of the greater value of the property after rehab. Is it not possible to take a loan on the property in order to buy it, rehab it, and then refinance the loan against the higher value of the property? Is this not something that's possible, or easily done? My understanding of loans and financing is pretty limited.

Eric James · Answer

Local banks will usually fund these purchases with their portfolio/commercial loans.

Greg Scott · Answer

If you pay cash for a property, you have to wait 6 months to do a cash-out refi.  You also have to have a lot of cahs.  You could also do delayed financing, but that will only lend you 75% of the purchase price, not the rehab, then you need to wait 6 months to get the rest through a cash-out refi.  Not a great strategy.

Alternatively, you could use a private / hard money loan to buy & rehab and then just convert to a rate & term refi as soon as the work is done and a tenant is in place.  With that strategy you minimize your out of pocket up-front and then don't have to wait for a refi.

Jay Hinrichs · Answer

your alternate was how 90% of all turn key was sold in the mid west and upper mid west pre GFC.. I started in Detroit in 2002 doing this exact same thing as the HML to the buyers from Los Angles..  in those days no seasoning at all.. and of course the buyers who bought into our program were in the home completely renovated at 65% ARV.. the 75% ARV loan dropped and they would get some cash back 5 to 10k per house we usually had them buy 4 at once.. and cash flow that was common and acceptable in those days was 100 a month positive.

So they had to put 1k down on my loan  then they got back cash at close and had 100 a month positive.  our average HML lasted 91 days.

we would not make the HML unless the borrower was fully underwritten and pre approved with ARV appraisal in hand.. so then we just needed a 442 for the refi to go through.  In those days investors were pay 80 to 130k for the homes fully renovated.. this was pre 08.. And of course many of them fell in value after 08.. By quite a bit so the investors were underwater big time on this no money down BRRR strategy.

Along with rent collection issues and of course the 5 to 10k cash back was to be used for reserves.. but 90% of the buyers never thought about reserves and the next thing you know they bought a new Jet ski or car or took a trip.. so that left a lot of very week landlords going into the GFC and well you know the rest of the story foreclosures by the thousands in Detroit investors failing.. double whammy  underwater on mortgage inadequate reserves. And it was not just Detroit most markets mirrored this.. Atlanta was even worse in some areas.

Annchen Knodt · Answer

@Steven Marks one reason why people who really try to maximize the BRRRR strategy don't make the initial purchase with a conventional loan is that they are often looking for properties that need a lot of work (and so provide the opportunity to add a lot of value), and banks won't lend on these distressed properties.  Hence the use of cash, hard money, private lenders, etc.

Tony Gorokhovsky · Answer

I only buy all cash when I’m getting 10-20%  discount otherwise makes more sense to leverage right away

Max T. · Answer

@Steven Marks

2x closing costs

Condition of property may not work for the buyers desired loan product.

Can get a discount when buying cash.

Tony Gorokhovsky · Answer

@Steven Marks

95% of the deals I’ve done have been buy cash, fix it and then either sell or refi.

Unless your a seasoned vet the bank will never give you money on an empty property to rehab. The risk is too big for them and their not the business of taking back properties.

Corby Goade · Answer

This doesn't apply if you are using HML or PML, but if you use your own cash, you don't have to pay lender fees twice.

Michael Kinsella · Answer

The latter scenario you describe of financing the purchase and rehab and then performing a cash-out refinance is quite frequently practiced.

Often, an investor will get a loan for the purchase and rehab of the subject property, and then (after seasoning) cash-out refinance using a traditional bank loan.

Concerning BRRRR-why not finance before buy and then refinance?

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