BRRR Method - Refinance

[Siedda Herbert]

Hello BP Members, 

I have a question about the refi part of the "BRRR Method." I am having trouble understanding if I should do a residential or commercial refi. I am buying the property under an LLC. I spoke with a broker, and she stated because I am buying under an LLC that it would be a commercial loan. Is this true? I am confused, because I thought commercial loans were for big MFR projects (5+ units). I am buying a duplex in Baton Rouge. My goal is to obtain 57 units this year, so I want to position my set for the best success possible when it comes to refinancing.

Also, How should I go about calculating my numbers based of the LTV for the refi, which is my exit strategy. How do you run your numbers if you are dong the BRRR Method? I have an investor friend whose duplex on the same street appraised for $114k in 2015. Should I go off of this or the recent comps? I am buying the property using a hard money lender, but the seller is doing an owner finance option with me. Purchase price will be $15k, rehab cost $50k, closing cost fee, appraisal fee, etc.

[Brandon Johnson]

Hey @Siedda Herbert, don't let the nomenclature trip you up. I used to think the same thing until I realized it was nothing more than terminology. I have commercial loans on single 2 bedroom townhouses strictly because I obtained the loans through small portfolio lenders and hold title in my LLC. They are known as commercial loans and can be used for financing what you and consider residential real estate. I'll outline several reasons these commercial loan products from small portfolio lenders work better for me in my business.

I do not use conventional government backed mortgages. All of those loans must adhere to the same basic rules from what I understand and here are the ones that keep me from using them in order of importance.

1. 180 days seasoning required. This is the biggest because it says I have to own the property for six months since purchase before I can qualify to refinance it and actually obtain that mortgage. That would have really slowed me down since my credit lines would have been tied up longer and kept me from refinancing and buying more properties.

2. Cash reserves equal to 6 months PITI for the subject property are required at many banks.

3. Higher LTV requirements. You can usually borrow 80% LTV on single family, but in most cases you can only borrow 75% for a duplex and 70% for a fourplex. None of my early multifamily deals had enough equity to make it on that criteria. While I prefer to buy deals with that kind of equity, I did pay more early on in exchange for some creative financing options that I paid up in order to access them.

4. Limit of 4 or 10 loans or whatever the rule is these days. I hear conflicting info on what the limit is, but I didn’t want to be limited. I have two of these loans already; one being my old residence (currently rented) and the other being my current residence which will become a rental one day in the future.

5. If you purchase or own the property in a business entity such as LLC, there aren't many banks that will make a 30 year Fannie/Freddie loan for rental property. That would have to be a commercial loan in most cases.

Small community banks and portfolio lenders do not have to play by these same rules. And while the max loan is usually only 20 years, it is much easier to get those loans and I am building strong relationships with several of these lenders. Now that they are familiar with me and my business it is pretty easy for me to apply and get approved quickly for new loans with a simple email with the details of the deal. Other benefits are that they can be much more flexible. I have refinanced properties without the need for an appraisal, they can often close in as little as two weeks if necessary (show me a conventional lender / big bank that will do that; in fact they sometimes are the reason your closing gets delayed), and once they know you they don’t require you to go through all the same hassle everytime you need a new loan after the first one is established. It’s the relationship you can develop with them that makes it work so well.  The Baton Rouge banking market is full of these type of portfolio lenders.

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