brrrr refi help please

[Skyler Mckinney]

So I am looking for a house to brrrr and I decided to be responsible for once instead of just jumping into something and made sure that I would be able to refinance out of a deal before I jumped into some hard money I wouldn't be able to escape from. I called the two banks I have relationships with and they both told me that they take debt to income into consideration when doing the refinance. I own a primary residence and a couple cars that put my DTI at over 50% and would not be able to refinance. I have done some research and I'm just wondering if there's something I'm missing here. How am I supposed to refinance if I don't qualify for it? Is there a specific loan type I should be using or a specific bank I should be using. Please help as I was planning on starting my real estate investing career with a BRRRR so I would have money to fund my next deal. I'm not opposed to just flipping but it's not a good idea without an exit strategy.

[Kevin Romines]

Not sure what the other banks are doing but it sounds like their guidelines or overlays are really strong and prohibitive of doing certain kinds of business? What I mean by that is that your refinance is most likely going to be with a Fannie Mae or Freddie Mac  program, if you want the best rates and terms. With that said, Fannie Mae and Freddie Mac will allow you to use rental income from the moment it begins. Even if the property is vacant, you can still use the rental income of that property as the lender will get that info. from the appraisal (rental comp. analysis)  that is being done for the refinance. See the image below for the actual Fannie Mae Guidelines. 

A properly structured BRRRR property is designed to give you instant equity once the rehab is done, its also designed to cash flow much better than buying a home that needs no repairs and is rent ready. So if the calculations are done correctly on these deals, they should be throwing off as much as several hundred dollars per month in cash flow?

The best practice is to know the formula that Fannie Mae uses in determining rental income. And that formula is (Gross rents X.75% Minus PITI = Net profit or loss) so lets use some numbers in that calc. (Gross Rents 1500.00 X .75 = 1125.00 Minus PITI of 1000 = Net profit of 125.00). If the number is a negative number, then it gets added to your debt ratio. If the number is a positive number, then its gets added to your income.

In most cases, the average rental will not add much to a persons debt, but it could a few hundred to the income as well? So with proper planning, you can identify houses that will meet the criteria and after careful calcs, will add dollars to your income column and not add them to your debt column. 

Find a lender that doesn't have any overlays on Fannie Mae's guidelines for counting rental income. Sit down with them and discuss your plans and work through the details in advance. Then when you feel that you have identified a property that calcs. out well, shoot that property to them with the estimated ARV and estimated rents and have them run the refinance scenario on that home. If you end up good, then go forward. For Loan Officers that like to work with investors, and not all do and not all are familiar with the basic calcs and how to properly do them, you will then have a strong player on your team that can deliver the kinds of refinances you will need on all your deals.

Lastly, When considering a BRRRR you always want to have 2-3 exit options. Option 1 - Rent it out. Option 2 - Sell it and get the profits. Option 3 - Lease Option it out - Get the option money, get a higher than market rent, and get a higher than today's value on the sales price of the home.

I hope this helps?