BRRRR with 80% of LTV or LTC, whichever is lower?

Question

Hi everyone,

My understanding of the BRRRR method doesn't seem to be aligned with what I'm getting from the 5 portfolio lenders I've talked to in Arkansas. I'm being told by everyone that they will lend 80% LTV OR Loan to Cost, whichever is lower. This makes it impossible to pull ALL cash out and REPEAT with my initial capital as they want some "skin in the game".

Am I talking to the wrong people or was I under the wrong impression that BRRRR's involve all cash out based on solely 75% or 80% ARV?

Thanks for your help!

Heath Ryans · Answer

@Jeremy Bohnett yes. The concept behind it is to use money, yours or other peoples, to purchase the property. Whether that be with cash, private money, or a standard loan. You do the rehab and place a tenant. Your overall costs should be less than 80% of the ARV. After you have completed all these steps, you refinance. If your deal is good enough, you pull out everything you had in the deal as well as some to pocket.

Jared McCullough · Answer

I actually have a partner so we were really trying to avoid putting anything in personal names so LLC was a big sticking point for us. Your are going to struggle to find anyone to give you conventional loan rates on a LLC. The loan we are looking at is a commercial at 5.6% with similar to as you mentioned a 5 year reset.

Both organizations I looked into never once even suggested using purchase price it was always based on appraised value. This is a win/win for me because although yes I have to get an appraisal it also offers me some validation in the asset value of my portfolio  (i.e. albeit I am not a huge fan of the process and think its worthless but it is something that is professionally done).

I spoke to quite a few credit unions none of which were interested in loaning to LLC. This being said they had some great rates for personal HELOC's which would have been the route I went had I been doing this alone.

Jared

Heath Ryans · Answer

@Jeremy Bohnett most lenders will refi up to 75-80% LTV after you have rehabbed the property and have a tenant in place. You don’t need a portfolio lender for a single property.

Victor S. · Answer

also, if you want to pull out most of the cost before 6 months, refer to this delayed financing strategy discussed here:

https://www.biggerpockets.com/forums/578/topics/59...

Jaron Walling · Answer

This isn't a problem unless the deal was bad to being with. If you're all in costs ended up at 75-80% of ARV, you won't have "cash" in the deal. It should be equity you achieved when doing the remodel.

Some people end up with money in the property. If it's a bad deal you can throw the BRRRR strategy out the door but that's just my take on it.

Jeremy Bohnett · Answer

Thanks to a fellow BP member, I think I found my lender. Here we go:

“To summarize our conversation I would like to see 10% of cost into the first deal or two. Assuming we are at 80% LTV or better based on the “as completed” value of the property after improvements.  After we have a couple under our belt and I have a chance to see how you guys operate we can look at moving to less cash down and base it off of LTV solely. Approximate terms are as follows:

80% LTV of appraised “as completed” value

6.0% interest rate

6-9 months of interest only period to make improvements and lease property

Converted to P&I payments for total of 60 month balloon based on 240 month amortization“

Brent Grinnell · Answer

@Jeremy Bohnett You are correct. Most lenders will only do 75-80% LTV on initial purchase based on purchase price. It’s on the refi after purchase where you can use the BRRRR method because the value is based on appraised value, not purchase price. In a perfect world this would be much higher than your initial purchase price, thus allowing you to pull your initial cash investment back out. Does that make sense?

Brent Grinnell · Answer

Scratch that. Didn’t see all of the other replies before I posted. My bad

Jaysen Medhurst · Answer

@Jared McCullough, @Jeremy Bohnett, there's a difference between "holding title in" and "loaning to." Loaning to an LLC is much more difficult, conventional loans are out the window, and most CUs won't be interested. Additionally, if the LLC doesn't have at least 2 years of profitable returns to show viability, it's going to be tough.

Holding title in a LLC is different, which is what Jared's partner is, rightly, concerned about.

I spoke with Allanach Mortgage today, who services mortgages for CUs, and they were open to holding title in the LLC. I'm waiting to hear back from the underwriter if I could do that from the get go, or have to wait and transfer title after closing.

Jeremy Bohnett · Answer

Thanks @Heath Ryans @Jared McCullough and @Jaysen Medhurst!

Jared, what type of loan are you obtaining? Commercial or a loan from credit union similar to what Jaysen is referencing?

And in regards to the credit union route, has anyone heard of credit unions loaning to LLC's?

BRRRR with 80% of LTV or LTC, whichever is lower?

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