BRRRR Financing in Huntsville / Birmingham, AL
Rental Property Investor · NYC · Member since 2018 · 25 posts · 3 votes
Hi All,
I am diving in this month and taking steps to BRRRR my first rental property in Huntsville and/or Birmingham, AL before the end of the year (hopefully sooner). First step is to secure financing and then on to building a team. Flight booked for last week of August for face to face meetings.
My Plan is to obtain a HELOC on my home to purchase properties in cash then convert to a Cash-Out Refinance after seasoning period.
Although I have heard of using a HELOC as a source of short term financing I have not specifically heard anyone speak of using with BRRRR specifically. When it comes time to obtain Cash-Out Refinance I will have a HELOC with a total credit line of $400k and roughly $120k (or less) on loan (purchase price + rehab). I'm aiming at $400k because I should qualify for this amount and want to be able to have ability for simultaneous deals in the future.
My question is, will lenders view the HELOC negatively even though the intention is to pay off using the Cash-Out Refinance? Are there any other limitations on this financing strategy I may be overlooking? Thanks in advance!
Hi All,
I am diving in this month and taking steps to BRRRR my first rental property in Huntsville and/or Birmingham, AL before the end of the year (hopefully sooner). First step is to secure financing and then on to building a team. Flight booked for last week of August for face to face meetings.
My Plan is to obtain a HELOC on my home to purchase properties in cash then convert to a Cash-Out Refinance after seasoning period.
Although I have heard of using a HELOC as a source of short term financing I have not specifically heard anyone speak of using with BRRRR specifically. When it comes time to obtain Cash-Out Refinance I will have a HELOC with a total credit line of $400k and roughly $120k (or less) on loan (purchase price + rehab). I'm aiming at $400k because I should qualify for this amount and want to be able to have ability for simultaneous deals in the future.
My question is, will lenders view the HELOC negatively even though the intention is to pay off using the Cash-Out Refinance? Are there any other limitations on this financing strategy I may be overlooking? Thanks in advance!
Hey Stefan! What you are describing (HELOC --> BRRRR) is exactly what my partner and I are doing in the Huntsville market. Please feel free to reach out if you have any specific questions on the process, but I can tell you that generally, I have not run into any problems with using a HELOC and then 6 months later refinancing the property on a conventional loan. My HELOC payments on a 50K balance are only $100 a month, and that is what the bank takes into account when they run your debt-to-income ratio. For us it has been a fantastic strategy to jump-start our investing journey, we went from 0 -> 6 units starting with basically no money other than the HELOC. My HELOC is from a local bank out here in Cali but if you need a few recommendations on refinancing lenders hit me up with a direct message.
If you want to take a look at an in-dept description of what we are doing here is the link.
https://www.biggerpockets.com/forums/223/topics/685820-first-brrr-complete-details-pictures
Thanks for the mention Caleb!
-James
As @Alexander Felice says to me, "It's an aggressive product."
I would venture a guess that there is a lender, or three, out there who will do delayed financing with a HELOC. I can't speak specifically about one but I'd bet they are out there.
Line the financing up before you go after a property and be specific with the lender about what you plan to do. You don't want to acquire a property, rehab it, rent it, and then have the bank refuse to refi, leaving you with a long term HELOC payment.
Good luck!
We've been doing exactly what you are looking at. When using the delayed financing exception, our refinancing lender was limited to refinancing based on the purchase price of the home and not the appraised value of the home after repairs. They also repayed our HELOC directly (Not ideal for a Brrrr deal).
If you are doing a Brrrr you are looking for a cash out refinance using the appraised value of the home and not going out of your way to disclose the HELOC was the source of the funds to buy and rehab the property (I don't think they will ask). HELOC will count against DTI just like any of your debt will, so make sure you talk to your lender's underwriting department to make sure you will qualify with added debt service. We were confident we would still qualify so we skipped that step, but make sure you are cautious before sticking yourself with something. After your cash out refi you will have laundered (for lack of a better term) HELOC money sitting in cash in your bank account which frees it up to be 20% down payment. If you are confident you can cover all of your investments with cash, you can repay your HELOC and then draw on it for the next deal if that is preferable for you. We are just paying down the HELOC using our W-2 income and keeping the cash available so we have the option of using it as a down on a larger project if it comes up.
Are you describing the seasoning period as the time HELOC funds sit in a bank account to resemble the rest of your cash assets or the time you own the property before a lender will refi based on your appraised ARV?
When you go to refi, the bank will pay the HELOC if they don't feel comfortable giving it to you. In really tight situations they may make you close it. They will know the HELOC is for the home purchase because they are going to source the funds.
run your plan by the lender in detail before you buy anything, this way you aren't guessing what will happen.
delayed finance is 75% LTV or 100% HUD1 whichever is lower
@James Gates you should throw some feedback on this thread since you're doing this right here in Huntsville
@Neil Henderson
Thanks for the feedback. Your definitely right. I don't want to be caught holding onto an ARM long term because I can't get approved for the Refi. Until now I was planning on working with separate lenders for each loan. But it might be a safer bet to search out a lender who is willing to do it as a package deal.
Does this move me into the “Creative Financing” category?! Haven’t ventured into that part of the forums yet...
Yes, I would say this qualifies as "Creative Financing". Good luck. Keep us all posted about your journey.
When you go to refi, the bank will pay the HELOC if they don't feel comfortable giving it to you. In really tight situations they may make you close it. They will know the HELOC is for the home purchase because they are going to source the funds.
run your plan by the lender in detail before you buy anything, this way you aren't guessing what will happen.
delayed finance is 75% LTV or 100% HUD1 whichever is lower
Hi All,
I am diving in this month and taking steps to BRRRR my first rental property in Huntsville and/or Birmingham, AL before the end of the year (hopefully sooner). First step is to secure financing and then on to building a team. Flight booked for last week of August for face to face meetings.
My Plan is to obtain a HELOC on my home to purchase properties in cash then convert to a Cash-Out Refinance after seasoning period.
Although I have heard of using a HELOC as a source of short term financing I have not specifically heard anyone speak of using with BRRRR specifically. When it comes time to obtain Cash-Out Refinance I will have a HELOC with a total credit line of $400k and roughly $120k (or less) on loan (purchase price + rehab). I'm aiming at $400k because I should qualify for this amount and want to be able to have ability for simultaneous deals in the future.
My question is, will lenders view the HELOC negatively even though the intention is to pay off using the Cash-Out Refinance? Are there any other limitations on this financing strategy I may be overlooking? Thanks in advance!
Hey Stefan! What you are describing (HELOC --> BRRRR) is exactly what my partner and I are doing in the Huntsville market. Please feel free to reach out if you have any specific questions on the process, but I can tell you that generally, I have not run into any problems with using a HELOC and then 6 months later refinancing the property on a conventional loan. My HELOC payments on a 50K balance are only $100 a month, and that is what the bank takes into account when they run your debt-to-income ratio. For us it has been a fantastic strategy to jump-start our investing journey, we went from 0 -> 6 units starting with basically no money other than the HELOC. My HELOC is from a local bank out here in Cali but if you need a few recommendations on refinancing lenders hit me up with a direct message.
If you want to take a look at an in-dept description of what we are doing here is the link.
https://www.biggerpockets.com/forums/223/topics/685820-first-brrr-complete-details-pictures
Thanks for the mention Caleb!
-James
@James Gates I'm very interested in hearing what CA lender gave you a 2.4% rate HELOC. What is the LTV? I'm going to close soon on a $60k HELOC at 6.5% and 80% LTV. It's not my primary so I expect a little higher rate, but 2.4% is phenomenal.
We've been doing exactly what you are looking at. When using the delayed financing exception, our refinancing lender was limited to refinancing based on the purchase price of the home and not the appraised value of the home after repairs. They also repayed our HELOC directly (Not ideal for a Brrrr deal).
If you are doing a Brrrr you are looking for a cash out refinance using the appraised value of the home and not going out of your way to disclose the HELOC was the source of the funds to buy and rehab the property (I don't think they will ask). HELOC will count against DTI just like any of your debt will, so make sure you talk to your lender's underwriting department to make sure you will qualify with added debt service. We were confident we would still qualify so we skipped that step, but make sure you are cautious before sticking yourself with something. After your cash out refi you will have laundered (for lack of a better term) HELOC money sitting in cash in your bank account which frees it up to be 20% down payment. If you are confident you can cover all of your investments with cash, you can repay your HELOC and then draw on it for the next deal if that is preferable for you. We are just paying down the HELOC using our W-2 income and keeping the cash available so we have the option of using it as a down on a larger project if it comes up.
Are you describing the seasoning period as the time HELOC funds sit in a bank account to resemble the rest of your cash assets or the time you own the property before a lender will refi based on your appraised ARV?
Thanks for your response. Did your Refi lender lend on purchase price of home or LTC (including cost of home+rehab)? Did you source both loans from the same lender for your property and the lender essentially pay themselves back to close out the HELOC?
I'm not quite following when you say "...HELOC money sitting in cash in your bank account which frees it up to be 20% down payment." It sounds like you used your HELOC for down payment and not for full purchase price.
The seasoning period I am referring to is time owning property prior to Refi.
When you go to refi, the bank will pay the HELOC if they don't feel comfortable giving it to you. In really tight situations they may make you close it. They will know the HELOC is for the home purchase because they are going to source the funds.
run your plan by the lender in detail before you buy anything, this way you aren't guessing what will happen.
delayed finance is 75% LTV or 100% HUD1 whichever is lower
Thanks. Do you think there is an advantage or need to obtain each loan from the same lender? I'm starting to think this might be a less risky path but at the same time ma ybe difficult to find a NY credit union willing to finance a 30yr morgage in AL or if an AL credit union will consider a HELOC on a house in NY.
Have you tried a commercial lender? Rates are higher but it's asset based and not on your DTI.
I have not. But thanks for the additional option!
Hi All,
I am diving in this month and taking steps to BRRRR my first rental property in Huntsville and/or Birmingham, AL before the end of the year (hopefully sooner). First step is to secure financing and then on to building a team. Flight booked for last week of August for face to face meetings.
My Plan is to obtain a HELOC on my home to purchase properties in cash then convert to a Cash-Out Refinance after seasoning period.
Although I have heard of using a HELOC as a source of short term financing I have not specifically heard anyone speak of using with BRRRR specifically. When it comes time to obtain Cash-Out Refinance I will have a HELOC with a total credit line of $400k and roughly $120k (or less) on loan (purchase price + rehab). I'm aiming at $400k because I should qualify for this amount and want to be able to have ability for simultaneous deals in the future.
My question is, will lenders view the HELOC negatively even though the intention is to pay off using the Cash-Out Refinance? Are there any other limitations on this financing strategy I may be overlooking? Thanks in advance!
Hey Stefan! What you are describing (HELOC --> BRRRR) is exactly what my partner and I are doing in the Huntsville market. Please feel free to reach out if you have any specific questions on the process, but I can tell you that generally, I have not run into any problems with using a HELOC and then 6 months later refinancing the property on a conventional loan. My HELOC payments on a 50K balance are only $100 a month, and that is what the bank takes into account when they run your debt-to-income ratio. For us it has been a fantastic strategy to jump-start our investing journey, we went from 0 -> 6 units starting with basically no money other than the HELOC. My HELOC is from a local bank out here in Cali but if you need a few recommendations on refinancing lenders hit me up with a direct message.
If you want to take a look at an in-dept description of what we are doing here is the link.
https://www.biggerpockets.com/forums/223/topics/685820-first-brrr-complete-details-pictures
Thanks for the mention Caleb!
-James
Hi James. I did read your discussion when you originally posted a few months back. Very inspirational!
So you did not have a lender lined up until you were well into the process. I will definitely check with lenders but as I am looking to obtain a line of $400k, I am wondering if the Refi lender (if not the same as the HELOC lender) will take into account just the $100k or so on loan at that time or the entire available line. If the Refi lender potentially forces the closure of the HELOC (as @Alexander Felice noted was a possibility above) that will be another hit as there are typically fees associated with lines closed within 36mo of opening.
I will PM you direct on more specifics. Really appreciate the response.
Thanks to @Caleb Bryant for linking James to this discussion!
So we've used proceeds from our HELOC 3 times to date.
1) We purchased and did minor repairs to a property. Wrote home equity checks to ourselves and wired the money into the title company. We immediately financed the property 80% of the purchase price using the same lender as our HELOC lender and they wired the funds to themselves because it was a delayed financing exemption. We also had to write a letter to underwriting explaining where the funds originated and that we wanted them to put them back.
2) We purchased a property cash and rehabbed it in the same manner as previously except we refi'd as soon as the rehab was complete. Cash out refi'd for 80% of final appraised value ~105k (total project cost was ~85K) closed about three months after we acquired the property and noone asked where the funds came from to purchase the house although our strategy was disclosed to the loan originator and the VP of Mortgage Lending of that credit union (It's a non conforming lender) prior to our application. Proceeds were wired to us instead of direct to the HELOC lender so we turned around and bought the next property direct out of our checking account this time.
3) We had loans approved from conforming and non conforming lenders on our third purchase two months after we acquired it but the other instances were the same as number two. Neither lender was the HELOC lender, because the HELOC lender requires 6 months between the acquisition and cash out refi for appraised value.
There are lenders that don't require a delay between taking ownership and lending.
HELOC proceeds can't be used as a down payment because every bank asks if any portion of the down payment is borrowed. My comment about HELOC money sitting as cash in a bank account just refers to keeping the money rotating in and out of deals instead of repaying it and borrowing constantly from the HELOC. That way, if a situation ever came up to buy some MF or monster SF property that was out of your range in cash, you would have the option to acquire a property with financing without having to season the HELOC funds in a checking account and. That was just what was right for us. If you are confident you won't get lured into something out of your cash price range, that would actually become a disadvantageous strategy if I'm objectively providing advice on account of unnecessary interest payments
@James Gates I'm very interested in hearing what CA lender gave you a 2.4% rate HELOC. What is the LTV? I'm going to close soon on a $60k HELOC at 6.5% and 80% LTV. It's not my primary so I expect a little higher rate, but 2.4% is phenomenal.
Hey Nathan, the lender I used gave me 1.99% for the first year, 90% LTV, $800 closing costs. PM me if you want the lender!
@Todd Rasmussen
This is all very helpful. I appreciate the time you took to explain your path forward.