BRRRR, refinancing hard money to portfolio bank

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BRRRR, refinancing hard money to portfolio bank

Pete Storseth
Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes

Hello BP

I'm planning my first deal based on the BRRRR strategy and I'm stuck. The refinance is key to get cash out in order to repay lenders and be able to repeat.

My question is, when you refinance aren't there a number of obstacles?

1. You have to qualify for the conventional loan to refinance into it.

2. Using local banks that keep loans in house, aka portfolios, still require 80%LTV which means you need to raise the value significantly in order to cash out refi.

3. Its confusing to research, because many investors are refinancing into "portfolio loans " that include multiple properties instead of just one refinanced property at a portfolio lender.

4. Doesn't this put too many properties on your credit to eventually lead to maxing out what banks will do for you? Forcing you to stay with hard money or private money?

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Whitney HuttenPro Member
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
6y

@Pete Storseth BRRRR when done correctly uses the forced equity in the property as the new downpayment on the refinanced loan. Let's keep the math simple:

1. You buy a home below value.  Let's say $50K.  You KNOW when this rehabbed it will have a value of $100K and rent for $1K or higher.

2. You put in a $25K in a rehab

3. Your new value is $100K

4. You tenant the property for $1K a month

5. You go to the bank and ask for a refinance. They will give you 75% LTC (a new loan for for $75K) AND 75% credit of the rent for expenses (PITI + HOA) which is $750 ($1K *75%).

6. Here's the cool part... your expenses (PITI + HOA) are only about $650. NOW you have $100/mth added to your income AND $350/mth cashflow in your pocket, with very little (or none) of your own money in it.

7. You repeat this process, adding income and cashflow to look stronger on every deal.  

Now this is a perfect BRRRR and they are out there. Keep in mind I simplified the math too. Totally doable with the right deal and team!

Podcast Guest on Show How to Build Generational Wealth Without Losing it Along the Way
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  • Alex BekezaBusiness Member
    Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    6y

    @Pete Storseth

    1. You have to qualify for the conventional loan to refinance into it.

    NOPE, commercial loans on 1-4 units have no personal income requirements and base the loan on FICO and subject property cash flow. Plus, unlike conventional loans, they'll allow you to cash out much sooner than 6 months based on new appraised value. 

    2. Using local banks that keep loans in house, aka portfolios, still require 80%LTV which means you need to raise the value significantly in order to cash out refi.

    Correct, you're more likely to actually be limited to 75% Cash Out.  So don't over leverage yourself on the front end. 

    3. Its confusing to research, because many investors are refinancing into "portfolio loans " that include multiple properties instead of just one refinanced property at a portfolio lender.

    There's a confusion here on the dual use of the word portfolio.  There are portfolio lenders which hold/service the loans on their own books rather than selling them on the secondary market vs. "portfolio" loan products which lump multiple properties together. 

    4. Doesn't this put too many properties on your credit to eventually lead to maxing out what banks will do for you? Forcing you to stay with hard money or private money?

    The commercial products I mentioned on #1. have no limit on the number of financed properties you have.  However, yes, you are no eligible for conventional loans once you have 10 financed properties. 

    [email protected]818-606-8823
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    3Reply
  • Pete Storseth
    OP
    Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes
    6y

    @Alex Bekeza

    Thanks

    On #1, I have yet to find a lender to verify this. They always have the DTI issues that any conventional loan product does.

    On #4, then HOW is BRRRR supposed to work?

    0Reply
  • Alex BekezaBusiness Member
    Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    6y

    @Pete Storseth I am the one who just verified it haha. I've done this over 50 times. Find a mortgage broker who does non conventional loans (commercial, non qm, portfolio, etc). Don't expect a rate in the 3s. Rates will be in the high 4 to 5%-6% range (depending on buy downs) but this allows you to scale and affords other luxuries (entity vesting option, short seasoning, etc). On the relatively small loan sizes "most" Midwest/Southern BRRRR deals require I find that this higher rate is 1. Negligible considering the other benefits and 2. Historically excellent anyway.


    On your question regarding #4.  Conventional products have a limit on the number of financed properties you have.

    commercial products (these ARE available on 1-4 unit residential properties) do not! They'll allow you to have as many as you want. This is how BRRRR investors scale passed their conventional limits.

    dive into the BRRRR deal diaries others have shared hear on BP. When there's a will there's a way!

    Best of luck! 

    [email protected]818-606-8823
    Investor Property Loan5306 Reviews
    WebsiteView Page
    4Reply
  • Whitney HuttenPro Member
    Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    @Pete Storseth BRRRR when done correctly uses the forced equity in the property as the new downpayment on the refinanced loan. Let's keep the math simple:

    1. You buy a home below value.  Let's say $50K.  You KNOW when this rehabbed it will have a value of $100K and rent for $1K or higher.

    2. You put in a $25K in a rehab

    3. Your new value is $100K

    4. You tenant the property for $1K a month

    5. You go to the bank and ask for a refinance. They will give you 75% LTC (a new loan for for $75K) AND 75% credit of the rent for expenses (PITI + HOA) which is $750 ($1K *75%).

    6. Here's the cool part... your expenses (PITI + HOA) are only about $650. NOW you have $100/mth added to your income AND $350/mth cashflow in your pocket, with very little (or none) of your own money in it.

    7. You repeat this process, adding income and cashflow to look stronger on every deal.  

    Now this is a perfect BRRRR and they are out there. Keep in mind I simplified the math too. Totally doable with the right deal and team!

    Podcast Guest on Show How to Build Generational Wealth Without Losing it Along the Way
    6Reply
  • Bryan MartinezBusiness Member
    Lender · Austin, TX · Member since 2019 · 22 posts · 6 votes
    6y

    @Pete Storseth

    Great responses from everyone so far. Alex was right on point with everything he said. There are a lot of lender options out there, traditional lenders(DTI and income based), hard money lenders(short term, high interest rehab loans), private capital(Debt service coverage*DSCR ratio and credit based) and commercial lenders.

    Traditional lenders will cap you at 10 properties, however, you may get capped before that because of DTI. A lot of new investors like to start off this way because they have the lowest fee's and rates.

    Hard money lenders are one of the few lenders that will help you buy distressed properties and rehab them. There are other options for this but this is one of the quickest options. 

    Private Capital lenders can usually do long term financing on rentals. So they are comparable to traditional lenders but easier because they are not income based. They are DSCR based. Since they are DSCR based it is a riskier loan for the lender which is why you have higher rates and fee's with these types of lenders. Typically they don't report to your credit file so they help keep you DTI low.

    I would recommend calling several types of lenders and vetting them out. Get a feel for there minimums, max LTVs, seasoning requirements. Seasoning requirements is a big one! If you have a short term high interest loan on a rehab, you want to be able to get out of that right away. The longer you sit in that the more profit you lose. The more you know about what is available the more educated choices you can make about your next property. If the numbers don't work don't be afraid to pass on the deal. 

    [email protected]737-217-1592
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    1Reply
  • Pete Storseth
    OP
    Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes
    6y

    @Alex Bekeza

    I will keep calling credit unions and small banks. Thank you

    0Reply
  • Pete Storseth
    OP
    Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes
    6y

    @Whitney Hutten

    Your example didn't have a cash out refinance. Isnt it possible to increase the LTV with a modest rehab budget, and get both cash out and a lower monthly payment if I'm willing to take the longer term?

    0Reply
  • Pete Storseth
    OP
    Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes
    6y

    @Bryan Martinez

    Thanks I'll keep reaching out to both small banks and hard lenders. I wan at least 5 of each in my pocket for the deals I'll pursue in the near future.

    0Reply
  • Pete Storseth
    OP
    Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes
    6y

    My current issue, 24k annual income, no real landlord experience.

    My strengths, low debt-low enough to payoff half in next several months, resiliency-I did door to door for almost 10 years, good credit-700+, time, energy, passion.

    My goals...

    BRRRR with a twist. Ideally screening tenants who aren't just ideal for renting, but responsible enough to buy someday. After refinancing, offer tenants owner finance and wrap my own mortgage, collecting a 10% down payment on the new ARV. This with the refinance could get me enough to scale into a bigger deal for the next one, if not multiple properties.

    House Hack, when I do move, I will definitely house hack to reduce or eliminate the housing expense.

    My Dream Deal. Multi-family with half long term rental, half short term. The short term unit will double as a AirBnB/VRBO and a personal vacation home. I want to do this locally in Houston and also in Austin. Eventually, other desirable locations as well.

    0Reply
  • Pete Storseth
    OP
    Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes
    6y

    How the heck will I do this with 24k a year?

    1. Pay off half my loans

    2. Get a new job as a mortgage loan officer or property manager, either should increase salary to 35-50k minimum. (DTI from a single cash flowing property at 200/mo and cutting 200 off my monthly debt should do the trick)

    3. Save every penny of profit, cashouts, down payments to invest in next property.

    0Reply
  • Pete Storseth
    OP
    Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes
    6y

    Or I could just do my first deal seller finance, keep my low paying job that's flexible with me doing this on the side.

    Problem there is it narrows my marketing to only landlords. But that is laser focus!

    0Reply
  • Kyle Altenau
    Tinton Falls, NJ · Member since 2020 · 108 posts · 85 votes
    6y

    If you are new to investing, I can't stress this enough. You should work with a commercial real estate broker in your area. Do you research to find the best as they certainly are not all great. But a good CRE broker in your area will be able to listen to the deals you have, the goals you have and then immediately think of at least 5 banks that'd be best to approach with your loan. Typically they'd put together a package to present it to the lenders professionally and help get you the absolute best deal. As you gain experience you may decide it's no longer necessary, but in the beginning it will definitely end up saving you a lot.

    In regards to the finding tenants that will one day buy the property, I'd scrap this plan. When the renovation of the property is completed you want to fill it with a qualified tenant as quickly as possible. You may end up waiting a very long time until you find the right tenant to one day by it. You want to keep this method as simple as possible. The key factor here is the velocity behind your capital. You want the money you put down back in your pocket (through refinance) and used as down payment for another property as quickly as possible. Keep it simple. Build a quality team. And execute. 

    2Reply
  • Whitney HuttenPro Member
    Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    @Pete Storseth You can do a cashout refi if the deal is good enough.  And you have to wait out potential seasoning requirements.  I've done that a couple of times.  However, most projects I work on are B-class mid-level rehabs where there isn't that much spread.  It can be done.  Be ready to solve large problems!

    Podcast Guest on Show How to Build Generational Wealth Without Losing it Along the Way
    0Reply
  • Pete Storseth
    OP
    Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes
    6y

    @Kyle Altenau

    Thanks that broker will definitely be invaluable.

    The wrap around/ tenant buyer is just my exit strategy, I know it's not gonna be so lucky to get day one. Thanks Kyle

    0Reply
  • Pete Storseth
    OP
    Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes
    6y

    @Whitney Hutten

    That's what we do! Solve problems

    0Reply
  • Pete Storseth
    OP
    Investor · Houston, TX · Member since 2019 · 274 posts · 61 votes
    6y

    Found a lender, recommended by my realtor friend. They're on BP too.

    They will finance purchase of 80% plus rehab costs under 30k, then cashout refinance into 30 yr after 91 days provided its rented with a lease. The cashout would be all the upfront costs, and they'll do it 3 times a year. Then, they have a lower interest, portfolio loan that will consolidate 5 loans into one.

    BRRRR, perfected.

    0Reply
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