Thoughts on this refi?

Question

Hi everyone!

About to do my first purchase which will be a BRRRR.
PP of 55k cash, repairs ~$13k. ARV ~70k. Rent for ~$750. Cash flow around $400/month.

Local portfolio lender (loan stays in-house) I'm talking with has NO seasoning period. Here are their terms:

75% LTV, 5% interest amortized over 20 years, but must refinance remaining loan every 5 years with them.

In this particular case, they are saying that loan amount would be $52,500; estimated payment would be $350/month at 5% based on a 20 year amortization. A 15 year amortization would be $415.00.

I would ideally like to consider 30-year amortization, but that would likely have to be with a conventional lender who will have a 6-12 month seasoning period?

Also, if I am refinancing every 5 years, it seems that most of what I have paid thus far would be interested, and minimal would be to principal. How long would it actually take to pay off the $52,500?

Thank you!

Lisa Eckman · Answer

@Kahren Aydinyan I've never seen a clause that says you MUST refi WITH THEM every 5 years. I think you're just talking about a balloon pmt in 5 years, but you should be able to refi with anyone. I doubt that's even legal (to require you go thru them again). With regard to 15, 20 year vs. 30 year, etc. I would lean towards 30 year. Pmts will be less, no need to refi (which will cost you - in one way or another). If you CHOOSE to make additional principal pmt, no pre-payment penalty, but it is your choice to pay it down faster if you want to. Also, keep in mind that if you refi, it DOES cost money (even a "no-cost" refi), and you will probably be adding on to the term and therefore paying more over the cost of the loans you have for the property. If that doesn't make sense, let me know and I'll give some examples. And my first thought too was what @Jaysen Medhurst said - 68K all in for 70K ARV. BUT, it is a step in getting your first property. It will be a learning experience, and if you can cash flow for $350, that's what makes this project worth doing. With only 2K difference in value, it would be all about cash flow. Just be careful you consider the costs of your loan(s) including refi's. AND the cost of the $ you have tied up in this project that you cannot use to invest elsewhere.

Kahren Aydinyan · Answer

@Lisa Eckman Thank you Lisa! Yes it's all about cash flow for now. All in will actually be closed to 65k or so. I'm predicting a 70k ARV, but may be higher.I actually got a hold of a few conventional lenders, and they aren't doing any cash-out refi's at this time due to COVID :(. We'll see what happens in the next couple months.

Kahren Aydinyan · Answer

Yeah it's considered a commercial loan. Just not sure if I should do it this way or get a conventional cash-out refi.

Wayne Brooks · Answer

Typical commercial terms but you don’t have to refi with Them....just pay it off somehow after 5 years (balloon).

Kahren Aydinyan · Answer

There aren't really any 70k turn key properties where I'm looking. It's essentially a 1% deal, which is as good as it gets here from the MLS. I understand it's not a full-on BRRRR, and I can't pull 100% of the value out. We decided on some upgrades for this property that will bring the value up and rents up, which drove the reno cost up. As far as refi, yeah, they're saying "every 5 years the whole loan is due and you have to refinance with us for another 5 years." I'm guessing that it is a balloon payment clause?

Jaysen Medhurst · Answer

@Kahren Aydinyan, I see a number of potential problems here:You're paying $68k ($55k PP + $13k reno) for a property with an ARV of $70k. That makes no sense. In the best case scenario, you've only saved $2k but taken on all the stress and risk of the renovation. Why not just buy a $70k turn key?This isn't really a BRRRR. For the reason above, when you do refi at 75% LTV, you'll get $52k. You're still $16k (plus closing costs) out of pocket. Ideally you would purchase this for $36k-40k in order to actually BRRRR the property."Must refinance remaining loan every 5 years with them." What the heck does that mean? I've certainly seen 5/5 ARMs before and loans with 5-year terms (balloon payment), but no reason why you must refi with that lender.Is there a yield-maintenance clause?I don't think it's worth compromising residential terms in exchange for no seasoning period. I would happily wait 6 months for 30-year amortization/term, lower rates, and no balloon. BTW: the seasoning period is only if you want to refi with a new appraisal. Considering the specifics of this deal, you could probably borrow 75-80% of the $68k w/o a seasoning period.