Brrrr refinance help?

Question

Hello BP,I am new to investing in real estate. I have little experience for I have two duplex’s. I am looking at moving away from buying houses the conventional way and want to do a brrrr for my next project. I believe I found a good hard money lender. They are offering to cover the whole day. It is 13% interest only for the price of the house and rehab. They also have a 4% fee of the total loan. They explained that’s how the make there money.Where I am lost is how to refinance. From my research a DSCR loan would require 20-25% down so I would still need capital for that. I also just figured out you need to own the property for 6-12 months. How do people work around this? What other loans are out there that I am able to refinance out of the hard money loan?Thanks,Cam

Ash Hegde · Answer

Hey Cameron, ideally with a BRRRR you want your all in costs to be 70-75% of the after repair value. When you go to refinance, you can leave 25% equity, pull out the 75% in cash, and pay off your hard money loan. The "down payment" is really the appreciation you forced by buying a good deal and rehabbing it, and you end up with a rental property with zero out of pocket. The numbers don't always work out like that, but that would be the best case. For a conventional refinance you would need to own it for 12 months, but with DSCR you can refinance at 3-6 months.

Christian Arce · Answer

Hi Cameron, I am very familiar with the process..In a BRRRR strategy, the property is treated like a fix-and-flip, so, your research and calculations are the same. Use short-term financing to acquire and rehab (fix and Flip Loan). Then, after the property has been finished. Then you'll refinance into a DSCR 30-year loan to pay off the short-term loan and turn the property into a stable, long-term, cash-flow-positive property that continues to build equity. And then, you repeat the process all over again with a new property.A few things to keep in mind when you do your research are 1. it needs to have sufficient equity2. your purchase and renovation need to be below 70% of ARV if possible3. The maximum leverage on DSCR Loans is 80% LTV4. if you cash out the funds you invested your max will be 65-70% LTVHope this helps, feel free to reach out if you have any questions

Cameron Mitchell · Answer

@Ash HegdeYes that does make sense. Maybe I was talking to the wrong lender. He was explaining to me that when I refinance I’d need the 20% liquid.He was explained to me that DSCR loans are about 1-1.5% more than conventional loans. How do investors get by with such high interest rates right now?

Ash Hegde · Answer

If you think about it the opposite way, rather than needing you to put 20% down, they will lend you up to 80% of the value. So if you buy for 100k and do repairs for 50k, but the value becomes 200k, they will lend you up to 80% of the 200k, or 160k. Since you only put in 150k for purchase and rehab, you can pay off your loans and have some left over. Hopefully that makes more sense.

Mark Munson · Answer

Hey @Cameron Mitchell You need someone to underwrite the long-term debt at the same time you purchase it, so you know that a BRRRR will work. As others stated, your current lender is charging a lot. Now, if they are lending 100% of everything, I understand the higher interest rate (most hard money lenders are between 10-12%), but 4% in origination is very high too. Again, if you absolutely need 100% financing, then it's okay. As others have stated, to cash-out at the maximum value (most DSCR lenders cap at 75% LTV on a cash our refinance), you need to own it for 6 months. There are a few lenders that will do 3-months, but they won't necessarily offer you the best DSCR terms. Also, a lot of them require you to do the short-term financing with them too, to waive the 6-months of seasoning. To truly BRRRR correctly, you need to be buying at deep discounts on the front end. Also, if you are aiming for a certain CoC return or amount of cash flow every month, you need someone that truly knows how to underwrite both loans for you and can tell you exactly what you would net and can justify it with solid figures and comps. With rates where they are and values going up (along with insurance and taxes), it makes BRRRR-ing much more difficult. You can buy a bit of time to wait the high rates out by going with a interest only DSCR loan to maximize cash-flow and refinancing in year 3 after rates have dropped. If you are limited on capital, I would suggest being open to flipping one or two properties, then doing a buy and hold. The risk you are taking attempting to BRRRR without hammering out all the figures is that you will lock up all your capital into one rental and you are back at square one, with no ability to scale. Everyone BRRRRs to rinse and repeat their money, but there is no guarantee of that unless you truly know your numbers, inside and out. I prefer sprinkling in a wholesale deal or flip or two to ensure I can inject capital back into my company and continue to scale. Feel free to message me if you need help with the numbers or any more feedback.

Robin Simon · Answer

An advantage for DSCR Loans will be that the 6-12 month seasoning period is not a requirement (conventional req. changed to 12 months in April), so some DSCR lenders can beat this by seasoning requirements of as little as 3 months to cash you completely out. Its a tough market but for a BRRRR refinance if things go right you wouldn't need any cash down since the forced appreciation through the rehab should ideally create enough value that the "down payment" would be covered by the value of the property.As you noted in the thread, it is tough with rates higher and especially if you are in Minnesota. Due to unfortunate laws and regulations in MN, DSCR lenders can't offer a prepayment penalty provision in that state, which requires much higher rates than if you would be able to do a DSCR loan refinance in most other states where adding prepayment penalties results in interest rates much closer to conventional.

Ash Hegde · Answer

Great question and it's certainly a problem people are running into. A lender may have an offer for up to 80% loan to value, but when the numbers are calculated, it doesn't cash flow so it doesn't qualify. In many markets you will only be able to pull out 75% or even 70% in order to cash flow, sometimes even less. If you stay in the game long term, you are likely going to refinance many times to get tax-free cash out of your properties. When interest rates are higher, you are using cash flow more for defense than offense. You want to get through these tough times, and over time your rents will go up and the property will appreciate, and at some point rates will likely come down and you'll have plenty of equity to cash out at a better rate.

Cameron Mitchell · Answer

@Ash HegdeThank you for the advice! My issue is I don’t understand the refinance part. As my understanding using a DSCR loan I still need %20 down. How am I able to use the equity I pushed onto the property for the refinance?

Kayleen Hammerschmidt · Answer

Hi Cameron,I agree that there are better deals out there with creative financing. If you run into a snag, I can definitely set you up with a phone call to get you the help you need.Good luck!

Corby Goade · Answer

Great advice above- keep in mind the entire point of the BRRRR process is to keep recycling the same cash over and over. If you are doing it right, you don't need "new" cash for the next deal, the equity you built is your skin in the game. Best of luck!