BRRR strategy - seasoning required before refinancing?

Question

Hey BP community,How much seasoning (history of rental income) is needed when going to execute the ‘refinance’ section of the BRRR strategy. I was speaking with Bank of America the other week and was told they’d need to see 2 years of rental income on investment property before they’d refinance. This is obviously problematic if I’m going to buy in cash with hard/private money which I’m aiming to pay back as quickly as possible. I’m hoping smaller banks have flexibility to refinance more quickly after I occupy a unit with renters. I’ll certainly be chatting with other banks, but wanted to see what has been other people’s experience? Was BoA an anomaly or the norm? Does it depend greatly on the property itself and my ability to build trust with the bank? Thanks for your input here.

Scott England · Answer

James Calabrese I believe your biggest issue here is summed up with "I was speaking with Bank of America the other week..."

Chris Mason · Answer

That is because BofA is idiotic. That's where dumb loan officers go to vegetate; no one serious works there. If someone good does work there, it's a matter of time before they are poached by a smaller local direct lender or small local brokerage. If you buy using hard money, and it's officially recorded with the county as a mortgage, you can start the process of rate/term refinance out of the hard money the day after closing using plain boring 30 year fixed Fannie financing (at least I can, I can't speak for what other lenders do). I have no idea if your DTI needs it, but the lesser of appraised market rents or current actual signed lease with an actual tenant will be used. If the tenant hasn't moved in yet, we will want to see a security deposit made to prove it's not just a BS lease with your buddy Billy.There is actually a school of thought saying that hard money is better than all cash specifically because of the zero seasoning period. I can see that argument, or at least why it would be advantageous in some situations. You will want to get preapproved for the refinance before buying using that hard money, to ensure you aren't stuck in it longer than is necessary.

Chris Mason · Answer

Oh, and quick note: the hard money folks know this trick, so expect points up front, a crazy interest rate, or a prepayment penalty to prevent you from refinancing so soon (giving them time to collect some interest from you). The hard money folks gotta make money too.

Chris Mason · Answer

The appraiser pulls rental comps, calls landlords, does research, and comes to a conclusion. Signed leases aren't like purchase prices where you can just hop on Redfin and see closed deals, so it's a little tougher. Just like appraisals often hit exactly purchase price, if you show an appraiser the actual lease currently in force and it's credible.... hint hint nudge nudge.

James Calabrese · Answer

@Chris M. don't hold back on BoA, tell me how you really feel. Seriously though, thank you everyone for the input here. I'm on the road right now so will need to reread tonight to fully digest but overall it is nice to know what I already suspected that major banks are not a great option, and that there are other ways to skin a cat here. Also great to know about pre-payment penalties from hard money. @Chris Viglietta small world! I'll shoot you a direct message to connect. Would love to pick your brain more and gossip about Michelle of course.

Albert Bui · Answer

If you buy with all cash you can refinance for up to 70% of the market value up to the total acquistion cost during your purchase whichever is less. Sometimes if you buy a good enough deal then 70% of market value is higher than your acquisition cost + rehab. If you buy the property "right," you can probably atleast get back your acquisition and your rehab. If you buy it wrong you get back acquisition or less and are stuck in the deal with your rehab still but each persons financial investing preferences are different in what they may consider "good," or not "good," and the that is just the general investing criteria.The 6 month seasoning is only required if you want to do a "regular conventional cash out." Its important to clarify the difference between a regular conventional cash out and using the niche guideline of DFE (delayed financing exception) with conventional financing and what the pro's and con's are.DFE is quick and requires no wait period, you can rehab 1-2 months and start your refi and fund in month 3 while with the reg. refi cash out you need a min 6 months so technically you can start month 5 and close after the 6 month mark. The regular refi cash out's benefit is that there is no LTV restriction on the cash out or no limit to the maximum you can get out of the property like the DFE exception which is limited to 70% of market or acquisition, its just a pure 75% cash out on 1 unit and 70% on 2-4 unit (cash out).To clarify though, with regards to DFE, "acquisition cost," refers to the purchase price plus closing costs during the initial cash purchase not just the purchase price. Often times 70% of market value is high enough to take back all of the purchase price and closing costs or "acquisition costs."

Cristian Aviles-Morales · Answer

Not to bring up dead threads but I consistently keep coming across the issues that the OP is having when I analyze my deals. I guess the deals I analyze are BAD deals but maybe if I explain myself here someone can tell me where I am not assuming some cost or expense? So lets say I wanted to structure a deal like so...Purchase: 229,000Cash to Close: 45,980 (HML/Private Money foots this bill)Rent: 2600Expenses, 10% for Vacancy, Repair/CapEx, PM + mortgage and insurance, taxes: $2372, round to 2400 for easy numbers.So I have Cash Flow of 200/month. Cap Rate which is Annual Net - Mortgage / Price = 18600 / 229,000 = .081 or 8.1%Cash on Cash is Annual Net w/ Mortgage / Price = 2400 / 229,000 = .010 or 1% (Horrible, Bad Deal, but lets continue)If I financed this deal with a HML who probably wouldn't have financed this deal, and I go to refinance, I am limited to only refinancing either the Purchase Price + Closing Costs (235,000 for whole numbers) if it is before the seasoned period, or the ARV of $250,000. With the first refinance, I only get 70% of the loan which will equal out to 164,500. In the second refinance, I would probably get 70% maybe more, but probably 70%. Which will equal out to 175,000. I would owe 183,020 before refinancing so in both cases I would lose/not be able to refinance to pull any equity out and would still not be able to pay back my lender who footed the bill for the closing costs. My question really is, after spelling everything out, is there a QUICK way to figure out if a property I am considering will be worth it (so before calculating expenses, calculating CapRates and CoC returns etc etc) so that I know at the end of it I can pay back the 20% my lender puts up?

James Calabrese · Answer

Thanks @Chris Viglietta. I do love Chris Mason's recommendation to get the HML working directly with the traditional lender. Let the experts communicate directly and remove myself a bit from the middle of everything. Chris M also mentioned "If you buy using hard money, and it's officially recorded with the county as a mortgage, you can start the process of rate/term refinance out of the hard money the day after closing using plain boring 30 year fixed Fannie financing (at least I can, I can't speak for what other lenders do). I have no idea if your DTI needs it, but the lesser of appraised market rents or current actual signed lease with an actual tenant will be used."How is the 'appraised market rent' typically determined? Are there useful tools for me to get a sense of what market rents are, or should I just scroll through craigslist rentals, and contact local agents and management companies?

Chris Viglietta · Answer

@James Calabrese, correct.Or you follow the advice that Chris Mason said above and work with a bank and HML

Chris Viglietta · Answer

@James Calabrese, everything Chris Mason is pretty spot-on. I work with a private money lending firm based out of Redondo Beach.Generally, we'll charge 2 pts, 9-9.5% on 1-2 year terms, $100k-5mm for most states (including CA)Our pre-payment penalty is 4 months on 1 year and 12 months on 2 years. We do offer 4 year terms, but our 1-2 is our most popular product.