Brrr + STR "Refinance" Question

[Brandi Scharrer]

When using the Brrr method and it comes time to refinance do you have to show any rental history of the property being rented? Is that something the lenders take into consideration? If so, how much?

Found a property that looks like a good opportunity to Brrr in Michigan, the difference is I don't want to rent to a longer term tenant but instead want to do a STR. The property is out of state, but in the area we grew up in and that we return to every year to visit family and friends. We normally stay for 3-4 mos and stay in another STR. I'd like to stay in our own property moving forward when in town but then STR it the other months of the year. Will I need to show proof of any renting history to the lender when I refinance? Thanks in advance!

[Julie McCoy]

@Brandi Scharrer It is very uncommon for a bank to take projected STR income into consideration for refinancing; appraisers will almost never consider it, and that is the opinion the banks will rely on. In the BRRRR method, the refinance is based on having a long-term lease in place that shows a certain amount of income relative to the loan price; this is not possible with STRs. If the property is in a market where the overwhelming highest and best use is STRs (as it is in Gatlinburg/Pigeon Forge where I invest), then there's a possibility local appraisers take that into account and the lenders might accept it, but that's definitely a conversation to have before you get started. (even in GB/PF not all appraisers are willing to take STR income into account). @Parker Borofsky can talk in detail about this.

But in general, no, you cannot use projected STR income as a means to refinance the house. If you can qualify for the refi in other ways (based on your own strength as a borrower) then awesome, but on the property's income basis, not generally through a conventional loan. I know a private lender who might do it, but then you're talking about higher fees and interest rates, etc.

[Anand S.]

Visio and Quicken will do it based on projected STR income. Granted, there has to be others in the area that have similar homes with STR history to compare to. Once it's performing for some time you can approach portfolio or local banks.

[John Underwood]

I think its typically a couple years of tax returns to show the income.

[Lee S.]

I could see them using it if you have 6 months of records to show them.  Otherwise, when I've done it I just show them the signed long term lease.

[Jerry Padilla]

@Brandi Scharrer
The short term rental income would be on your tax returns for at least a year to count rental income.
Why not purchase as a second home?, since you intend on staying there 3-4 months a year.

[Nicole Heasley Beitenman]

@John Underwood @Brandi Scharrer My understanding is that you have to have 2 years of rental income on your tax returns before banks and lenders will pay any mind to rental income at all. It doesn't matter which house it's from. I started house hacking in 2016 and purchased my 2nd property in 2018. I had a tenant with a 2-year lease in place when I financed the property through a HELOC. The only reason they considered the rental income was because I had a long-term history of collecting rental income AND the property in question had a lease.

[Brandi Scharrer]

Thanks everyone for the feedback! All great input I'll need to keep in mind. 

I was caught up in if a STR would qualify for "rent" during the "refinance" step of the BRRRR method I didn't even think about just seeing if I could refinance off my strength as a borrower and not worrying about the rental income. That may work for now but I'm sure as acquire more properties I won't be able to do this.

@Jerry Padilla - tell me more please. :) I don't own a "first" home, but my state of residence is Nevada and this home is in Michigan. If we live in the property can we claim it as a second home vs a rental or investment property? And if yes, how many months do we have to live there and can we have multiple homes? Thanks in advance.

[Eric P.]

Originally posted by @Brandi Scharrer:

Thanks everyone for the feedback! All great input I'll need to keep in mind. 

I was caught up in if a STR would qualify for "rent" during the "refinance" step of the BRRRR method I didn't even think about just seeing if I could refinance off my strength as a borrower and not worrying about the rental income. That may work for now but I'm sure as acquire more properties I won't be able to do this.

@Jerry Padilla - tell me more please. :) I don't own a "first" home, but my state of residence is Nevada and this home is in Michigan. If we live in the property can we claim it as a second home vs a rental or investment property? And if yes, how many months do we have to live there and can we have multiple homes? Thanks in advance.

I believe there's also some lenders who won't accept STR income during the first 2 yrs but they will accept the standard market rate for LTR as an income projection. So if you're earning $50k in STR income & the market LTR rental rate is $2k/mon for your house then, at the least, they'll count $24k of that income in your favor. So it gets you somewhere at least! Helps the DTI a bit. At least they're acknowledging the property has income generation value, albeit at a lower amount

[Michael Baum]

@Brandi Scharrer, one other thing to think of. The IRS prohibits personal use of the home for more than 14 days if you want to claim any expenses for deductions.

[Brandi Scharrer]

Ah, @Michael Baum good point. I'll be sure to get with my accountant on this. Thanks

[Paul Sandhu]

@Brandi Scharrer  You remind me of Dorothy.  She's the lead singer of a band of the same name.  Flawless is their big hit song.  I YouTube it when working out in my home gym.

[Todd Goedeke]

@ Julie McCoy, lenders do indeed consider STVR income. As a commercial loan with a Master lease in place lenders consider that lease income. And for retirement account investors with enough down they will make a non recourse loan.

[Anand S.]

The lenders I mentioned do not require a rental income history but they do require a rental comp to be done as part of the appraisal process, which they use to determine DTI. That's why you need to have comps in the area with a history.