BRRR won’t work for this property?

Question

So I have a property I recently bought as an off market deal for 145k. It has a brick house that’s a 3/1 and a small house/apartment built behind that is a 2/1. I currently rent them both out for 1900$ and month which is cash flowing 1200$ a month and has potential for more with more rehab. I’ve talked to my lender about refinancing and getting equity back but the bank says I’m unable. I owe around 100k and the property comps strong at 250k. Should I keep the rental or flip to get into something else that I can actually BRRR? Wanting to keep adding properties to my portfolio as quick as possible.

Arlen Chou · Answer

@Robert Adkins This is not often discussed, but it is pretty typical for commercial lenders to still take DTI into account for newer investors, even if it is technically a "commercial" loan. Once you have a larger portfolio and a longer track record, you will be able to negotiate this away.

One good cash-flowing deal is not enough for them to believe that you won't make a mistake with a larger sum of money. I would personally keep the rental, and start building up the track record so you will be able to get past this barrier. It will obviously take longer then you planned, but you look young which probably means you have time on your side.

I ran into a similar problem when I first started out. I am not sure where your primary market is located, but I am in the SF Bay Area. I leveraged the crazy appreciation we have in this market by doing a cash out refi. After a few properties under my belt I was then able to move away from doing cash out refi's to a HELOC that was tied to my personal residence AND some investment properties. This gave me a very large credit line that turbo charged my purchasing power. This is not a fast process... it took me about 5 years to get to that point. Once I got past seven properties, going for a commercial loan based upon the potential performance of the target property became substantially easier.

Good luck!

-Arlen

Ali Boone · Answer

It sounds like that property is a major asset, so getting rid of it wouldn't be my first thought. If you're thinking about doing that, MAKE SURE that you know where you're going to put the money so that you know you'll be getting higher returns with the new one than you're currently getting on that one. If you're not getting higher returns, there's no point. With the way the market has grown over the last few years (or decade, for that matter), it's usually pretty unlikely that if someone has a good/great deal they already own that they'll find a better deal if they sell it now. But if you do, go for it.

One alternative is to do a cash-out refi or get a HELOC with that $150k of equity and put that towards some additional properties.

Andrew Postell · Answer

@Robert Adkins why aren't you able?  What was the reason that the lender gave you?

H. Jack Miller · Answer

I would suggest that the Buy, rehab, rent, refinance repeat is not the way to go for the long term.

Buy good solid real estate, take permanent debt and payoff the debt. If you buy one good piece a year, you will be very wealthy.

When people grow to fast, its a for disaster waiting to happen.

Rob Beeman · Answer

@Robert Adkins  I like the idea of using a short-term rehab loan as a form of cash out refi to conduct the rehab needed to increase rents and increase value. This would also add a little title seasoning to the transaction which might be helpful in the 30 year rental cash out refi loan. When you are ready for that step, most DSCR lenders will not look at your income or debts, but use the income and debts for the property. Typically in today's market they want to see at least a 1.15DSCR.

However, besides the loans for rehab and rental, here are 2 items that need to be addressed if they are not already:

1.) If the property is not already in an LLC, transfer it to one when you close on the short-term rehab loan. This will keep the transactions commercial in nature.

2.) See if that 2nd building on the property is legit. Does it show up on tax records as part of the parcel? I recently had a borrower who had a second 3BR/1BA building on the property (in addition to the main house) and even though it was rented to the SAME person that occupies the main house, the appraiser couldn't mention it, nor use the income from it, as at the time of construction (or in this case conversion) permits were NOT acquired to do so. The building wasn't showing up as existing at the county records office, so the income (and value) for it couldn't be considered in the valuation of the asset. Additionally, now he has an issue that it is occupied living space that isn't technically qualified in the eyes of the county. He is going through the steps to get it corrected, but its a headache. Good luck.

Robert Adkins · Answer

This was through a commercial lender, that’s why I was confused on this response as well.

Corby Goade · Answer

Sounds like you've maxed out your DTI, which is really common early in the game. For the time being, you should look in to DSCR or commercial loans- those lenders will lend based on the deal rather than your income. Those loans cost more, but it's less expensive than sitting on the sidelines.

As you grow and scale and build more equity and cashflow, it will become less of an issue, but push through for a few years, you'll be glad you did.

Good luck!

Robert Adkins · Answer

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BRRR won’t work for this property?

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