BRRRR at 6-months has been ELIMINATED???, now only 1-year option??

Question

I have been informed by my loan officer that we no longer have the option to cash out refinance our rehabbed properties at the typical 6-month seasoning.  It has changed to 1 year.  I am looking at other options to get the money out of our deal in the next 4 months, and want to see what others are experiencing.  I would like to avoid hard money, but open to other options.  Thank you in advance!

Andrew Postell · Answer

@Adam Soyak  Sometimes I hesitate at answering these types of posts because I'm not sure how to answer this except in a direct way.  And sometimes it causes friction.  I mean, the lenders you have might be your friends.  I've worked at companies before that couldn't do certain things...and it was still my job to get people to work with me.  So I want to be sensitive of others who might be doing something because they have to be.  So in every response below just enter "You can do work with whomever you want, but this is what is possible to do".

1. Cash Out on the REFINANCE step - You should never face a "cash out" situation when using the BRRRR Method.  If you are facing a "Cash Out Scenario" then it's either we didn't structure our transaction correctly in the beginning...or we are working with lenders that cannot do what other lenders can do.

2. The BUY Step when using HML - in most cases you can find a Hard Money Lender (HML) that will lend me 75% of the ARV.  When I BUY at 75% of the ARV then I am using the maximum amount possible.  This means that when I go to refinance I don't face "Cash Out" rules.  If I take the maximum amount in the beginning it's "NO CASH OUT" rules when I go to REFINANCE. The "Cash Out" limit when using Fannie/Freddie (which is what your original post is talking about) is 75% LTV.  So if I borrow 75% initially...then there's no reason to face a "Cash Out" Scenario.  And to be MORE clear about this - when I am taking a "No Cash Out" loan, now I can go HIGHER than 75%.  So I can be even more effective with my numbers. I need to structure the deal correctly when I buy the property.  We want to avoid all "cash out" scenarios so we don't face them.

3. The BUY Step when buying with CASH - there is ALSO a better way to structure this transaction.  If you purchase the property entirely in cash you can completely SKIP cash out rules when REFINANCING.  I wrote an entire post on this subject years ago and we still use this technique today.  You can read the post HERE.

4. Clarification - there were some...different...comments above.  Keep in mind that Fannie/Freddie do allow the FULL, AFTER REPAIR VALUE to be used on Day 1 of ownership.  You do not have to wait any length of time to use the full value - as long as the lender itself doesn't have extra rules that limit us.  The period of time you wait is for the CASH OUT part of the refinance.  Not using the ARV.  And we can avoid the cash out thing entirely.

5. Other loan types - And yes, there are OTHER loan types out there. We generally want to use the Fannie/Freddie loans early on since they provide us better terms and better rates on our loans.  That allows us to be more profitable.  But there are TONS of very successful investors that never even touch Fannie/Freddie money.  So certainly loans fit certain people better and it's important to work with someone that offers both types of loans.  Or at least for you to have both types of loans with multiple different lenders.  I usually recommend for someone to have 4 different lenders at their disposal early on.  As you build and become more successful the need to have even MORE lenders will be required.  It's just part of the process of growth.

*WHEW*  I hope all of that made sense.  And yes, continue to work with the people that you feel comfortable in working with.  If you need new contacts my recommendation is to ALWAYS rely on other investors that are in your local market.  Ask who they use - whether it's a plumber or a lender or a property manager or anything in between.  It's not foolproof, but asking other local investors is usually the best practice since they can give you direct recommendations and experience from working with those vendors.

Thanks!

Jonathan Taylor · Answer

@Adam Soyak your loan officer is referring to Fannie/Freddie rules for conventional lending. It went into affect for loans submitted on or after March 7th.

DSCR aka business purpose lending has as little as 90 days seasoning as @David Lambert stated. These loans are the tools that most of my flipping clients use to scale quickly.

70-75% LTV with some lenders allowing up to 85% Rate and term, but the catch is the property has to debt cover. With the high rates most dont debt cover so you are limited by the DSC ratio on the cash out amount.

Mike Dymski · Answer

Go to local banks and credit unions that are portfolio lenders (i.e. not selling their mortgages to Fannie and Freddie).

Shaun Weekes · Answer

I touched on this earlier this week so hopefully the post link and the information attached to it coupled with additional responses helps you.

Take care and have a good one.

Information on getting cash out earlier

Allan Smith · Answer

I had a lender do this to me once. They told me it was 6 months and then the next deal I brought to them all of a sudden it was 12 months. You know what I did? I got a loan from a different bank.

John Warren · Answer

@Adam Soyak you have some good information here. This new 1 year rule is real, and it is just another small change to the game. The BRRRR was a little overhyped anyways. The focus on getting your money out in 6 months became too much of the focus instead of operating a deal profitably. If you just bought the deal, strap your seat belt on for an extra six months of reposition. That really isn't that long.

Another option is to flip the property if you really need to exit your capital faster. You can also do a 1031 exchange if you are really building equity that quickly and roll the proceeds into a new deal.

Ultimately, the rules change from time to time in investing, but the basic principles remain the same. Buy good, quality buildings you believe in and make sure that they can cash flow for the long haul. Run them well, and pull the equity out to reinvest when it is prudent to do so. Rinse and repeat until you are personally satisfied, and then stop levering up and live on the fruits of your labors.

Clayton Silva · Answer

On the conventional (Fannie/Freddie) side, that is correct, you now have to own the property for 12 months to use the new appraised value.  There are some DSCR lenders that have shorter requirements, and we have some that can do 80% cash out at 6 months or potentially less.

Chris Seveney · Answer

@Andrew Postell

The lend the money from the LLC as a refinance is genius by the way.

Alex Bekeza · Answer

No need to wait 6-12 months when 90 day seasoning is available via DSCR loans.

Adam Soyak · Answer

Is this 75% LTV? And a cash out option?

BRRRR at 6-months has been ELIMINATED???, now only 1-year option??

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