The FLAW with BRRRR -- The 3rd 'R' - Refinance

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
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The FLAW with BRRRR -- The 3rd 'R' - Refinance

David Lamb
Member since 2024 · 33 posts · 30 votes

I'm sure there is a creative workaround but the trouble I am finding with BRRRR model is the Refinancing part!! More specifically, I can't seem to refinance due to my Debt to Income ratio due in large part to BRRRR!!!!!

Facts: My net worth is about $3m. My income is about $350k. I own a car ($850 mos. payment). I have no credit card debt. I have no other debt. The only real "debt" I have is my investment properties which earn me about $75k cash flow (included within my $350k annual). Here's the problem. Due to the "magic" of real estate (i.e. depreciation, expenses etc.), on paper my properties are functioning at a loss (great for taxes, terrible for DTI). Of course with great losses, the debt side of the ledger greatly increases and substantially decreases the income side. Thus, despite two of my properties having over $1m in equity each, I can't seem to refinance to access the money for new investments due to DTI. Oh and my interest rates are 3.5 and 4.25 on the two properties, so the numbers would have to make sense.

HELOC - No. No HELOCs on investment properties I am constantly told.

CASH OUT - No. DTI

TRADITIONAL - No. DTI.

Soooooooo, why am I struggling with the third 'R' of BRRRR?

Thank you,

Dave

3Reply
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
2y

Use a DSCR lender.

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    2y

    Use a DSCR lender.

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    9Reply
  • Kristine Ann
    Investor · WNY/CNY/Adirondacks, New York State · Member since 2024 · 151 posts · 133 votes
    2y

    Are you using a bank, credit union or mortgage broker?

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    2y
    Quote from @David Lamb:

    I'm sure there is a creative workaround but the trouble I am finding with BRRRR model is the Refinancing part!! More specifically, I can't seem to refinance due to my Debt to Income ratio due in large part to BRRRR!!!!!

    Facts: My net worth is about $3m. My income is about $350k. I own a car ($850 mos. payment). I have no credit card debt. I have no other debt. The only real "debt" I have is my investment properties which earn me about $75k cash flow (included within my $350k annual). Here's the problem. Due to the "magic" of real estate (i.e. depreciation, expenses etc.), on paper my properties are functioning at a loss (great for taxes, terrible for DTI). Of course with great losses, the debt side of the ledger greatly increases and substantially decreases the income side. Thus, despite two of my properties having over $1m in equity each, I can't seem to refinance to access the money for new investments due to DTI. Oh and my interest rates are 3.5 and 4.25 on the two properties, so the numbers would have to make sense.

    HELOC - No. No HELOCs on investment properties I am constantly told.

    CASH OUT - No. DTI

    TRADITIONAL - No. DTI.

    Soooooooo, why am I struggling with the third 'R' of BRRRR?

    Thank you,

    Dave


     Use bank statement loan so dti is not an issue

    5Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    2y

    Use the dscr loan or the bank statement loan mentioned above. Or find a lender that’s been around more than 3 days. They’ll know that they’re supposed to add back in the depreciation like they were taught on day 1. I assume you are only talking to mortgage brokers so they can shop your needs to multiple lenders at once. 

    I literally financed 10 properties without a job back in the 2010’s when “credit was tight. And nobody wants to lend.”

    6Reply
  • David Lamb
    OP
    Member since 2024 · 33 posts · 30 votes
    2y
    Quote from @Kristine Ann:

    Are you using a bank, credit union or mortgage broker?


     Thus far I have only spoken with several banks and mortgage brokers.

    0Reply
  • Nate HerndonPro Member
    Lender · Springfield, MO · Member since 2023 · 277 posts · 195 votes
    2y
    Quote from @David Lamb:
    Quote from @Kristine Ann:

    Are you using a bank, credit union or mortgage broker?


     Thus far I have only spoken with several banks and mortgage brokers.

    Hi David, many of my clients struggle with same issues. No one wants to turn in pay stubs, taxes, etc. if they can avoid it. That's what Debt Service Coverage Ratio (DSCR) loans are used for. Private institutional lenders actually offer 30-year fixed loans underwritten to the income of the property.

    Only your personal credit score, photo ID and two months of bank statements are what is asked of you (as far as personal info). The credit score helps determine your rate and available leverage. These loans close in the name of your entity/LLC as well.

    I and many other here deal in these loans daily, whether it is a purchase of a turn-key property or a refinance at 75-80% LTV of the BRRRR property that you just wrapped up rehab on. Would be happy to explore your options with you when you have time.

    As far as replacing your current interest rates of 3.5-4.5%, that is a bullet you would have to bite to pursue access to equity. Any DSCR loan must be in 1st position, and will refinance you out of your current mortgage.

    [email protected]417-605-2196
    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    you need a good community bank and community banker .. all your banking should be done with them .. then take your banker to lunch have them get to know you personally ..

    depreciation is added back in not used against you.
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  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    2y
    Quote from @David Lamb:

    I'm sure there is a creative workaround but the trouble I am finding with BRRRR model is the Refinancing part!! More specifically, I can't seem to refinance due to my Debt to Income ratio due in large part to BRRRR!!!!!

    Facts: My net worth is about $3m. My income is about $350k. I own a car ($850 mos. payment). I have no credit card debt. I have no other debt. The only real "debt" I have is my investment properties which earn me about $75k cash flow (included within my $350k annual). Here's the problem. Due to the "magic" of real estate (i.e. depreciation, expenses etc.), on paper my properties are functioning at a loss (great for taxes, terrible for DTI). Of course with great losses, the debt side of the ledger greatly increases and substantially decreases the income side. Thus, despite two of my properties having over $1m in equity each, I can't seem to refinance to access the money for new investments due to DTI. Oh and my interest rates are 3.5 and 4.25 on the two properties, so the numbers would have to make sense.

    HELOC - No. No HELOCs on investment properties I am constantly told.

    CASH OUT - No. DTI

    TRADITIONAL - No. DTI.

    Soooooooo, why am I struggling with the third 'R' of BRRRR?

    Thank you,

    Dave


    Check out DSCR Loans - no DTI is the key aspect of the loan product. This article published here on BP last year goes over your needs and questions pretty closely - help this helps!

    BRRRR Loans: What Are the Options, and How Do DSCR Loans Stack Up?

    https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

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    0Reply
  • Allan C.
    Rental Property Investor · Member since 2018 · 826 posts · 810 votes
    2y

    @David Lamb same as what Bill and Jay said. Depreciation needs to be added back in by lender.

    0Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    2y

    As others have said with a DSCR lender you shouldn't have a problem qualifying. But you do need to continue to make sure that you future rents will be cash flowing to keep your entire portfolio above the coverage ratio. This is where purchases aimed at appreciation without good cash flow could keep you from qualifying for future loans.

    1Reply
  • Rachel Davis
    Rental Property Investor · Brevard County, FL · Member since 2024 · 9 posts · 16 votes
    2y

    You can definitely get HELOCs on investment properties, but the interest rate is high. I've been told by Ormond Mortgage Group that they could get me a HELOC on an investment property at around 10% interest, 10 year term. DSCR doesn't typically source funds so it's possible to use as a down payment.

    Full disclosure: I have not gone this route personally, and this is definitely a high-risk scenario. Just sharing what I've found in my own research trying to solve this same issue. 

    0Reply
  • Melanie P.Pro Member
    Rental Property Investor · Member since 2023 · 1k+ posts · 922 votes
    2y

    @David Lamb With $2M in equity in your current investment properties why are they functioning at a loss? In addition to the $75k "cash flow" you mention i assume you're making principal payments on the debt which also records in the profit column at the end of the year. In any event some lenders will count up to 75% of gross rents as income while recording mortgage, taxes, insurance, HOA fees as "front-end" debt payments. I would ask the lender you applied with to disclose how they calculated your DTI... sometimes they fail to add back in depreciation or deduct costs from your schedule E like tenant turnover, improvements, etc. that shouldn't be included in the DTI calculation.

    Be aware that DSCR loans are expensive. They come with points and ~8% interest. Another option is a commercial portfolio loan. You would visit with a community bank or credit union in your area about their products for real estate investors. The primary concern with using commercial financing is it typically features a short term, long amortization and a balloon that could be problematic if you cannot afford to refinance due to market conditions at the time the loan becomes due.

    1Reply
  • Jay HurstBusiness Member
    Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    2y
    Quote from @David Lamb:

    I'm sure there is a creative workaround but the trouble I am finding with BRRRR model is the Refinancing part!! More specifically, I can't seem to refinance due to my Debt to Income ratio due in large part to BRRRR!!!!!

    Facts: My net worth is about $3m. My income is about $350k. I own a car ($850 mos. payment). I have no credit card debt. I have no other debt. The only real "debt" I have is my investment properties which earn me about $75k cash flow (included within my $350k annual). Here's the problem. Due to the "magic" of real estate (i.e. depreciation, expenses etc.), on paper my properties are functioning at a loss (great for taxes, terrible for DTI). Of course with great losses, the debt side of the ledger greatly increases and substantially decreases the income side. Thus, despite two of my properties having over $1m in equity each, I can't seem to refinance to access the money for new investments due to DTI. Oh and my interest rates are 3.5 and 4.25 on the two properties, so the numbers would have to make sense.

    HELOC - No. No HELOCs on investment properties I am constantly told.

    CASH OUT - No. DTI

    TRADITIONAL - No. DTI.

    Soooooooo, why am I struggling with the third 'R' of BRRRR?

    Thank you,

    Dave


     Your lenders are not doing it right. The depreciation along with other allowable deductions against real estate income including property taxes, insurance and mortgage insurance are added back. Very simple form that is used:  https://content.enactmi.com/documents/calculators/Form1038.C...  

    You will even be able to add back one time expenses as well if you can prove it is one time. (like a roof etc) If you are buying cash flowing properties your DTI should IMPROVE not go up if your LO understands how to calculate. Sadly, it seems a good portion of LO's do not.

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    3Reply
  • David Lamb
    OP
    Member since 2024 · 33 posts · 30 votes
    2y

    Wow, thank you everyone for the great advice and the time you took to write it.  Appreciate you all!!!

    0Reply
  • Manny VasquezBusiness Member
    Real Estate Agent · Orange County · Member since 2022 · 317 posts · 293 votes
    2y

    Before you commit to a DSCR loan, make sure you fully analyze your financial and cash flow situation. If your existing rates are 3.25% and 4.25%, you are 100% going to take a hit on rates and subsequently, cash flow. Get some quotes on the current interest rates for a DSCR loan. While DSCR loans may be the solution for you to get around your DTI problem, they do come at a much higher interest rate. Right now they are in the low 8%'s or high 7%'s at best. Good luck!

    0Reply
  • David Lamb
    OP
    Member since 2024 · 33 posts · 30 votes
    2y
    Quote from @Manny Vasquez:

    Before you commit to a DSCR loan, make sure you fully analyze your financial and cash flow situation. If your existing rates are 3.25% and 4.25%, you are 100% going to take a hit on rates and subsequently, cash flow. Get some quotes on the current interest rates for a DSCR loan. While DSCR loans may be the solution for you to get around your DTI problem, they do come at a much higher interest rate. Right now they are in the low 8%'s or high 7%'s at best. Good luck!


     Yes, thank you Manny.  I have been doing a lot of research and certainly see the downside.  Appreciate you.

    1Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    2y

    Before you refi.   I would run the numbers on cashing out and paying the capital gains or 1031.  Don’t have all of the numbers here but your cash on cash looks out of balance.  Your next Brrrr should have more upside than these two properties.  

    Put the cash with the bank you will take your Brrrr loan with.   Get that interest income plus have them tie your deposit up and have them knock a percentage point off your loan.  

    The numbers will tell you.  

    0Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    2y

    @David Lamb  I would advise you not to do a portfolio loan as there is a poster on here that has experienced the downside to these.

    Better to have a high interest loan on one property and keeping the others at low interest. Losing low interest loans a big mistake.

    Blend the interest of a high interest loan with the low interest rate loans and see what the blended rate is. The super high interest on one purchase shouldn't sink your boat if all other programs are working well.

    1Reply
  • Olivia Grabka
    Property Manager · Leominster, MA · Member since 2022 · 103 posts · 50 votes
    2y

    @David Lamb. Two options: (1) financing investment properties in the future in an LLC, that way you are not the borrower just the guarantor, (2) debt service coverage ratio loans are more expensive, but make the process of refinancing easier

    0Reply
  • Jay HurstBusiness Member
    Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    2y
    Quote from @Olivia Grabka:

    @David Lamb. Two options: (1) financing investment properties in the future in an LLC, that way you are not the borrower just the guarantor, (2) debt service coverage ratio loans are more expensive, but make the process of refinancing easier


    But, you are the personal guarantor of the LLC which is the same thing when qualify for a mortgage.

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    0Reply
  • Caleb Drake
    Real Estate Agent · Pensacola, FL · Member since 2020 · 210 posts · 138 votes
    2y

    I have always found that using a local credit union or business-friendly bank and putting my properties into commercial loans with those banks has been the easiest and simplest way. Quarterly, I update my PFS with them and they reevaluate the risk (there isn't much because of the equity I force into each deal) and that's really about it. Essentially they are cheaper DSCR loans.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Jeff S.:

    @David Lamb  I would advise you not to do a portfolio loan as there is a poster on here that has experienced the downside to these.

    Better to have a high interest loan on one property and keeping the others at low interest. Losing low interest loans a big mistake.

    Blend the interest of a high interest loan with the low interest rate loans and see what the blended rate is. The super high interest on one purchase shouldn't sink your boat if all other programs are working well.


    Yup DSCR loans easy to get into hard to get out and a disaster if you miss any payments or have other DSCR issues along the way you jeopardize your entire portfolio.. use those with extreme caution and make sure if you dont understand it all, this is one of the few instances I think U need to have an attorney review and explain all the Covenants of these loans and what they mean.
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  • Olivia Grabka
    Property Manager · Leominster, MA · Member since 2022 · 103 posts · 50 votes
    2y

    @Jay Hurst

    Then, I am incorrectly assigning the value to the vesting structure, all of the loans work because we use DSCR loans.

    0Reply
  • Jake BakerBusiness Member
    Flipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 695 votes
    2y

    @David Lamb

    Use a DSCR lender. If you plan to keep the property for a long time, consider adding higher prepayment penalties to reduce the rate.

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  • River SavaPro Member
    Lender · USA · Member since 2022 · 1k+ posts · 1k+ votes
    2y

    Hey David - 

    Given your strong cash flow and substantial equity, a DSCR loan would be ideal for you. DSCR loans focus on the property's income rather than your personal DTI ratio allowing you to bypass DTI constraints and utilize the rental income being generated. I sent you a dm to connect further!

    [email protected]
    2Reply
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