Taxes and Refinancing with BRRR

[Dennis O'Loughlin]

2 questions about BRRR. When you use the BRRR method, since you are not doing upgrades but rather repairs, you can either deduct or depreciate all the work you do or hire out right?

Second question. After you Rent and are ready to refinance, how do you work it so it doesn't go against your 10 maximum personal loans you are allowed to have? Obviously you can't DSCR it so what do you do?

[Nicholas L.]

@Dennis O'Loughlin

on your second question - what do you mean "obviously you can't DSCR it"?

i have done several BRRRRs and have a mix of conventional and DSCR loans. you can definitely refinance a BRRRR into a DSCR loan.

on your first question - can you elaborate what you're asking?

[Robin Simon]

Quote from @Nicholas L.:

@Dennis O'Loughlin

on your second question - what do you mean "obviously you can't DSCR it"?

i have done several BRRRRs and have a mix of conventional and DSCR loans. you can definitely refinance a BRRRR into a DSCR loan.

on your first question - can you elaborate what you're asking?

This as well - what do you mean on "obviously can't DSCR it" - to the contrary, DSCR Loans have become the main option for BRRRR Refinances ever since the GSEs upped the seasoning requirements for cash-out refis last April

[Dennis O'Loughlin]

Quote from @Nicholas L.:

@Dennis O'Loughlin

on your second question - what do you mean "obviously you can't DSCR it"?

i have done several BRRRRs and have a mix of conventional and DSCR loans. you can definitely refinance a BRRRR into a DSCR loan.

on your first question - can you elaborate what you're asking?

Hi Nicholas,

When thinking about taxes and deductions for your real estate business, according to the last IRS info I saw, you cannot deduct improvements or upgrades. However, you can deduct or depreciate things needed to keep the property in rentable condition. When you BRRR a property, since you can get ones that are in really rough shape and need to be rehabbed, can you deduct and depreciate those expenses off your taxes or do you just eat the expense?

2nd question...so even though you're not doing an initial purchase and trying to take out the equity in the property, does a dscr really make the most sense or does something like a heloc do better?  

[Dennis O'Loughlin]

Quote from @Robin Simon:

Quote from @Nicholas L.:

@Dennis O'Loughlin

on your second question - what do you mean "obviously you can't DSCR it"?

i have done several BRRRRs and have a mix of conventional and DSCR loans. you can definitely refinance a BRRRR into a DSCR loan.

on your first question - can you elaborate what you're asking?

This as well - what do you mean on "obviously can't DSCR it" - to the contrary, DSCR Loans have become the main option for BRRRR Refinances ever since the GSEs upped the seasoning requirements for cash-out refis last April

I was under the impression that DSCR could only be done at initial purchase...not when trying to take out equity.

[Nicholas L.]

@Dennis O'Loughlin

when you BRRRR, typically the improvements you make will go into the cost basis of the property. and then that's what you base depreciation on, once it's "put into service" by being rented. but talk to your CPA for details.

on the refi - you can definitely refinance into a DSCR loan. like i said, i've done it multiple times. doing one now. bought a condo with hard money. refinancing into a DSCR loan.

typically a BRRRR is bought either with cash - actual, genuine, from your checking account cash - or a hard money loan. if with a HML, then that's loan 1. then you rehab, and hopefully the ARV goes up. then you refinance. that's loan 2. loan 2 can absolutely be a DSCR loan. (some DSCR loans can have seasoning - 3-6 months, for example. but you're rehabbing anyway, which takes time.)

now, could you buy with a DSCR loan (loan 1), and then refinance into a different DSCR loan (loan 2)?  maybe...?  but most people wouldn't do that - for multiple reasons: 

1. DSCR loans typically require 15-30% down.

2. if a property is severely distressed it may not be rentable, and won't qualify for financing.

3. some DSCR loans have pre-payment penalties, and so that would be silly.

make sense?

[Robin Simon]

Quote from @Dennis O'Loughlin:

Quote from @Robin Simon:

Quote from @Nicholas L.:

@Dennis O'Loughlin

on your second question - what do you mean "obviously you can't DSCR it"?

i have done several BRRRRs and have a mix of conventional and DSCR loans. you can definitely refinance a BRRRR into a DSCR loan.

on your first question - can you elaborate what you're asking?

This as well - what do you mean on "obviously can't DSCR it" - to the contrary, DSCR Loans have become the main option for BRRRR Refinances ever since the GSEs upped the seasoning requirements for cash-out refis last April

I was under the impression that DSCR could only be done at initial purchase...not when trying to take out equity.

Nope - DSCR is typically the best option now for refinances - I actually published an article on this exact topic last year here on BiggerPockets - ALl the options for BRRRR financing (including refis) and pros/cons, etc - hope it helps!

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

[Basit Siddiqi]

Your first question is the debate between Repair vs improvement

Repairs can be immediately expensed
Improvements need to be capitalized and depreciated over their useful life.

The other issue is if the property was purchased in unlivable condition and you rehab it to become livable, all repair / improvement costs need to be capitalized.

[Jay Hurst]

Quote from @Dennis O'Loughlin:

2 questions about BRRR. When you use the BRRR method, since you are not doing upgrades but rather repairs, you can either deduct or depreciate all the work you do or hire out right?

Second question. After you Rent and are ready to refinance, how do you work it so it doesn't go against your 10 maximum personal loans you are allowed to have? Obviously you can't DSCR it so what do you do?

I will address the 10 loan part of your question. It is common misconception that the limit is 10 conventional loans. so, folks will say will lets do a DSCR loan on this one to save a slot for a conventional loan. That is NOT how it works. Fannie/Freddie will allow you to have UP to 10 personally guaranteed loans residential loans period. (and yes, DSCR are personally guaranteed)

The number of financed properties calculation includes:

• the number of one- to four-unit residential properties where the borrower is personally obligated on the mortgage(s), even if the monthly housing expense is excluded from the borrower's DTI in accordance with B3-6-05, Monthly Debt Obligations
• the total number of properties financed (not the number of mortgages on the property nor the number of mortgages sold to Fannie Mae), with multiple unit properties (such as a two-unit) counting as one property;
• the borrower’s principal residence if it is financed; and
• the cumulative total for all borrowers (though jointly financed properties are only counted once). For HomeReady loans, financed properties owned by a non-occupant co-borrower that are owned separately from the borrower are excluded from the number of financed properties calculation.

https://selling-guide.fanniemae.com/sel/b2-2-03/multiple-fin...

[Nicholas L.]

@Jay Hurst

for the 'up to 10' loans... i read that it was a misconception that DSCR loans were excluded, as you are saying.

but... I have talked to folks who have 20+ DSCR loans.

so... is this just because their non-QM lender is not catching it?  i suspect a conventional lender would...

thoughts?

[Jay Hurst]

Quote from @Nicholas L.:

@Jay Hurst

for the 'up to 10' loans... i read that it was a misconception that DSCR loans were excluded, as you are saying.

but... I have talked to folks who have 20+ DSCR loans.

so... is this just because their non-QM lender is not catching it?  i suspect a conventional lender would...

thoughts?

The 10 financed properties rule is ONLY applies to when you are applying for a conventional loan. The link I posted came from Fannie Mae as they make the rules for conventional loans. You can have as many DSCR loans as the DSCR program your are applying for will allow you to have. Many programs have no limit where some do have a limit often 20.

What I was trying to convey is that if you have 10 DSCR loans and zero conventional loans you are NOT eligible for a non-owner occupied conventional loan because Fannie/Freddie will not allow you to have more then 10 residential loans of any type. So, there is no saving slots.