BRRRR Exit Strategy Advice Needed for San Diego Property

[Jake Vayda]

Hey BiggerPockets community,

I’m looking for some advice on an exit strategy for a BRRRR deal I'm working on. I've done this method once before, but this time I'm a bit torn on the best approach. I am looking to buy again in the next six months.

Here’s the situation:

• I own a home in San Diego, currently worth about $1.05 million once the ADU is built.
• I owe $680k on the mortgage at 4.25%, with monthly payments around $5,500.
• The property generates $7,500 in monthly income: $5,200 from the main house as a vacation rental and about $2,300 from the ADU as a mid-term rental.
• My broker is advising me to do a cash-out refinance and switch to a DSCR loan, then move the property into my LLC.
• I’m hesitant because current interest rates are around 8%, and I was originally considering a HELOC due to these high rates.

Given the high rates, would you recommend sticking with the HELOC, or does the DSCR loan make more sense in the long run? I'd appreciate any thoughts or experiences you have with similar situations.

Thanks in advance!

[Connor Hibbs]

Hi Jake,

Rates should not be at 8% for a DSCR loan, you should be looking somewhere around the low to mid 7's but can always buy down your rate with points at close if you'd like. Why are you looking to refinance the property though? If you needed to pull cash for the rehab then I think HELOC would work best to keep your rate, but if you're only refinancing to move the property into your LLC then it doesn't seem like it's worth it. You also could always ask the current lien holder if you would be able to quit claim the property into your LLC and keep the current mortgage. There's no guarantee they'd say yes to that, but it would let you keep your rate and be way less expensive.

[Erick Armando Gonzalez]

Hey Jake,

It sounds like you have a solid property with good rental income and are exploring different exit strategies. Both a DSCR loan and a HELOC have their pros and cons, so it's great that you're weighing your options carefully.

@Bill J Fay Can be of help!?

[AJ Exner]

Quote from @Jake Vayda:

Hey BiggerPockets community,

I’m looking for some advice on an exit strategy for a BRRRR deal I'm working on. I've done this method once before, but this time I'm a bit torn on the best approach. I am looking to buy again in the next six months.

Here’s the situation:

• I own a home in San Diego, currently worth about $1.05 million once the ADU is built.
• I owe $680k on the mortgage at 4.25%, with monthly payments around $5,500.
• The property generates $7,500 in monthly income: $5,200 from the main house as a vacation rental and about $2,300 from the ADU as a mid-term rental.
• My broker is advising me to do a cash-out refinance and switch to a DSCR loan, then move the property into my LLC.
• I’m hesitant because current interest rates are around 8%, and I was originally considering a HELOC due to these high rates.

Given the high rates, would you recommend sticking with the HELOC, or does the DSCR loan make more sense in the long run? I'd appreciate any thoughts or experiences you have with similar situations.

Thanks in advance!

Hey Jake,

You'll definitely have some options with DSCR lenders, but you'll need to be really sure that the lender you use is okay with underwriting STR income as well as with the ADU as a mid-term as they are kind of tricky.

With DSCR loans, your credit score is going to be a big determinate to where you will lend. If you are just doing a lower leverage (compared to a full 75% cash out) then it will save you on the rate as well.

Happy to connect and talk through some options, but it would certainly be feasible to Quit Claim your property into your LLC and do the HELOC from there, but it is up to you.

Good luck!

[Ko Kashiwagi]

Hi Jake,

Refinancing the SD home is likely the lowest rate you'll get but this probably doesn't make sense since you have a 4.25% mortgage. DSCR should be in the 7's and possibly even the high 6's if it qualifies. HELOC would have a higher rate (9's-11's on average) but if you have a specific strategy for it it may make sense. As for the cash out refinance, you don't have to put the property in an LLC to do DSCR

[Tanner Lewis]

Hey Jake - most DSCR loans are in the high 6's at the moment!

[Kerry Baird]

A comment about the financing part...it is much easier and cheaper to get a HELOC on an owner occupant property.  The rate is variable, and you could really move the needle on debt paydown if you throw a ton of that cashflow at the loan.  HELOC allows us to draw and use the line again.  However, DTI can be an issue, so depending on how you are funding the renovation, credit card balances will hinder.  These loans are not particularly easy nor fast.  They require full doc.  I have found some lenders that will do a drive by valuation, meaning they don't look inside. Other HELOC lenders I have used absolutely want an inside peek.  

[River Sava]

Hey Jake - 

Rates are currently around the 7's, but the exact rate will largely depend on factors like your cash flow, LTV, and FICO score. You can also consider buying the rate down with points if that's a better fit for your strategy. If you're planning to continue growing your portfolio, having an LLC is never a bad idea for that extra layer of protection.

Regarding your decision between a HELOC and a DSCR loan, it's essential to weigh how both options fit into your long-term goals. I've included an article below that dives into how DSCR loans work within the BRRRR method, which might provide more clarity.

Happy to connect and discuss further if you have any questions!

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

[Ashish Acharya]

@Jake Vayda Given your favorable 4.25% mortgage rate, sticking with a HELOC is likely the better short-term option. It offers flexibility and lower interest rates than a DSCR loan and allows you to access equity without significantly increasing your monthly payments. A DSCR loan could make sense for long-term stability and moving the property into your LLC, but the current 8% rates would reduce your cash flow.

You can consider refinancing into a DSCR loan later when rates improve. For now, the HELOC lets you continue building rental income while keeping costs manageable.

[Erik Estrada]

Quote from @Jake Vayda:

Hey BiggerPockets community,

I’m looking for some advice on an exit strategy for a BRRRR deal I'm working on. I've done this method once before, but this time I'm a bit torn on the best approach. I am looking to buy again in the next six months.

Here’s the situation:

• I own a home in San Diego, currently worth about $1.05 million once the ADU is built.
• I owe $680k on the mortgage at 4.25%, with monthly payments around $5,500.
• The property generates $7,500 in monthly income: $5,200 from the main house as a vacation rental and about $2,300 from the ADU as a mid-term rental.
• My broker is advising me to do a cash-out refinance and switch to a DSCR loan, then move the property into my LLC.
• I’m hesitant because current interest rates are around 8%, and I was originally considering a HELOC due to these high rates.

Given the high rates, would you recommend sticking with the HELOC, or does the DSCR loan make more sense in the long run? I'd appreciate any thoughts or experiences you have with similar situations.

Thanks in advance!

 Hey Jake, 

If your exit strategy is to pay off the balance asap, I would advise doing a HELOC.

But I would consider a traditional refinance if you do not have an exit strategy lined up to pay the balance off immediately  and your blended rate (1st + 2nd Mortgage) is significantly higher than a standard cash out refinance. 

But without knowing too much it sounds like the HELOC might be the better option since you will be paying interest on whatever you draw, and if that balance is significantly lower than your 1st mortgage, then your total monthly payment should be lower than a cash out refi.

Hope this makes sense. 

[Vlad D.]

I have a similar case. My loan rate on an investment property is 3.5% and after construction there is a significant equity, which I prefer to use for HELOC. Any advice for the HELOC lender, who would allow to keep the existing loan, means will take 2nd position?

Note: the property is in a good area in San Diego, close to downtown. 

TNX, Vlad