Using a heloc to brrrr

[Trent Gulino]

Hello everyone im a newby, this is my second investment property.I'm using a heloc from my primary residence to buy an investment property for $145k and I'll use my own cash for the $15k in renovations. And the ARV will be $240k and im trying to figure out my exit strategy now. Everybody I have talked to says there is a 6-12 month season period before I can refinance and get my money from the heloc back out. Is there any other options anybody else would do or would you just wait 6-12 months to refinance to start on my next venture?

Thank you for the help

[Katie Smith]

Hi Trent!

Have you considered using a fix-and-flip loan and leveraging your HELOC funds just for the down payment rather than the entire project? Many lenders offer financing up to 90% of the purchase price and 100% of the rehab costs. If you're planning to pay cash for the rehab, make sure the lender provides non-dutch interest on the rehab portion so you only pay interest on the funds you actually draw, if any at all.

Once the renovations are complete, you can do a cash-out refinance after 3 months of ownership. Alternatively, if your project wraps up quickly and you’re less concerned about pulling cash out, a rate-and-term refinance could be another option.

Happy to connect if you have more questions!

[Jake Baker]

@Trent Gulino

I agree with @Katie Smith about considering a hard money lender. These lenders can be an excellent option for quicker access to funds if you're ready to move on to the next property. Just crunch the numbers and ensure the terms work for your deal.

Hard money typically funds up to 90% of the purchase price and 100% of the rehab costs on a draw schedule. You can leverage your HELOC and cash to cover the down payment, the initial rehab draws, and holding costs.

I’m also in Jacksonville and have experience with flips and BRRRRs here. Based on the local market, $15k for renovations seems light—have you had contractors confirm this budget? 

[Jaron Walling]

@Katie Smith He probably needs a quick closing (cash) to get the deal done. Even without the market details it's a no brainer.  

@Trent Gulino Once you complete the remodel shop around for DSCR loans. The rates are higher but the terms are great. You can cash-out refinance in under 90 days. That's what a lot of investors are doing right now.

Conventional loans jumped to 12 months seasoning about a year ago. No thanks. 

[Stacy Raskin]

You can do delayed financing where you get only the money you used to purchase (and some lenders allow closing costs) as part of a DSCR loan refinance after closing with no wait. Delayed financing is an option that allows an investor to pull the cash out paid for the property. Some lenders will require the money to go back on to the HELOC.

If you wait three months, you can use the new appraised value for the cash out refinance which is helpful because if you're doing a BRRRR, you're presumably adding value and will get more cash back for your next project if you wait the three months seasoning period. For some lenders, the property doesn't have to be rented after you finish the rehab to begin the refinance. It just needs to be rent ready as the appraiser will do a rent survey and that rent amount that the appraiser comes up will be used to structure the loan- more on that below.

The seasoning period varies between 3 months to a year with DSCR lenders. Different lenders have different guidelines.

More on how DSCR loans work:

DSCR loans won't use your income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further. 

[Caitlin Davis]

I can do a cash-out refinance at 3 months seasoning. Let me know if I can help you with that. 

[Simmy Ahluwalia]

@Trent Gulino - we can do a cash-out/Refi as soon as the rehab is complete and the property is "tenant ready". Reach out and we can put some numbers together for you.

[River Sava]

Hey Trent - Have you looked into DSCR loans? You can under 6 months. Happy to connect with you. Feel free to send me a DM.