Am I doing the BRRRR correctly?

Question

Good day everyone,

I have questions regarding the BRRRR Method. I will explain my situation and I will carry on with the questions.

I own a house with a mortgage on it. In late 2021 I had a great oppurtunity and purchased a Triplex that was in my wife's family for 140k I refinanced my primary residence to get some money to rehab the property. I put 30K in upgrades. I am not sure what the value of the property is currently as it is getting appraised this week by the bank. I am looking to refiance the triplex to have some money to purchase another property.

I already got approved if the property is worth 250k, for 200k @3.54%. 200K-107K(left on mortgage)=93k+31k(money saved up)=124k for a 20% down payment + closing cost and maintenance.

Am I getting the BRRRR Concept right? Will I get approved for a 3rd mortgage? Is there a limit of how many mortgages one can have or as long as the income is good the bank will keep lending you money? When do you start thinking of creating a company to put your properties under? Is it better to borrow from a mortgage broker or a big bank?

Any help or advises would be much appreciated.

Thank you for your time and answers,

Alex Harnois

Randall Alan · Answer

@Alexandre Harnois

I'll try to answer a few of your questions.

As for the number of loans one can have... typical residential lending (where the bank / mortgage broker follows Fannie Mae guidelines) is limited to up to 10 properties in your name.  If you are married and put the properties in just one name, you could have up to 20 properties financed.  It's more complicated than that... but those are the outer limits.  What happens in between is that there are reserve requirements that change as you add the number of loans you have.  You also have to be on your own mortgage if you own a house once you get to 7 financed properties in your own name  (ask me how I know!)... so one of your 'slots' is eaten up with your personal house if financed.

Getting approved for loans is a whole process unto itself... Your biggest holdback from a residential loan perspective if your credit score is good, is usually your debt to income ratio.  Banks / lenders want to know that you can handle your total debt... even if things go a bit sideways... like what if you have a vacant unit, or a squatter you have to evict, etc.  So as you apply for your next loan, they are looking at your ability to pay that loan back... AND they want you to have excess capacity above the ability to pay the loan itself.  If you are cash out refinancing your triplex, this only adds to your debt ratio... so it won't help your case as you look to get financed for your next property.  I get that it is an ends to your means of having the money to finance the next deal... but just understand that it actually hurts your financial situation as to how you look to your next lender.  You might want to run over to "2nd base" (your next lender) before you do your cash out refi and just ask the 2nd lender to look at your finances taking into consideration your anticipated cash out refi and ask them, "Am I going to be able to pull off my next loan if my finances look like "this" with the refi figured in.  It would sort of suck if you do the cash out refi and then you can't qualify for your next mortgage.  You have borrowed money with nothing to spend it on.

If your residential lending option falls through for any reason, your backup plan would be going to the commercial lending side of your local / regional bank and seeing if they will lend you the money.  I say local / regional bank because I find they are more 'friendly' to local investors than big (national) banks are.  They typically hold their own notes, so are not as bound by Fannie Mae guidelines as much... which is code for "they can sometimes flex their lending standards if you are close to qualifying for the loan."  Big banks will just stop as soon as they hit the first road block.  Commercial lenders will usually use the income off the triplex and your new purchase to help offset your debt to income calculations - which makes it easier to get that type of DSCR loan to go through.  You could also go meet with them and ask them the same question... "Hey, I'm doing this cash out refi, and I want to buy this other property... will you be able to lend to me?"  Just schedule a meeting with their commercial lender and go have the conversation... it's an easy 20 minute meeting (take a summary of your financial picture with you).  Know that commercial loans are a bit more expensive than residential loans usually, and that they are amortized across 20-25 years, instead of 30 years... so your monthly payments end up being higher.  Also, most commercial loans reset their interest rate every 5 years... so in general the terms of a commercial loan aren't as favorable as a residential loan when viewing it from monthly cash-flow perspective.  One advantage you might have is that commercial loans often aren't counted in the Fannie Mae limit on the number of financed properties you can have.  In addition, with commercial loans, you can finance multiple properties at once.  We did a consolidation loan where we paid off 5 other residential mortgages with one commercial loan.  It freed up more spots for new residential loans for us.

I sort of question your 3.54% approval... that looks very suspect in today's lending environment.  I don't know of much of anything below a 6% rate right now... so double check your numbers there.

I have always borrowed from mortgage brokers... just because they can shop among many lenders.  Whereas with just a bank, they are only going to quote you THEIR rate.  Ultimately a mortgage broker is really just shopping a lot of banks (typically)... so my vote is to go with the broker.

As for forming a company... that is sort of more about asset protection.  By putting your asset in an LLC, etc, it separates its liability from your other assets.  It's a good idea... but also understand that you can't do residential lending in the name of a company.  So if you are doing a commercial loan, you could put it in an LLC name.  If you are doing a residential loan, it will at least initially have to be in your name.

Hope some of it helps!

Randy

Alexandre Harnois · Answer

Wow! Thank you very much Randy! It clarified a lot of things for me, I appreciate the assistance.