How to Refinance a BRRR Property

Successfully completing a BRRR deal requires investors to eventually refinance a property. But, many new real estate investors have either A) only dealt with a primary residence refinance, or B) never done one at all. Investors often ask me how to refinance a BRRR property. 

With a BRRR deal, investors need to refinance their hard money purchase/rehab loan into a long-term, traditional mortgage. To do this, investors should get pre-qualified for that long-term mortgage before starting a deal. That way, as soon as they have tenants placed, they know they’ll qualify.

I’ll use the rest of this article to talk about different BRRR refinance considerations. Specifically, I’ll cover the following topics: 

  • What is a BRRR Property?
  • How to Refinance a BRRR Property
  • Lender Considerations
  • Securing Your Hard Money Loan
  • Finding a No Money BRRR Deal 

What is a BRRR Property?

Before discussing refinancing BRRR properties, I need to provide some investing background. BRRR has four steps: 1) buy, 2) rehab, 3) rent, and 4) refinance: 

  • Buy: Similar to fix & flip investors, BRRR investors look for distressed properties in need of repairs. Ideally, they can purchase these houses at a significant discount due to their current state of disrepair.

  • Rehab: After purchasing a distressed property, investors renovate it. More precisely, they renovate it to a standard that will appeal to tenants. BRRR investors typically make material decisions based on the long-term wear and tear tenants can put on a rental property. In other words, investors want to use durable materials that won’t need to be frequently replaced.

  • Rent: Following the rehab period, BRRR investors rent the property out to high-quality, long-term tenants. Unlike fix & flip investors who profit on the sale of the renovated property, these investors instead seek cash flow and loan amortization via quality tenants.

  • Refinance: Once they’ve signed a lease with long-term tenants, BRRR investors need to refinance the loan on the property. Typically, investors use short-term, high-interest hard money loans to finance a BRRR purchase and rehab. Then, once they’ve rented the property, they look to refinance these short-term loans into long-term mortgages—with significantly lower rates. 

How to Refinance a BRRR Property

If BRRR investors fail to refinance their hard money loans into long-term mortgages, they face two bad options: 1) continue paying the high interest rate of a short-term loan, or 2) change strategies and sell the property. This begs the question, how can investors refinance a BRRR property? 

If investors ask this question during a BRRR deal, they’ve already set themselves up for failure. Instead, before beginning a deal, BRRR investors need to get pre-qualified for the eventual permanent, or take-out, loan. They need to find a lender who will provide this sort of refinance loan on an investment property, apply for pre-qualification, and then purchase the property with a hard money loan. 

This sequencing is the result of credit requirements. With hard money lenders, credit scores and income qualifications largely don’t matter. These lenders only concern themselves with the “hard asset,” the property, and its after-repair value. As a result, hard money loans are often easier to qualify for than traditional mortgages. 

On the other hand, traditional lenders do care about credit scores, income requirements, and other personal financial information. This means that, of the two loans, the long-term financing proves far more difficult to receive. Due to this reality, BRRR investors will want to confirm that they’ve tentatively secured their long-term financing before jumping into a deal. If not, they can face an unpleasant surprise during the refinance period of the BRRR deal. 

Lender Considerations

Not all lenders apply the same criteria to their loan products or even offer the same products. Accordingly, BRRR investors should ask a few pointed questions of any lender they consider using for long-term financing. 

Do you offer rate and term refinances on investment properties? 

When you refinance a hard money loan into a traditional mortgage without taking any additional cash out, lenders call it a rate and term refinance. You only change the interest rate and the length of the loan (the term) when you refinance from the hard money loan into the long-term mortgage. Essentially all lenders provide this service for primary residences, but some will not for investment properties. 

Do you offer cash out refinances on investment properties? 

Even fewer lenders offer this option for investment properties. If you would like to take some cash out of the deal, you’ll need to find a lender willing to provide cash out refinances on investment properties. While certainly not impossible, you’ll have to do some more research to find one of these lenders. 

How much “seasoning” does the lender require? 

Seasoning simply refers to the amount of time lenders require investors to own a property before they will allow a refinance. This requirement exists to prevent fix & flip fraud. Lenders don’t want investors to clean out a little dust, say a property has been “rehabbed,” and sell it for a huge mark-up. Related, many lenders will want to see a detailed accounting of all of your rehab expenses, to include receipts, to prove that you did, in fact, renovate the property. 

Many investor-friendly lenders will require a six-month seasoning period, while more conservative ones could require more than a year. Whatever the duration, following the seasoning period, the lender will accept the current appraised value—as opposed to the purchase price—in determining the allowable refinance amount (most lenders will approve 80% loan-to-value refinances for investment properties).

Do you accept rental income towards debt-to-income requirements?

Many investors will need the income from the BRRR property to meet lender DTI requirements. Make sure to ask this while researching lenders, as not all do accept this. And, of the ones who do accept rental income, many only accept a percentage of it. 

Securing Your Hard Money Loan

After you’re pre-qualified for your takeout financing, you can secure your hard money loan. Each lender differs, but at Do Hard Money, we offer hard money loans up to 70% LTV based on the property’s after-rehab value, or ARV. 

For example, assume you can purchase a distressed property for $150,000. We’ll work with you and a professional appraiser, who will compare your property, its projected rehab plan, and local market comps to determine what this property will be worth in the future. If the ARV appraisal comes in at $300,000, we’d issue a hard money loan up to $210,000 ($300,000 x 70%).

We also have lending partners that are more investor-friendly on the refinance and don’t have as many requirements as other lenders. We can help get you set up.

Finding a No Money BRRR Deal 

With a particularly good deal, investors can complete the BRRR steps without contributing any money to the deal. To do this, they need to look at both the allowable hard money and permanent loan amounts. 

For instance, let’s use the above example. Assume that the initial ARV and final, post-rehab current value both equal $300,000. If the investor can complete the purchase and rehab for less than the hard money loan amount ($210,000), he or she could complete the deal with zero cash.

However, deals this good are exceedingly rare. But, the permanent loan provides a little more wiggle room. As stated, most lenders (after the seasoning period) will provide refinances up to 80% LTV on the current appraised value. In this case, that means the investor would qualify for a $240,000 permanent mortgage ($300,000 x 80%), $30,000 more than the hard money loan.

If investors can complete this purchase and rehab for less than $240,000, they can also complete the deal with no contributed capital. But, in this situation, they’d need to solidify gap financing for the $30,000 difference between the hard money loan and eventual permanent financing. While still tough to find, these deals do exist. 

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