The BRRRR strategy hinges one one key element: refinance all of your own money out of a deal.
While all parts of the BRRRR are important, some may argue that refinancing is the most critical part. For this reason, today we are going to focus on four key elements that the BRRRR investor should be looking for when establishing a relationship with a lender.
Not All BRRRR Lenders Are Made Equal: Here Are Four Key Differences
1.) Down payment requirements:
If you’ve been thinking about real estate only for a short while, you probably believe that you must put down 25% on all non-owner occupied investment properties.
This is a common misconception in real estate circles, especially with beginners, but please know that all lenders have different requirements.
When I bought my first property, I was saving the down payment from scratch to the tune of $15,000 maximum per year, so finding a lender with the least down payment required was hugely important.
For that reason, I reached out to 55+ small banks and credit unions in Massachusetts looking for that “unicorn” lender that fit all of my criteria. It took effort, but finding that lender has made all the difference in my real estate investing trajectory.
2.) Refinance Seasoning Requirements:
Everyone says that you need to make 6 mortgage payments before you can refinance a loan. This is called the “seasoning period” for a mortgage. I heard this so often in podcasts and books that I never questioned it. I took it to be fact. Well, it isn’t. My lender allows me to refinance a mortgage literally days after I close on a loan. They have no seasoning period at all.
Now, you may say: “It’s only six months, why is this important?” Good question! This is important because when you are BRRRR’ing a property, you are usually utilizing hard money or a rehab loan, both of which carry higher interest rates. Further, if you’re done rehabbing the property within three months, using a lender without any seasoning requirements for the refinance will allow you to get your money out of the deal and back into your next deal that much quicker.
3.) Debt to Income (DTI) Ratio Calculations:
We are a single income household so when we started out I was pretty pleased to learn that we would qualify for an investment property mortgage on top of the mortgage for our primary residence.
The investment property was acquired at $150K with an assumed rehab budget of $50K, so the total loan was based on an aggregate 200K cost for the property. With the rehab going really well, I started calling banks looking for an 80% loan to value (LTV) cash out refinance product.
When calling, I was giving them my projected after repair value of $300K, and more than a handful of banks said that my debt to income (DTI) ratio was too high to support an 80% LTV cash out. Some tried to convince me that I should only cash out 70%, while others told me they couldn’t work with me altogether.
What did I do? Continued calling! Ultimately, I found a lender who was willing to consider the projected rental income for the property, which lowered my DTI and allowed me to qualify for the 80% LTV cash out loan that I was seeking.
4.) Reserves Requirements:
I was three weeks out from closing on my cash out refinance when my lender called me with the question: where do you keep your reserves? “Reserves? What reserves?” She proceeded to explain to me that they required me to have a 6-month cash reserves for the property’s expenses. Naturally, I freaked out. I had used every penny to buy the darn house. I didn’t have any cash reserves.
That is when a good lender comes in! She calmly asked me: “How about 401Ks, or other types of accounts?” Thankfully, my wife and I had $80K in retirement accounts, and the lender was able to utilize those retirement funds and my reserves.
I share these items with you to highlight the importance of having the right lending partner. If you haven’t found what you’re looking for in a lender, just keep calling and searching for a lender that will be able to check all of your boxes! Happy hunting.
Frugal Mogul 🏡 (@RealFrugalMogul) / Twitter — twitter.com
Sharing my journey to financial independence through real estate. Follow for live tweets as I go from 0 to 15+ rental properties (currently at 4).
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