Tag Archive for: #Buy and Refi

How to Refinance a BRRRR Into a DSCR Loan

100% leverage for BRRRRs will be back on the table soon. Here’s how to refinance a BRRRR into a DSCR loan.

“Can I use a DSCR loan for a BRRRR?”

Yes!

A DSCR loan is one of the many products you can use to refinance your BRRRR property. 

Using the BRRRR method, you could buy a house with a hard money loan, fix it up, then refinance with the DSCR.

Let’s go through an example of what it would look like to refinance a BRRRR into a DSCR loan.

What Is a BRRRR and a DSCR Loan?

To get started, let’s review what these two real estate investment terms are.

What Is a DSCR Loan?

A DSCR loan (which stands for debt coverage service ratio) is a long-term rental loan with minimal qualification requirements. Your ability to get a DSCR loan is based on the property’s debt ratio, not your income, history, or experience. As long as the rent from the property covers all its expenses (mortgage, taxes, insurance, and HOA fees), you can qualify for a DSCR loan.

DSCR loans rely on cash flow. There are some DSCR products out there designed for negative cash flow properties. But these loans have higher interest rates, lower loan-to-values, and more cash out-of-pocket.

What Is a BRRRR?

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It’s a time-tested real estate strategy for acquiring cash-flowing rental properties.

In BRRRR, there are two loans involved:

  • The buy loan. The loan you use to close the house, do the rehab, and handle carry costs until you get a tenant. Real estate investors often use hard money for this, since it’s a short-term loan.
  • The refinance loan. The loan that gets you out of the hard money and captures the equity you put in the house with your repairs.

A DSCR loan can be a perfect fit for many BRRRRs’ second, long-term, refinance loan.

Appraised Value vs Purchase Price for a BRRRR’s DSCR Refinance

DSCR loans come in many different products (interest-only, 30-year fixed, etc.). You can use any type of DSCR loan as a refinance for a BRRRR.

There is just one question you need to ask your lender: For the LTV on a DSCR refi, do you need to use the appraised value or the purchase price?

When you do a rate-and-term refinance with a conventional loan, the guidelines often allow you to use the appraised value. For DSCR loans, however, lenders write their own guidelines. The number used for the LTV varies from lender-to-lender, so it’s always important to ask.

A Fast Refi

You don’t want to be stuck in the hard money loan for very long at all. The ideal BRRRR reaches the refinance stage within 90 days. The interest rate on hard money adds up quickly. It’s important to figure out all the details of your refinance ahead of time so you can get through the process fast.

We’ve been doing BRRRR long before it was named that. Back in the day, we called it “Quick to Buy, Quick to Refi.” The old name emphasizes a part of the process that many current BRRRR investors miss.

To be quick to refi:

  • Make sure you’re pre-qualified for the refinance loan, before you even close on the property.
  • Understand when you can use the appraised value of the house. This will tell you how much money you’d have to bring into the refinance.
  • Plan out whether you can get this BRRRR done with 100% leverage

Refinance a BRRRR into a DSCR Loan with 100% Leverage

100% leverage means you don’t put any of your own money in – not for purchase, closing, rehab, or even carry costs. In 2010, we helped many clients do BRRRRs with zero money out-of-pocket. Those opportunities will be available again soon.

For a successful 100% leverage BRRRR, the property you buy has to be at least 25% undermarket. In a down market (like the one quickly approaching us now), you can find many properties for 25-40% below market value.

Example of a 100% Leverage BRRRR

What numbers do you need in order to figure out a zero down option for BRRRR? Let’s go over a couple examples.

The 75% Rule

As we’ve covered, the short-term hard money loan comes first, and the long-term refinance loan comes second. But you have to know what LTV you’re qualified for before you close on the loan.

For most cases with a rate-and-term refinance, you can qualify for an LTV of 75% of the current appraised value.

To get 100% leverage for your BRRRR, all of your costs have to stay under 75% of the after-repair value.. For example, if you had a property with a projected ARV of $400,000, a 75% LTV would leave you with a $300,000 loan (aka, 75% of $400k).

Now, the difference between the ARV and the LTV is the amount you get to budget for all your costs (purchase, closing, carry, and construction). In this case, that would be $100,000. Any costs above $100,000 end up coming out of your pocket.

Budget for Costs

Let’s continue with our previous example.

Let’s say the purchase price for this home was $250,000.

We’ve looked over the property, and we could do the full rehab for $35,000. Also, closing and carry costs will be at $15,000.

So, what does all this mean? If you can get a hard money loan for $300,000, then your whole project is covered. You can refinance the whole amount into a long-term DSCR loan and pay off the hard money, with nothing out-of-pocket for you.

Going Over-Budget

No money down is the ideal for BRRRR. There will be more opportunities upcoming for zero down properties.

But for the sake of example, let’s say your costs on a property can’t stay under 75% of the ARV. If the purchase and carry costs are the same, but the rehab will actually cost $65,000, that brings our all-in costs up to $330,000.

Yet even the best hard money lenders probably won’t be able to give you more than $300,000 for this property. That extra $30k comes out of your pocket.

This is why you need to know your BRRRR numbers ahead of time before buying a property. Too many people jump into a hard money loan, but can’t qualify for the amount they’ll need.

Help with Refinancing a BRRRR Into a DSCR Loan

Are you in a position to qualify for a 75% loan? Do you know what numbers your deal needs in order to get a good refinance? Have you found a property that could be a 100% leverage BRRRR?

If you need help answering these questions, send us an email at Info@HardMoneyMike.com. Let’s run the numbers on a hard money loan. We’d love to see you refinance your BRRRR into a DSCR loan.

Happy Investing.

Quick to Buy, Quick to Refi – A New Rental Investment Strategy

Quick to Buy, Quick to Refi, a new 2-step loan strategy, helps you maximize your loan amounts while limiting the amount of cash you put into a project. It also helps you rapidly finish your projects and buy again, and again, and again.

What does that all mean? It means you no longer need to worry about missing out on great deals and getting stuck in expensive hard money loans.

The Quick to Buy, Quick to Refi strategy all starts with properly setting up your short AND long-term loans.

Now, even though your short-term loan will come first (to quickly buy an under market property from a wholesaler), a key step is to FIRST get pre-qualified for the long-term loan. Why? To ensure you’re able to maximize both loan amounts. If you can qualify for a larger loan upfront, then it’s likely your short-term lender will match that amount.

It also means you’re already going through the process for securing a long-term loan as you begin renovating a property with a short-term loan. Think, “Two birds, one stone.” By the time you finish renovations, you’re ready to refinance into a long-term loan.

But, hold on. You also need to know about the types of refinances. There are two you need to know about: “rate and term” and “cash out”. And yes, it matters you know the differences.

Ready to find out what about those differences? Then check out the whole video here and start capturing free equity, boosting your cash flow, and investing in more properties.

Want more videos with more tips to maximize your cash flow? Then check out our new video page, or subscribe to our new YouTube channel! Be sure to also check out all of our invest tools.

2-Step Loan Program: Quick to Buy, Quick to Refi

2-Step Loan Program: Quick to Buy, Quick to Refi

One of the key factors to making more on your investments is working with a lender who can handle your short-term AND long-term loans. Or rather, help you quickly buy and quickly refinance a property.

Why find a 2-Step loan program?

Well, most investors don’t have the luxury of closing a deal in 30 plus days. They need to close as fast as possible, especially if they’re buying from a wholesaler with a strict deadline.

However, many investors are nervous about using non-traditional funding (like hard money) to close a deal upfront. What if they get stuck in an expensive loan for months and months? What if they can’t get approved for a long-term loan and get stuck with that expensive loan?

That’s why it’s so important to work with a lender who can handle both sides of the coin. And not just any lender, but a lender who has experience with short-term and long-term loans.

Benefits of working with experienced lenders:

Benefits of working with experienced lenders

When you work with an experienced lender who offers a 2-Step Loan Program, you’ll:

  • Be able to quickly buy and quickly refinance a property.
  • Maximize your return on credit.
  • Maximize your refinance.
  • Enjoy less confusion and stress.

Think of a 2-Step Loan Program like a one-stop-shop for all of your real estate loans.

Less work, less hassle, more money.

Ready to learn more? Check out our YouTube Channel, download our investor tools, or Contact us today to get the ball rolling.