Refinancing money out of a BRRRR property is always one of the high points in my investor career. Nothing feels better than closing on a refinance and having a cash-flowing property—plus money in your pocket to do your next deal!
Refinancing out can also be the most tenuous part of the BRRRR process.
Who’s Involved in Refinancing?
There are three major players in a BRRRR refinance:
You
The property
The appraiser
Let’s take a closer look at each one.
Your Role in Refinancing
Believe it or not, you have a huge impact on if the refinance goes through. The lender is underwriting you if you are using conventional lending and the home if you are using commercial lending (although you still have to sign a personal guarantee).
Here are some action steps to take to improve your odds:
Line up your “take out lender” during your initial diligence of the property and have them pre-qualify you on the loan.
Have a good FICO score and reserves, so you can actually qualify for the new loan.
Don’t change jobs, reduce your hours, or quit before your refinance is complete.
Don’t make major purchases that would throw off your debt to income ratio (DTI) or deplete your reserves, or your lender may no longer see you fit to lend to.
Don’t purchase more properties or execute other refinances without involving your lender to ensure that you can still qualify for the refinance loan.
Partner with the lender to know what type of loan you qualify for and what type of down payment you will have to bring. The lender is a team member.
Though this all seems to be common sense, I’ve seen investors get tripped up by purchasing too many properties at once, executing complex refinances on multiple properties at once, or being silly and reducing their hours at their job or quitting their job two weeks too early!
The Property’s Role in Refinancing
Another player in a successful refinance is the actual home and rehab. This work should be completed in the due diligence phase as you finalize all numbers for the purchase AND refinance at one time.
Have you run your numbers accurately?
The property: Are you purchasing a property that is in a stable or appreciating neighborhood and market? If prices are declining, you will need to account for a decline in the ARV you desire (and ask yourself why you are purchasing in a declining area anyways!).
After repair value (ARV): Did you pull accurate comps for the level of rehab you are doing? Have you ensured your numbers work at the lower end of the comp range?
Taxes: Did you account for possibly losing a tax homestead exemption? When you purchase a home, the previous owner might have had a homestead exemption. An investor, at some point during the hold, will lose that exemption. The lender counts this as an expense in their underwriting. Also, is the local government raising property taxes? I had one home where the taxes tripled during the time I held it. (I now have sold it.)
Insurance: Did you account for the difference in premiums in your post-refinance numbers? Again, the lender counts this as an expense. Have your insurance agent write a quote for the pre- and post-rehab home so you aren’t surprised.
Rehab: Did you bring the home up to market competition level? The appraiser will be looking at the recently sold properties and upgrading and downgrading your home to those retail sales. Make sure your home is on a similar level with regard to number of beds, baths, garages, and finishes. This does not mean over-rehabbing the property—just being on par! Make sure the rehab is also quality work. In addition, take care of major mechanical and foundation issues before refinancing, and keep all receipts.
If you have purchased a great home in a great market, run your numbers, rehab it to the competing market, and you should have a relatively good chance the refinance will go smoothly.
But there is still one hurdle to clear—and that’s the appraiser.
The Appraiser’s Role in Refinancing
At the time of this post, home sales are on fire and getting a timely appraisal is extremely challenging. (I’ve currently been waiting three weeks on three of my properties!) The lender doesn’t even get to choose the appraiser, rather they put in a request to an appraisal network. Most appraisers are solid and competent; we investors LOVE this type of appraiser.
Conclusion
There are clear action steps, within your control, that you can take to ensure your BRRRR refinance goes smoothly. And while you can’t control the entire refinance transaction, you are now empowered with ways to deal with most BRRRR refinance situations.
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