BRRRR Method: The Refinancing Process
Refinancing a property is one of the four “R”s of the BRRRR method and can be the main accelerant in growing your investment portfolio.
Of the five properties we own, we have completed the BRRRR strategy twice and are currently working on the remaining three. Our investments are mainly single family homes that are approximately 700 to 1000 square feet. We purchased and renovated them with cash. For these two properties, a majority of the cost was paid for by taking out loans on the first two houses so we didn’t have to wait long to raise the funds to buy these properties. We were able to proceed with the final “R” in BRRRR – REPEAT – with a lot of success.
Researching Loan Options
Finding the right bank or financial institution is key to pulling the most money from your investments. Common traditional banks like Chase, Wells Fargo, etc. may have more requirements that you need to meet and higher interest rates while credit unions and local banks trend toward being more small business/investor friendly. Shop around be sure to ask lots of questions including:
- How long of a seasoning period (how long do you need to own the property or have someone renting it) is required?
- What is the loan based on? The typical standards are Loan-to-Value (LTV based on a percentage of what the home is worth based on an appraisal) or Loan-to-Cost (LTC based on the percentage of the loan to the purchase price plus the renovation value).
- Is the loan fixed or variable rate?
- If applicable, does the financial institution loan to out-of-state investors? (some do not, even if your company/LLC has a local address).
- Lastly, what documents are required to apply for a loan?
Our Refinancing Experience in Oklahoma
The bank we use in Oklahoma asks for pretty standard documents. These include the past two years personal tax returns, our personal financial statements, the year-to-date cash flow, income and balance sheets, and our LLC formation documents/operating agreement. Our loans are based on LTC so we have to provide some documents that show the purchase price and the scope of work with pricing for the renovation costs. The bank also provides a form requesting information on the rent roll, which sometimes requires a copy of the tenant lease.
For the personal financial info, we are able to generate the documents from Personal Capital, which we use to manage our budget, track our money from cash to investments. Then Stessa maintains our property financial records and generates the statements needed for the bank. Both of these tools are completely free. Paid versions of both these programs are available, but we haven’t seen the benefit in taking that step.
Another thing to consider is opening bank accounts with the institution of your choice. We did this with our bank. David Greene, the author of a wide selection of real estate investing books including Buy, Rehab, Rent, Refinance, Repeat, always emphasizes the importance of relationships and making them mutually beneficial or adding value wherever possible. Having accounts with your lender makes you a “real” customer and provides the bank with additional funds to lend out. The accounts also make it very easy to get your money once the loan is approved as the funds can be deposited straight into it once the processing is complete.
Before you do get the cash, you may need to notarize your signature, if your bank doesn’t allow you to sign digitally. Our bank is pretty old school so we have to sign multiple copies of the loan agreement by hand and have them stamped by a notary. UPS offers this service at some of their locations, but I’m also lucky to have a few co-workers that I can tap to have this service done. If your colleague is willing to do this for you, you should provide a thank-you gift, especially if this is a request you make often.
Show Me the Money!
The entire process takes between four to eight weeks for our financial institution, but may vary by lender. For us, having paper copies of everything sometimes drags things out, especially if we find a misspelling in an address or an incorrect detail. Then all the paperwork needs to be reissued and mailed, etc., etc. Obviously, it’s all worth it since we are tapping into money we used to buy one property and can now take it out of the asset to buy another. We are able to take out between 75 and 90 percent of our loan-to-cost value by refinancing. Cha-ching!
A key reminder is that it does NOT always make sense to refinance your property. Generically speaking and speaking NOT as a financial advisor, if your rental income from your investment does not cover the mortgage, it likely does not make sense to refinance it. For our circumstances, we sacrifice some of the cash flow on the property by taking out the loan, but purchasing additional investments more than makes up for that loss.
As always, you need to evaluate your own “big picture” to make sure a refi makes sense for your financial goals, strategies and your wallet.
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GET REFINANCING SMART
- MsFIRE 2 Blog Post – BRRRR…Heating Up Your Real Estate Portfolio
- Personal Capital
- David Greene Real Estate – Lots of Free Education in all types of media formats