10. BRRRR Strategy vs. Cash or Debt

This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.

You’ve just gotten a great property under contract you want to keep as a rental. Because you need to close quickly, you’ve decided to pay cash. After closing, you’ve completed the renovations and placed a tenant. You accomplished this in 6 weeks from the date of closing.

Congrats! Your property is now a stabilized cash flowing asset. The next step is to refi and cash out your investment capital at 75% LTV as quickly as possible. You call to start the refi process and here’s our conversation:

Did you pay cash or is there an existing mortgage from a short-term bridge loan?
Cash of course!
When do you buy it?
6 weeks ago.
I can get you 70% LTV max now or we can wait until you’ve owned the property for 6 months to get a higher LTV.
What? WTF! Why?

Since you paid cash for the property, most all lenders will require 6 months seasoning. This is 180 days since you took ownership of the property. There are some lenders who will do 3 months seasoning at 70% LTV or 80% LTC (loan to cost). If you had a short-term bridge loan from an institution or hard money lender with a mortgage recorded, the lender would finance with 3 months seasoning at 75% LTV.

Why do lenders do this? With cash, you have no credit or payment history to provide with the property. They will mitigate their risks by insuring the property is stabilized after 6 months of ownership.

Paying cash gives you the greatest flexibility if you know you will tie up your capital for six months during the seasoning period or accept a lower LTV at 3 months. But the old saying of “Cash is king” doesn’t always work to your benefit with a BRRRR property.

Looking for funding? REI Trader, LLC has purchase, refi and fix and flip loan programs for your SFR, rental and multifamily portfolios. For rates and terms, please email jonathan@reitrader.com

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