12. BRRRR Strategy vs. Pre-Payment Penalty Period

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

Part of your BRRRR loan terms comes with a pre-payment penalty period. Typically, that’s a period of 5 years. It’s a stepdown period of 5/4/3/2/1.

If you satisfy the loan in the first year, expect a 5% penalty; second year, 4%; third year 3%; fourth year 2%; and 5th year 1%. For example, if you decide to sell at any time during this period, you will be assessed the corresponding penalty equal to the percentage of the loan amount for that year.

What about paying down additional principal during the pre-pay period? I am glad you asked. Most lenders will still assess the pre-pay penalty for any additional principal payments during this period. Ask your lender for clarification so you know your options. Lenders want to keep these loans for at least 5 years, which is why they include this stipulation in your loan.

Can the pre-payment period be shortened? Another great question and the answer is yes… with some lenders. Shortening the pre-payment penalty will increase your interest rate. Every lender is different but the term sheet you receive will include the pre-payment details.

If you are planning on holding the properties long term, the pre-payment penalty period should not be factor. With our portfolio of financed rental properties, they all have the 5-year pre-payment penalty. We plan on holding for a long time.

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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