16. BRRRR – Local bank or Commercial Lender?

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

Most investors are seeking to refi their rentals (BRRRR) post-renovations into a long-term fixed rate. Before calling me, they have usually reached out to their local community or large institutional banks for rates and terms. Great news! They have rates as low as 4% provided you refi in your personal name. That’s the hook. These banks may offer low rates but only with loans such as a 5/1 or 7/1 ARM and a 20-to-25-year AM. With that amortization schedule, this will significantly reduce your monthly cash flow. Fantastic, if your crystal ball is working and you know where the market will be in five to seven years. You do have the option of extending the loan at the time the balloon payment comes due, usually for a fee of 1% of the amount of the loan. The loan then adjusts to the current market rates. Suddenly, your interest rate increases exponentially, and you can’t break even on your cash flow. All those gains from the previous 5-7 years have just evaporated.

Now, there are many investors who choose this route for their own reasons. They are usually more financially aggressive wanting to maximize all options both short- and long-term exit strategies. They might hold on to the property for a couple of years banking on property values rising (property speculation – risky but timing in the market is everything). My response to someone who wants this type of loan – remember 2008? Many investors had ARM loans before the crash. When the rates adjusted, they couldn’t cash flow. They either sold at a reduced price, took a loss, or lost the property altogether at foreclosure.

With commercial lenders, your rate can be as low as 4.25% with a 30 yr. fix/30 yr. AM, depending on credit, experience, and other negotiating factors. Suddenly, you have multiple options. Hold for long term passive income, work to pay off the mortgage in 10-15 years to increase your income, or possibly look to sell many years from now, all without the short-term pressure.

Is that 5/1 or 7/1 ARM with .25%-.5% savings on the interest rate worth the risk? You decide.

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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