17. BRRRR – From Bridge Loan to Fixed Loan
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.
I briefly touched on this in my previous posting regarding funding options. Let’s dig a little deeper.
You have a vacant property under contract. The plan is to renovate, place a tenant and then transition to local property management. You will keep this property as a cash flow asset for your long-term passive income wealth building strategy. This is the essence of the BRRRR strategy and require two loans to make complete the process.
BRIDGE LOAN
You will need to acquire a short-term bridge loan (fix and flip). Loans are typically up to 90% of purchase price plus 100% of renovation costs. It is an interest only one year note, with a balloon payment, a 30 yr. AM, and no pre-payment penalty. Rates and terms vary depending on experience and your middle FICO score.
Therefore, you will need to come to the closing table with up to 10% down payment plus closing costs and points. If you plan on including renovation costs in your loan, the lender will require a project plan and scope of work with timelines, pricing, and phases usually in a spreadsheet format they will provide. You submit your project plan in two stages. Prior to closing, the lender will send their construction inspector to review your project plan and make any necessary costs adjustments. Your project plan costs may change depending on the recommendations of the inspector with a revised renovation loan amount.
Once you close on the loan, renovations begin. Wait! Where’s my renovation funds? The lender will not release the first half of the funds until the first phase is completed. This means you will need to come out of pocket for the first phase. Once you request the first draw, the lender will send the construction inspector to your property. Upon approval, the lender will release the first draw by direct deposit into your bank account. The process repeats itself at project completion for the second draw.
Please note that even though the renovation funds are held in escrow and on a draw schedule, it is still part of your loan and included in your monthly payments.
REFI LOAN
Once completed and rent ready or tenant occupied, the property is now stabilized. It’s time to refinance out of the bridge loan into a long-term fixed loan. Remember, the lender will require 3 months seasoning. With a mortgage recorded on this loan, the seasoning requirement is shortened to 3 months instead of 6 months with a cash only purchase. Now, this does not mean that we cannot start the process before stabilization. We can.
At what point can I start the refi process?
1. Within two weeks of completing renovations.
2. When the project is completed and rent ready.
3. With an approved tenant and scheduled occupancy date.
4. After tenant occupancy.
Any of these options will work but if you want to limit the time you hold your bridge loan, option #1 works best. The loan can close one day after the seasoning period ends.
Once you do close, it will then be time to chase that last R of the BRRRR strategy with your next 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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