19. BRRRR – When to start the refi process?
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.
You purchased a property and renovations are under way. You plan on using the BRRRR strategy. At what point do you start the refinance process?
Here are three strategies to consider.
1. Renovations completed/tenant occupied – This is a good strategy to make sure you obtain the best loan based on the minimum DSCR of 1.2 with the documented rental amount. In addition, there will be no delays in refinancing because of additional repairs.
While this strategy makes the most sense, it will give you the longest refinancing period. It will take 6 weeks to complete the refinance which means 6 weeks of additional holding costs.
2. Renovations completed/rent ready – You completed renovations and are marketing for a tenant. You started the refinance process and used the projected rental amount to allow the lender to determine your loan structure. Quick tip: Most all lenders will allow you to start the refinance process when the property is rent ready.
This strategy decreases the time to close because you are not waiting to refinance until after it is already tenant occupied.
Using the rent ready strategy is quite effective but there are two scenarios that could affect your pending loan. First, if the property is not tenant occupied by the closing date, the lender will simply delay closing until it is. I see this happen occasionally and usually causes a short delay in closing. Second, your actual rent is higher or lower than your projected rent.
Provided the projected rent is higher, you are fine. But, what happens if the projected rent is lower than your estimated rent? This may cause the DSCR to drop below the minimum of 1.2. The lender will then lower your LTV to increase the DSCR. Therefore, you may only receive a 73% LTV with the projected rent instead of the 75% with the estimated rent.
3. Renovations in process – You can start the refinance process when you are about 1-2 weeks away from rent ready status. During this time, you provided your estimated rent to the lender, accepted a term sheet, and are submitting the necessary documents required for your refinance. By the time the property has entered rent ready status, you have completed all the preliminary work and the property is now in underwriting. The same two pending loan scenarios outlined in strategy #2 will still apply.
Once last important point. If you have not completed the seasoning period required by the lender, you can still start the refi process 6-8 weeks prior. Just remember, the lender will require a closing at least one day after seasoning ends. This happened to a recent closing I had in Huntsville, AL where we had to wait four weeks until seasoning ending before we could close on the borrower’s tenant occupied property.
Remember, you do have options when you want to start the refi process. I am working on several pending loans where all three strategies apply so choose the strategy that makes the most sense for your current project. Let us know if we can help.
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 firstname.lastname@example.org
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