So far, we have covered three steps of the BRRRR process: Buy at a discount, Rehab the property, and Rent it out. The fourth step of the BRRRR process, Refinance, is a little less self-explanatory: what does it mean to refinance, and where and how do you do that? Our loan officer Dustin is here to help!
In the refinance step of the BRRRR process, you pay off the short-term loans that made the first few steps of BRRRR possible and enter into longer-term financing, usually with more favorable rates. Read on to understand more of this process!
What is refinancing in BRRRR?
This is where we pay off the hard money loan, whether we are paying back ourselves or a private lender, and we go through long-term financing. It is the part of the BRRRR process where we get all of our money back that we put into that property. At this stage, you are going to be refinancing that property into longer-term planning.
What to know about refinancing
There are a couple of things to keep in mind that will benefit you during the refinancing step of the BRRRR process. The biggest thing to know is that using commercials and smaller-town banks will offer you a different, better experience than with a major bank. It can also make this process run smoother. Typically, smaller banks are more interested in this sort of loan than the banks you may be familiar with, such as U.S. Bank or Bank of America.
When you are ready to refinance, we recommend that you call or visit a variety of smaller banks and start developing relationships with the people there. That is another great benefit of using smaller banks for these larger loan steps.
The second major thing to know about refinancing is that the majority of the time, refinance loans are going to be adjustable-rate mortgages. An adjustable-rate mortgage might be at 3-1, meaning every three years the rate can adjust or reset, or maybe a five-point loan, versus the 30-year fix that we hear so much about on our personal primary residence.
The next thing to keep in mind when refinancing is what name you put this loan in: the LLC, versus your personal name. When you’re buying these properties and you’re refinancing them, you need to ask yourself, “Do I want to put this loan in my personal name?”. If so, you can get a 30-year fixed loan through a Fanny Mae or a Freddie Mac conventional product. The main potential drawback to consider with this route is that you can only have 10 of those loans in your name and you have to make sure that your income can carry that debt.
Alternately, you could refinance in your LLC. There is no limit on how many loans you can have in your LLC.
Sometimes these options depend on what your bank offers. Some may be more interested in offering amortization, where you pay the long-term loan off in 20 – 25 years instead of via the typical 30-year fixed mortgage. These will be the sorts of variables that you want to discuss with the banks as you move into the refinance process.
Conclusion
Believe it or not, this is the fun part of the BRRRR process! During refinancing, we are now paying off that first lender that we had when we bought the property and getting all of our rehab money back as well. Refinancing is how we’re purchasing these properties and building our rental portfolio with no money out of our pocket because we get all of that money back when we do the refinance– if we did the numbers when they work properly. There’s no right or wrong answer when it comes to refinancing, but there are a few things to think about. We hope this is a helpful overview of what you will need to know when you enter this process. If you have any questions, please contact us!