Not long ago, fixing and flipping were the main goals of many real estate investors. In today’s market of high demand and rising home values, that formula has changed to buy, rehab, rent, refinance and repeat (BRRRR).
Increasing numbers of experienced investors – and certainly more of our customers – are seeking to buy and hold rather than flip. They are following this method to build their real estate portfolios by borrowing the equity from their rental properties to buy additional houses – a smart strategy, especially as home prices are appreciating and rents are going up.
The buy, rehab, and rent parts of BRRRR strategy are all critical to your success but don’t underestimate the importance of the refinance step. At Corridor Funding, we’ve helped many clients refinance Fix-and-Flip loans into long-term loans that free up their capital to invest in other properties.
Here’s how it works: a customer will start with a Fix and Flip loan. Once their rehab is complete, they refinance their hard-money loan into a longer-term loan that will allow them to rent out the property, freeing up cash flow and benefiting from the tax advantages that come with waiting to sell.
BRRRR TAX ADVANTAGES
The tax advantages with BRRRR investing are significant. When you flip you can make a lot of money quickly, but you pay higher taxes.
By refinancing, you avoid the taxable event of selling the property. In addition, refinancing allows you to harness the power of the current accelerated depreciation laws (watch for a future blog post on this topic, coming soon).
Depreciation, the reduction in the value of an asset over time, is one of the many tax advantages of real estate investing. Accelerated depreciation is an even bigger benefit to real estate investors, allowing them to take a higher deduction by claiming the maximum amount of depreciation in the first few years of owning a property.
Accelerated depreciation reduces or mitigates taxes, even for high-income earners. Many savvy investors will take accelerated depreciation for several years of holding the property as a rental. After taking full advantage of the accelerated depreciation they sell the property, often to the same tenant, with owner financing by the seller. By the time of the sale the investor knows if he or she is dealing with a timely payer, and after adding the pride of home-ownership to the equation, they are likely to continue to pay on time. Many of Corridor Funding’s clients sell their properties to previous tenants that may not apply for a conventional loan, so if they hold on to the mortgage note they will generally get a higher interest rate or they may opt to sell the note and reinvest the cash when the time is right.
INTRODUCING THE QUICK CLOSE, LOW COST, BUY & HOLD LOAN
It all starts with refinancing out of the initial hard money loan. As any fix-and-flip and buy-and-hold investor knows, time is of the essence. After all, the number one rule in real estate is that money is made when you buy, so working with a lender that can 1) get you into that “value add” play and lend you the renovation money to get it to rent ready, and 2) get you quickly into a subsequent loan that enables you to maximize cash flow while closing the loan quick is key.
Traditional banks don’t recognize that sense of urgency and typically take 2-3 months to close on a refinance as they review your bank statements, tax returns, pay stubs from your first job as a teenager, etc.
Corridor Funding offers two options for fast refinancing. Our top choice is a 5-year balloon loan that is amortized on a 30-year principal and interest schedule, known as the Quick Close, Low Cost, Buy and Hold Loan. It’s available only to exist clients who initially start with a fix-and-flip loan with us. With your established payment history as our client, you’ll be able to take advantage of the 60-month loan once your home is rent-ready and has 3 seasoned rental payments. This is a loan designed with accelerated depreciation in mind and it is available to SFR and multifamily who bought their home with one of our short-term acquisition and renovation loans.
This loan builds in several advantages for the sophisticated real estate investor:
- A 60-month loan with payments amortized over 30 years
- Financed into your LLC or entity of choice
- Your credit report will not show an additional mortgage, thus lowering your credit score because your debt-to-income went up
- Interest rates currently standing between 6-7%
- Fast closing in 2-3 weeks, vs. while our 30-year fixed are typically 3-4 weeks
- You’re paying down the principal balance, maximizing depreciation deductions, and then ultimately you exercise one of two common exits; 1) Cash out refi to buy new properties and create more passive income, 2) Sell with owner finance (still creating passive income).
- You’re growing your passive income while growing equity in your rental property.
Most importantly, this process frees you up to spend your time doing what makes you money: finding real estate DEALS to buy!
Corridor Funding also offers 30-year loans for those investors that don’t have an aggressive goal of building a passive income stream through a portfolio of several single-family rental properties. But we find that for those buying two or more homes a year, the Quick Close, Low Cost, Buy & Hold Loan is ideal to allow investors to redeploy funds into new investments.
KEY LESSONS FOR REAL ESTATE INVESTORS
- In the current market, homes are in high demand, prices are going up and rents are rising too; it all creates a climate in which buy-and-hold investor portfolios can build equity and expand their real estate portfolios.
- One of the most important R’s in the BRRRR formula is Refinancing. The right loan product will maximize your tax benefits while freeing up money to pursue other investment properties.
- When you’re on a hard money loan, time is of the essence. You need to refinance quickly to avoid going past your short-term loan maturity date and into higher interest and loan extension fees.
- The tax advantages with BRRRR Refinance are significant. By refinancing, you avoid the taxable event of selling the property. In addition, refinancing allows you to harness the power of the current accelerated depreciation laws.
- Discuss your real estate investing tax strategies with your CPA.
Get started today! Talk to the experts at Corridor Funding about refinancing your investment property.
By Jasen Miller and Jason Hirko