- Hey, what's up guys, Clint Coons here
and in this video, what I want to do is cut a second part
to that BRRRR video I put together
because I received so many questions
about using entities and financing.
I thought I need to revisit this
so here's a followup to this video.
It's gonna cover some important topics
that I didn't talk about in that first cut.
Let's get started.
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So here's the issue.
After I cut that video, I got a lot of questions
about limited liability companies
putting your property into an LLC
because in that first video, I discussed the problems
with taking title in a limited liability company
and then looking to do a refi.
And so I made the statement
you should probably just hold title in your own name
because part of the BRRRR strategy is about going,
buying the property, rehabbing the property
then refinancing the property, getting your money out
and going out there and doing it again.
Well, that could be a problem based upon A,
the type of financing you're gonna be using
to set this strategy up or how you acquired it
and that's why I was pretty specific on
you probably want to take title in your own name.
So I want to go back and clarify some of those points
and talk about some of the lending issues that come up
when you're using that BRRRR strategy.
So the first thing I want to discuss is the LLC
and what to consider there.
So with BRRRR if you're gonna be using that strategy,
you could definitely take title in LLC
and a lot of people brought up those comments.
They said Clint, you did discuss an LLC,
but what about the anonymity component?
How does that fit in and what happens if I get sued
during the course of the rehab work on the property.
Now I'm exposed cause title's held my name.
So here's the thing to consider.
If you're gonna buy this property
and you're not going to refi it for let's assume a year
or two because it just doesn't work out
so I'm gonna talk about here in a moment
with the financing, Freddie Fannie
how that works with BRRRR,
then yeah, go ahead and take title
in the limited liability company.
So what you should do is set up your LLC
and when you acquire the property,
definitely get that property acquired
in that limited liability company name.
Now, this is what I stated in the last video.
What I didn't talk about was anonymity
and a lot of my viewers, you included, probably said,
well Clint, that defeats the anonymity.
No, no, definitely.
I didn't go into it, but you could use a Wyoming LLC
just like this to hold that state specific LLC
that owns a property.
Now keep in mind in this strategy,
there's a number of different ways
you could have acquired this property.
You could have bought it for cash.
So then you paid cash for the asset.
You could have used a portfolio lender.
So a portfolio lender would be someone
like a community bank
or maybe it was private money to set the deal up
or you could have used hard money to buy the property.
Now, this is where it gets important
because when you're using the BRRRR strategy
you want to go in and pull your cash back out
and depending on the type of lender
you're gonna be working with,
this could create issues for you
the way you structure it on the front end.
And there's other ways
in which you could acquire the property.
Maybe it was through conventional mortgage to get this.
And so typically you would close in your own name
and then transfer it into the LLC.
So why did I say keep title in your own name
and not put it directly into the LLC?
Well, that's because, unless you're dealing with
these two right here, those types of lenders,
then it's gonna be more difficult for you
to pull your cash out
if it's in a limited liability company or even a land trust
because Freddie and Fannie are not going to issue a mortgage
to a trust or an LLC
and so what could possibly happen in this type of scenario
if you didn't have title in your own name
so let's say that you're gonna buy the property,
it was originally bought at auction.
So you got this property, it was bought at auction,
it was transferred into the individuals corporation
let's say or some business entity.
So this guy goes to auction, he buys it.
Most of my clients buy through entities.
And so now he owns it here
and then he's gonna sell it to you, the investor.
And so now that gets sold to you as an individual.
Maybe you come in here with a bank financing,
conventional financing to buy this property
from this individual.
So now it's in your name,
then you turn around because of the rehab
and you want to put it inside
of a limited liability company right here.
So now the property is over here
and let's assume this happened in January right here,
you bought it.
And then you moved it in here after...
Or he bought in January, you bought it in February.
Put it in your LLC.
And then after that you do the rehab work
and you're ready to refinance it
and then in June, you put it into your own name,
deed it back out of the LLC in your own name
in order to do a refi on the property.
So as you can see here,
there's been a deed transfer right here.
There was a deed transfer here,
there was a deed transfer here
so there's been three transfers.
Now I know you're keeping this property.
If you were looking to sell this property,
that would be a huge problem for you.
Finding a person that could get an FHA qualified loan
in order to come in and buy this
if they wanted to make it their primary residence,
this would screw the whole deal up for you.
But let's assume you're not doing that,
you're using the BRRRR strategy,
it can still create problems for you
because when you bought it,
let's assume that you bought this property for $100,000
and there's been these multiple moves
and now you're trying to do a refi,
cash out refi on the property
and you're claiming the property is valued at 200K,
something like that or 180.
It doesn't matter what the numbers are, my point is this,
that a lender could look at that and say hey,
title's been churned.
It's been too many transfers in a short period of time.
What is the true value of this asset?
So that's always gonna be my concern
when you're using any type of strategy
and you're moving assets in and out of entity.
So that's one of the reasons why
I indicated probably keep it in your own name
because if you're using Freddie Fannie financing,
it's going to be a problem for you.
So let's assume that you're using Freddie Fannie,
you went through this and you did it,
you own the property in your own name
and you plan to refi it within eight months.
So in that case, yeah, take title in your own name,
keep it in your own name through the construction period.
After you get your refi, cash out refi money on this deal,
then put the property into a limited liability company
for asset protection purposes going forwards
and again, hopefully you caught my due on sale clause video
where I talk about transferring it in
and that it's no longer concerned
when it comes to Freddie Fannie
and the due on transfer clause.
Watch that video if you haven't, it's very enlightening
for those of you that are not aware of this.
Now in this particular situation,
that LLC should definitely be owned
by a Wyoming limited liability company.
So that's a perfect way of handling
this type of transaction cause then to move it in,
you pick up your anonymity,
but if you think you're gonna be in that property
for a much longer period of time
before you're gonna be able to do the refi audit
because you're just not gonna have enough there
in order to go in, let's assume that it's gonna be...
You think at a year or two or three years,
then obviously right away,
put that property into the limited liability company.
But if you think you're gonna refi it within a year,
you might want to consider just putting it,
keeping it in your own name and then going in
and putting in the LLC after the refi is complete.
So that is just to clear up those loose ends
about using anonymity.
Yes, you should use a Wyoming LLC
to hold your state specific LLC that holds the property
and to put some more points
on how you go about structuring this.
Now the issue that comes up in all of this
whenever using BRRRR is going to be financing.
I briefly touched on portfolio loans
which is something you would acquire
from a community lender typically
and they're gonna allow you to have more flexibility
because they have different underwriting standards,
but most of us are gonna be working with Freddie Fannie
who basically controls about 90%.
So when you go to a broker and you get a loan
on a deal like this, they're typically gonna write
what's referred to as a Freddy Fannie conforming loan
which means that...
Oh, I forgot to mute that.
Which means that with a Freddie Fannie conforming loan,
you are writing that loan.
The broker is writing that loan
to sell it to Freddie Fannie.
So they want to make sure
that it's gonna conform with their buying guidelines.
So what I did is I put together a matrix for you
and if you go to the show notes,
you're gonna be able to find this matrix
which shows you some of the issues you have
with Freddy Fannie
when it comes to putting these deals together
because you have to understand there's two different types
of mortgages out there on investment properties
you're most likely going to be qualifying for.
One is gonna be the cash out mortgage.
One is gonna be a no cash out mortgage.
And depending on...
I mean, obviously as a BRRRR investor,
you want to go with the cash out mortgage on that deal
and it's gonna have different requirements
than a no cash out mortgage,
which means with a no cash out mortgage,
all you're doing is refinancing the existing debt
on the property, which isn't getting any cash out
that you can put into another deal,
but maybe that's not such a bad idea for you
if you go the no cash out route
depending on how you structured it on the front end.
Let me give you an example of something
that I've done in the past how that worked for me.
So on one of the very first deals I did
when I first got started investing,
it was a deal that I put together
and this was in Tennessee and I bought a property.
I think the property at that point in time
was let's say it was $75,000 for this property.
And so the rehab work on it was going to be about 15K
so you're all in for $90,000.
Well, my all in on this deal to get it set up,
to get this property was 5K.
I only had to put in $5,000
because I found a hard money lender
who is willing to loan against the ARV
and they were willing to do 80....
I think it was 80% or 90%
of after rehab value on this particular property.
So they basically funded the entire deal.
I had to come up with 5K,
but they funded the entire deal for me.
I bought this property,
I put in using the hard money lender.
So I think the interest rate on that deal
might've been around 10 or 11%.
I don't recall, but it's hard money.
So I got the deal under contract, closed on it,
did the rehab work, got it all wrapped up,
all set, ready to go.
After the rehab value on this property now,
let's say it was $140,000 after the work was all complete.
Again, for those of you like to pick through my numbers,
I'm just using this as an example.
I just want to throw that out there
before I start getting comments
where did you find a deal like that?
I mean, this is what happened.
So I had this property, did this deal
and then after I was done with the rehab work
and I got a tenant inside of the property,
then I went to a conventional lender.
I went to a broker and I got a loan on that property.
This was a no cash out loan.
So this is the situation where you would use it.
So I have this property now sitting here
and it has $90,000 in debt
that's owed to a hard money lender.
I then switched out of that higher interest debt
into a lower interest conventional mortgage
on this property and I was able to cash it out
for the original amount that I borrowed.
That's how a no cash out mortgage typically works.
You're not pulling any money out,
you can use a Freddie Fannie product
that will take out the prior lender.
Now they're typically not going to be
a seasoning requirement on this deal
in order for you to do this
because you're not pulling any money out of the property.
So all I did was retire the original debt.
Now there's a lot of real estate investors
that use this strategy to acquire property.
If you know that your after rehab value
is going to be enough
that you meet the loan to value ratios
and if you look at that matrix, I'll bring it back up.
I've got the loan to value ratios there
for Freddie and Fannie on these no cash out mortgages,
this is a way you can get into something
with very little down using someone else's money,
they're making points, they're gonna make interest
then you refine them out with a traditional mortgage.
So that's how I used a no cash out mortgage in the past
when I first started investing to get into properties
with very little down using hard money.
So going back to that matrix again,
let me just bring that thing back up here.
As you can see here on this matrix,
let me just expand it a bit here,
the cash out mortgage is a little different.
So with the BRRRR strategy,
what you're wanting to do of course with the strategies,
you go in, you buy the property, you rehab it,
you fix it up and then you pull cash out.
When you're pulling the cash out,
you're gonna take that cash
and you're gonna go and put it into another deal.
So what you have to be looking at here
with these no cash out deals is you need to know
what is the loan to value
that you need to be concerned about?
What are they willing to loan against
and as you can see here on the cash out mortgages
where we're gonna pull cash out,
on an investment property, that's one unit, it's 75%,
both Freddie and Fannie have the same guidelines.
On a two to four unit, it's going to be 70%.
So you can borrow up to 75% on a single family home.
And so if that house you got into is now at $200,000,
we'll just do the math on that,
it's gonna put you at 150.
So if you've got money into that, there's equity now, 50K,
you're gonna be able to pull that 50K out
and you're gonna be able to go out there
and put that into your second deal.
Now here's the thing about these cash out mortgages.
Unlike the no cash out mortgages,
there's a seasoning requirement here.
And the seasoning requirement is six months.
That means you got to own that property for six months,
a minimum of a six month period
before you're even eligible to go
with one of these Freddie Fannie conforming mortgages,
which as I stated, 90% of the mortgages
are owned by Freddie Fannie
so most brokers are writing these types of loans.
But there's also going to be
as you've probably heard in the past a limitation
on how many of these loans you can put together,
that limitation is going to be six to 10
depending on how they underwrite them.
If they use Freddie Fannie system,
it's called the DU where they go in
and they just punch in all the numbers
and it gets underwritten through the software calculations
and it's not manually underwritten
then you can have up to 10 mortgages this way.
If they manually underwrite the loan
because it just doesn't work through the system,
maybe there's something unique about that property,
then you're gonna be limited to six.
But for those of you that using the BRRRR strategy,
because of the lending on the backend,
this is why I'm saying don't put the property
into an LLC right away.
If you think you're gonna have sufficient equity
in six to eight months
and you're gonna go in there and you're gonna be able
to pull this back out under a cash out,
you're gonna have to do it in your own name
when you set these up.
And as you can tell,
I also put in here whether or not it was held in an LLC
or land trust they would allow you to do that
of course, because this is investment property.
You cannot do the cash out refi
with Freddy through there, with Fannie.
They may look at it and accept it
if it's in a trust such as a land trust
in certain states or living trust would work,
but again, that LLC is not gonna fly for you.
So what you'll do is you'll get your cash out,
then put it into the limited liability company
for the asset protection.
So that's how it works.
I'll have this in the show notes, I'll have a link to this.
And I actually have, in addition to this,
I've put together all of the links
back to the servicing guides for Freddie and Fannie
so you can actually...
If you want to go read them yourselves,
you can read all this and pour through it like I have
so you understand how all this goes together.
Hey, this is a little bit longer than I anticipated,
but I thought I needed to tie some things down.
It's important to know why I make the recommendations
of moving it into LLCs.
Hope you gained a lot from it.
Again, if you have any questions, throw them in there.
I'm really great at answering those questions for you
and thanks for watching.
I really appreciate you visiting my channel.
Take care, everyone.
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