Rental Financing & Seasoning – What It Means
by Matt Rodak, Fund That Flip
S easoning is the amount of time a property has been owned or has had an active mortgage. While this “waiting period” varies per lender, most investor-friendly institutions have an average seasoning period of 3-6 months. Meanwhile, more conservative institutions working with owner-occupied loans tend to be closer to a 12-month seasoning period. In many cases, banks and lenders will not allow investors to refinance their property if it has not been seasoned for the appropriate timeline. This restriction is in place to help prevent “scammer flippers” that are looking to dust off a home and sell it in a matter of days for a profit. Seasoning is also designed to prevent the constant flow of homeowners looking to refinance every few months when the economy is booming to pull out their equity. Without seasoning, people that purchased their home for a 20% discount would feasibly be able to go back to their lender the day after closing looking for cash. To some banks, this is a scary thought, given the risk associated with cashing someone out of their property so shortly after purchasing. To other lenders, removing this requirement is a catalyst for growth that allows experienced and efficient investors to kick it up a notch. While it does come at a slightly higher risk, some institutions see the value they bring to their clients by removing seasoning requirements. These investors don’t
have to wait 6+ months to pull their equity out of a deal to start working on their next project. Instead, they are able to leverage their speed and efficiency. Seasoning is most critical to investors that engage in the well-known BRRRR strategy - Buy, Rehab, Rent, Refinance, & Repeat. An investor will buy a rundown property well below market value in cash and renovate the property to create a sizable increase in value. The investor then locates a lender that will allow them to pull their cash out by obtaining a mortgage on the property. With cash back in the hands of the investor, the last stage of BRRRR can be satisfied by finding a new property and completing the process again. The speed at which the “Repeat” can occur largely depends on a lender’s seasoning period. With most competitive lenders having a seasoning period of 3-6 months, this means BRRRR investors are often limited to recycling their cash twice a year. Compare this with lenders that have 0-3-month seasoning, where the same stack of cash can be recycled 4+ times a year. Although no seasoning lenders may have slightly higher interest rates, this cost is significantly offset by the speed and volume investors can achieve. Next time you are shopping lenders, understand that no single term is as impactful as time. Lenders like Fund That Flip with no seasoning allow you to leverage this by allowing you to scale your business as fast as you can move. •
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