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Rental Financing & Seasoning - What it Means

March 18, 2020

Seasoning is the amount of time a property has been owned or has had an active mortgage.

Have you ever had a meal that was so enjoyable and well crafted, that it just didn’t need any seasoning? Much like your favorite meal, the best rental real estate lenders also don’t require seasoning. These lenders have designed their product with the needs of the investor in mind. Without these seasoning limitations, you can now exponentially scale your rental portfolio and still add tremendous flavor to your portfolio. Before I explain how to use no seasoning to your advantage, let's first identify what seasoning is and how it impacts investors.

What is seasoning and how does it work?

Simply put, seasoning is the amount of time a property has been owned or has had an active mortgage. While this “waiting period” varies from lender to lender, most progressive, 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 the lender prevent fraud related to “scammer flippers” that are looking to dust off a home and attempt to sell it in a matter of days for a huge 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 some other lenders, removing the seasoning 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 to the lender, some institutions see the value they bring to their clients by removing seasoning requirements. These investors don’t have to wait 6 or more months to pull their hard-earned equity out of a deal to start working on their next project. Instead, they are able to leverage their speed and efficiency to their advantage, knowing that their lender will not force them to hold the property for months before sitting down at the closing table. If you are curious as to how this small difference can make a huge impact on your bottom line, read below to see how top investors are benefiting from no seasoning.

Why is seasoning so critical for real estate investors?

Seasoning is often most critical to investors that engage in the well-known BRRRR strategy of real estate investing - Buy, Rehab, Rent, Refinance, & Repeat. As the acronym outlines, an investor will buy a rundown property well below market value in cash and renovate the property to create a sizable increase in value. With that increase, 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 in a single year. Compare this with lenders that have 3-month seasoning or no seasoning period at all, where the same stack of cash can be recycled four or more times within one year. Although no seasoning lenders may have slightly higher interest rates, this cost is significantly offset by the speed and volume investors can achieve. Here is an example to demonstrate the impact of a 6-month seasoning period vs. no seasoning.

Example:

An investor purchases a neglected property for $60,000 in cash. Next, the property is renovated with an additional $20,000. In its new and improved state, the property is now worth $100,000 - the investor has $80,000 cash in the deal and has generated $20,000 in forced equity. Let’s also assume this property can be rented for $1,000 per month. The investor then goes to their lender to do a cash-out refinance on their property, allowing them to pull the initial $80,000 back out:

 

Sam has a lender with a 6-month seasoning period, allowing them to complete the BRRRR strategy twice in 12 months leading to:

  • 2 Houses Owned
  • $200,000 Portfolio Value
  • $2,000 Monthly Rent

 

Charlie has a lender with no seasoning period and is able to complete renovation in 3 months, allowing them to complete the BRRRR strategy four times in 12 months leading to:

  • 4 Houses Owned
  • $400,000 Portfolio Value
  • $4,000 Monthly Rent

Partnering with a lender who does not require seasoning allows you to do more deals more quickly. This will result in more rent and more cash.

 

While Sam and Charlie both started with the same amount of money, found the same quality deals, and had the same amount of time, Charlie was able to generate 2x the portfolio, net worth, and cash flow all because of the seasoning period their lender offered. Sam and Charlie may be equally skilled investors living in the same area, however, Sam was limited in their capabilities while Charlie had the freedom to move as quickly as possible. Imagine the impact of this difference over 2, 5, 10, or even 30 years! You are looking at a multi-million dollar increase in portfolio value and thousands of dollars difference in monthly rent over a long period of time. Who would have thought that such a small difference in a lender could result in such a large difference in profitability over time?

 

Next time you are shopping lenders, understand that while rate, fees, and terms are all important, no single term is likely as impactful as time. Lenders with no seasoning allow you to leverage your most valuable asset (time) by allowing you to scale your business as fast as you can move.

 

Interested in Fund That Flip's new, no seasoning required, long-term rental product? 

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