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Posted almost 12 years ago

BRRR - How to Buy a House with Zero Money down Getting a Loan!

***I think I was the original creator of this process. Back then it was not called a BRRR (Buy, Rehab, Rent, Refinance).  This is the BRRR Method.  I have training video's on how to do this on my you tube page: https://www.youtube.com/playli...

This seems to be a hot topic so I wanted to go over the whole process with you.  What I’ve been doing lately is buying up short sales like crazy to keep them as long term rentals.  I am getting a long term 30 year fixed loan on these properties and my cashflow is $500-$700 per property because I’m buying them at huge discounts.  My out of pocket per deal is ZERO!  So how am I doing these you wonder?  Here is the process.

You or your credit partner needs to purchase the property in the name the loan will be under.  So this will be you personally.  You have to first get a fix and flip type loan on the property so you can rehab the property.  You can do this by using a hard money lender, fix and flip lender, or a private money lender.  A deed of trust must be on the property.  The key is the deed of trust must be in the amount that you want to refi the property at.  So the deed of trust needs to include the full purchase price + total rehab costs + money costs of this loan.  You have to buy the house at least 30% below market minus repairs.  While my rehab is going one, I contact my lender who I am going to refinance the property with.  They immediately get my loan paperwork started while the rehab is in process.  They order the appraisal as well immediately.

The great thing about these transactions is when I buy my house, the first lender I use is a conventional lender and their payment isn’t due for 1 ½ months. Then when the refi is done, their payment isn’t due for another 1 ½ months.  So I own this property for 3 months with no payments.  I learned that doing the light rehabs makes this more successful.  Just paint and carpet rehabs are what I’m looking for. I want to be in and out in 2 week and get the house on the market.  I actually start to market the house as soon as I buy it as a rent to own.  This way when the rehab is done I usually have somebody moving in right away.  This gives me 2 months of collected rent payments, where the mortgage doesn’t need to be paid yet.  I always keep 6 months reserves for each property in the bank before I take out any cashflow for myself.  It is generally good practice and the lender will require it.  Now if you have lots of houses and you already have tons of money in the bank to cover damage and vacancy, you probably won’t need to do this for every house.

Key Points

  • The key is the appraisal.  In order for you to be out of pocket zero money you need to get the appraisal to come in 75% of ARV.  If it comes in lower, that is money you will bring to closing.
  • You need 6 months reserves in the bank for each property that you personally own.  This can be cash in the bank or a Heloc or IRA or other funds.  You or your credit partner must have good credit.
  • I would only do one transaction at a time.  One time I was doing 2 transactions at one.  With one of the houses we were done 30 days before the other.  The lender said we would have to do both refi’s at once and we would need leases for both properties before they can finalize the loan.
  • Get the property rented as soon as the rehab is done.  My lender requires the lease to finalize the loan.  Also doing so gets cashflow immediately so you can start escrowing the 6 months reserves for the next property.
  • Find a credit partner to help you out. Since you can only do 10 houses, get your family and friends on board and show them how much money they can make by doing nothing.  If you do get a credit partner on board I would make the partnership fair so they want to do more.  I split my cashflow 50/50 with my credit partners and I split the back-end equity 50/50.  I manage everything for the partnership.  I manage the rehab and the property once it’s rented.  We keep the first 6 months of reserves in our escrow account.  Once that is met we start cutting checks.
  • 2 appraisals will be done because I am using 2 lenders.  If the first appraisal doesn’t come in right, you may be out of pocket money or you can pass on the deal

I’m a visual person so here are some #’s to work with:

Here is a deal I am buying very soon on a short sale.

Purchase Price is $71,000

ARV is $135,000 (I am being conservative, I think it could go as high as $145k, but I am working my numbers off of worst case appraisal)

Rehab is $10,000

Overfunding Rehab $8,000

Loan Costs for first loan is $4596.67 (1 month holding time)

Refinance Costs are $4786 (This gets wrapped into the loan)

My Permanent loan is $92,400 (this is a 30 year loan with 4.8% rate)

When the Refi will be done I will get $1,767.33 back in my pocket.  This is because I overfunded the rehab.  So my 1st lender will be giving me a reimbursement.

My monthly payment will be $484.79 Plus taxes and Insurance my payment will be $596.

I am going to rent for $1100

Monthly spread before vacancy and expenses are $504

I am going to get this house filled within 1 month of buying.  I will have 2 extra months of no mortgage payments. So this is $2,200 in money.

I am also doing a rent to own which requires a down payment. So the minimum down payment I will accept is $3,000.

 

So Bottom Line:  I will have $6967 in my pocket within 3 months of buying this house with no money out of pocket.

 

Doing these transactions will increase the money costs. Because you have 2 lenders you have to go through.  But I would rather do this than to buy a house and put 20% down.  I am usually ahead and have money in my pocket.

You will need to find lenders in your area who do these transactions.  I use Merchants Mortgage in Colorado for the 1st fix and flip loan. I use Denver Mortgage Company for my 2nd loan.  You will need to find a lender that has zero to little seasoning requirements.  Denver Mortgage Company has zero seasoning requirements.  Local and Portfolio lenders are ones who usually do these transactions.  Go to investor meetings to find these lenders.  Even if you have to drive to the next big city it’s worth it.  I found these lenders by driving 1 ½ hours to an investor meeting in Denver.  You will find that the bigger meetings usually have sponsors and the sponsors are these lenders.


Comments (50)

  1. Since I first read this post a while ago I have been on a search to find a lender with no seasoning requirements but I havnt had any luck. But I found a Lender that would do this type of deal but in a way to get around the seasoning. So, If you use your hard money lender to Purchase + Rehab the property, you would usually have to wait 6months to use the new appraised value for the 2nd lender to refinance. But my 2nd lender as an option where if you only use the hard money lender for the purchase of the property, my 2nd lender would be able pay back the 1st lender + they would lend for rehab as well. So this way you still get your rehab financed and you can get around the 6month seasoning that almost all banks have (my area). Just another option for you if you get stuck trying to find a bank with no seasoning requirement.


  2. Monica, I just stumbled onto your article about zero money down investing. I apologize for the lag time.... Very compelling approach. I have limited experience with hard money lenders and the ones I am aware of charge significant points up front. Is that your experience as well? Also, give me a range of interest rates that you've seen over the past year if you don't mind sharing that as well. I've done some of this but always had substantial amounts of my own cash involved so no need for a hard money lender. I am a real estate broker and see attractive deals but I am reluctant to purchase/flip/rent due to the cash drain. I can float several months of payments with no problem, but loan limits of 75% of the lower of sales price or appraisal limits what I can do. I actually prefer the buy/fix/rent as I like the equity kicker when the market rebounds. You recommend attending local investor seminars which are sponsored by hard money lenders. Have you ever attempted syndicating this and attracting investors? Just curious....


    1. Hard Money Rates do vary depending on the money lender. I see them range from 1 point and 15 or 2 points and 10 it just depends. The lender that I use is not a hard money lender but they are a conventional loan that has a fix and flip program so it is cheaper. There are lots of investor seminars in my area that are sponsored by both money lenders and investors or real estate companies. I try to go to as many as I can fit in my schedule.


  3. Monica, you may want to be careful in doing these deals. It appears you mentioned that you're over-funding the first loan deal and that lender is refunding you part of that money after they are paid off by the 2nd lender. If the 2nd lender is not made aware of this "refund" to you on the over-funding then you & your first lender MAY be accused of mortgage fraud. I'm not an attorney, but highly recommend you check with one regarding this. Good article!


    1. Lender # 1 will lend up to the threshold of the loan. So they don't mind lending more than what what I paid. They are aware and I'm not hiding anything from them. Lender #2 will lend up to their threshold as well and they are fully away. But yes, you must be careful and make sure everybody is aware and is Ok.


  4. First off, Thank you very much Monica (and others) for all your great help and ideas. Second off, wish I lived where you do, I think. I was looking at your figures and you make $500 a month a rental. Since I live in the highest taxed township in the highest taxed state I rent for $100 dollars more then you and only make $100. The mortgage payment is about the same. The difference is i pay more then $100 a week not a month in taxes. It is family living there now at a discount, after i got the previous renters out. Thought id never rent again after them. They broke everything, even stuff that wouldnt break. But anyway thanks again for your insight and great ideas.


  5. My Heloc is with wells fargo, but actually dont like them very much. I prefer local credit unions. In my state we have Ent federal credit union and i love them.


  6. Luis Montes Hi Luis, I would get a HELOC for the houses you have free and clear. This way you take out the money that you need and you can put the money back in the account if you don't need it. I have a HELOC on my primary residence because I have so much equity. I use this HELOC to fund my fix and flips. Once the property sells I put the money right back into my account. They are advertising HELOC rates right now at 3.5%. Really cheap.


    1. Thank you for your time, what lender would you recommend if it was you doing the deal?


  7. Monica much compliments to your progress, i have a few questions your expertese can help with. I have 5 rental properties all mortgage free in a trust, im having a few obstacles getting equity from one or two so i may purchase another income property at a wonderful price. i also have a primary home out of the state i do business that is also mortgage free but would like to excersize all my remedies for a loan on the income properties before risking my primary. What would you do if were in my position and do you know of a source that would be of assistance. Thank you for your time and keep up the progress.


  8. we need to talk


  9. Great Job Monica! I too am using this exact strategy to acquire properties that are cash flowing up to $700 a month. I also offer hard money loans in Colorado and Minnesota, helping clients buy properties as fast as they can. I work with Denver Mortgage Company exclusively on my own refinances and they do a great job.


    1. Thanks Travis for joining. Everybody Travis is with Pine Financial, he is one of the hard money lenders I use and they are awesome and fast.


  10. @ Dennis Dennis, We work with a lot of investors in your same situation who have 10 or more properties. Many of them are bundling those loans into a commercial loan so you can start all over purchase additional properties. If you need a referral I can help.


  11. @ Mike, We can use a variety if accounts for the liquid reserves requirements such as IRA's, 401k's, Cash Value Of Life Insurance Policies, Stocks, etc. These are in addition to the typical checking or savings accounts. Depending on total # of properties that your investor has financed we can sometimes make exceptions with good compensating factors such as higher credit scores, lower DTI's, etc.


    1. Thank you Dustin. I am in St. Louis Missouri, and wish you did loans in this area. Thank for your clarification on everything. My understanding from investors I have spoken too here is that investor loans are next to impossible to find since the housing burst. I have also not been able to find a lender in this area who will lend on a property without it seasoning 6 months. I guess I just need to look harder. Thanks again for your help!


  12. @Daniel B, The 100% financing loan is typically a short term loan(typically 6-12 months depending on the hard money lender) with higher interest rates. We come in behind that loan to get you permanant financing on 30 year fixed loans. Let me know if you have any other questions.


  13. Hello everyone, I thought I would jump in this thread and introduce myself. My name is Dustin Block and I work on Natasha Walls team over here at Denver Mortgage Company. We are the lender that Monica has been mentioning who can assist the permanent financing through our Portfolio Investor No Seasoning Program. Let me know if you have any questions on our programs.


    1. Thanks Dustin for stepping in. You can reach Dustin and his team at http://denvermortgagecompany.com. Phone # is (303) 763-7676.


  14. Thank you for that clarification. If you have a lender who will lend 100% on the 1st loan, what is the point of getting the second loan/refi? If the first loan (one of your lenders) is willing to lend 100% why get the second loan and have to pay another $4,000-$5,000 in loan/closing costs? You had mentioned the deed of trust from the first lender covers rehab costs as well, so if you go with this first lender, don't you already not have any money in the property? Am I missing a step/other information? Thanks again for your help, I am a new investor with 3 rental properties started last year, I have too much cash in my properties and am trying to understand how to borrow a greater % in order to buy more. All of them are doing ok, I just realized if i had less cash in them I could leverage better and increas my returns & purchase more properties.


    1. Hey Daniel, the first lender is a hard money lender. They won't do long term loans. So you have to be in and out of the financing as soon as possible. The 2nd lender is going to be a 30 year loan. The reason we do it this way is it get's around putting the 20% down you typically have to do with just getting a conventional loan.


  15. Do you have a similar approach for people who don't have six months in the bank? I talk to a lot of start-up investors and they'd love an idea like this, but there's no way they have the cash on-hand for this particular strategy.


  16. On the first loan, how much cash do you have to bring to closing? The first loan/deed of trust is for purchase price & rehab & closing costs; the 1st mortgage company does not mind putting a deed of trust on the property for all of this, or is there a second deed of trust in addition the the amount of the loan? I understand how the second loan works & the difficulty is finding someone who does not need it to be seasoned especially since it would have just sold for less 1 month earlier. Can you clarify the details of the first loan? Thank you so much for your help!


    1. How much You bring to closing on the firstbloan depends on the lender younuse. There are 2 different lenders i use. One is slighly cheaper but i have to bring about $14k to closing as a down payment escrow. I get this back when i refi. Or there is another lender who will lend 100% but it costs a little more. It's pine financial in denver. Kevin amolsch is the lender and he is on the forum. You should only have one deed of trust on the property. My lender will only refi the first. I guess it might depend on the lender if they will refi with a 2nd. It may also dependmif even with the 2nd mortgage you are still below the loan threshold. Check with your lenders and ask around.


  17. Very well written article!


  18. Hi Monica -- good article, thanks for sharing. Are you saying that Denver Mortgage company makes 30-year fixed rate mortgages at 4.8% and keeps them in their own portfolio (doesn't resell to Fannie/Freddie)? I know you have called them a portfolio lender, and the loan they're giving you definitely doesn't seem to conform to Fannie/Freddie standard due to the lack of seasoning, as well as financing of the rehab expenses. The 4.8% rate for 30yr fixed money is a government-guaranteed artificial rate that only Fannie/Freddie can do normally. A typical portfolio lender that is holding their own loans would have to charge much more (and 99.9% won't even consider doing a 30-year fixed at any rate). Around here, a 5/1 ARM on a SFR will start at 6% or so, and your initial rate is only locked in for 5 years. Maybe they're underwriting them so that they will be sellable to Fannie/Freddie at some point in the future, and are willing to take on some risk in the meantime. I may call them, to understand better how they do this. You've found a HML that will finance 100% of purchase+rehab+even more, which is awesome. When you do these, are you using the 50% expense guideline by which half of the gross rent will go for vacancies+capital items+operating expenses over time? IOW, $1,100 of rent would translate to $550 of Net Income over time, and so $550 is what is available to cover P&I. Since you have a RE company and are doing your own prop mgmt, and have maint. people available to you, you can likely do better than this. Your taxes and insurance also seem very low there where you live, so a lower expense ratio is probably warranted. Thanks again.


    1. Denver Mortgage Company discloses that they have the right to sell the loan, but so far all my loans have stayed with them and I pay my mortgage payments to them. Maybe they will sell at a later time. Yes I am getting 4.8% for NOO Investor loan for 30 years fixed. I don't use the formula you were stating. We don't have many expenses. Our houses are all in good condition and all have new roof's. There will obviously be vacancy and some maintenance expenses in the future. My taxes and insurance are already wrapped into the payments so I don't have to worry about those.


  19. Hi Monica - I bought most of my present rentals this way back when you could buy and then immediately start the process to do a refi based on the appraised value. Have you had success, or do you know anyone that has had success with this approach after they have reached their limit of 10 conforming mortgages? I know this approach will still work, but I haven't been able to find a portfolio lender here that will do #11 for me.


    1. My lender does limit to 10. There is a local bank in my town that will do unlimited but they want skin in the game. Meaning your money. I've been utilizing credit partners and family members to help me. I am giving them hald the deal to them but i think it's worth it.


  20. Great write up. My wife and I really enjoyed reading the article as well as checking your other resources!


    1. Thanks so much Jonathan. I happened to stumble upon these transactions and I couldn't believe they existed. I wanted to share the knowledge with everybody. I hope there are lenders like mine in other states. I am so thrilled, I am finally in a position now where I can retire because of these deals. I have 25 rentals which are cashflowing like crazy. My goal is to buy 100 houses like these. If I had 100 houses even with partners my spread each month would be $25k. My goal is to have them all paid off in 15 years. In 15 years my cashflow just for my side would be $720,000 a year. This is with me giving half to a partner. It's amazing. I was so used to doing fix and flips. The way I see fix and flips is it's a never ending job. The income will stop once you stop doing them. But with rentals, the income doesn't stop and it's passive.


  21. Great Article Monica. I believe I'm missing some of the ins and outs to this. So I will have to view this video you have on your website. Where is it at on you website? I have a few questions: 1. how did you come up with $92,400 = PP 2. the $4596.67 holding cost... does this include pts. What do your closing cost consist of? 3. You mention that you get the appraisal done during rehabbing... does this mean you have already settled with the 1st lender? And then at a later date you are refinancing with the bank? 4. Are you buying houses that are appraising for more than 75% before rehab has been done? Sorry for all of the questions. Just trying to get an idea on how this works. Thanks!


    1. It would be on my blog on my website titled "Fix and Hold Workshop -Recorded Video’s". The video's are also on my U tube page. I have a spreadsheet that I made that is specifically for my lender that calculates their points, fee's etc so that is the number it gave me. Each lender will have different figures, you just need to find out what all the costs are with your lender. You can also get it by getting a good faith estimate from the lender. This will have all the fee's on it. The $92,400 is the amount of my deed of trust from lender #1. This includes the purchase, loan costs, and rehab. There are 2 appraisal's done. The 1st lender will do an appraisal pre-rehab and appraisal #2 gets done once the rehab is done by lender #2. I am not buying houses unless unless they are 30% below market minus repairs. There are too many good deals out there right now to pay more. You don't want to buy a bad deal or get desperate. It's better just to wait for the perfect deal.


  22. My houses are bread and butter and in nice clean neighborhoods. My houses typically just need paint and carpet and minor handyman work.


  23. Monica, Great article. In what type of area do you find these properties? By that I mean are they in the bread and butter areas, or the outskirts of smaller towns? Thanks


  24. Thanks for sharing your technique. I think many might benefit from this method. I'll have to look into some lenders in my market that will do deals like this.


  25. Thanks for sharing your technique. I think many might benefit from this method. I'll have to look into some lenders in my market that will do deals like this.


  26. Great Article. When you do your refinance it sounds like your lender is lending based on a value greater than your original purchase price. I'm just getting started and my mortgage broker has told me that refinance can only be based on the lower value of either original purchase price or appraised value. Is this true?


    1. Hey There, Each lender will be different. My lender will do the refi for the amount of the deed of trust or the payoff that lender #1 gives to lender #2. My deed of trust includes the purchase plus the costs of the rehab. If my lender would only do the refi for the purchase cost, I would be out of pocket a lot of money. They however won't lend more than 75% of the appraised value. So if the appraisal doesn't come in that is money you have to bring to closing. You should keep looking around for more lenders.


  27. Great post, I am thinking of adding this strategic approach to my operation but I haven't ironed out the kinks yet and or fully understood the ins and outs. Is there any literature you recommend that covers this approach indepth? Thanks Monica!


    1. I have a training video on my website and u tube. I did a 2 hour long class with my lenders on this topic. They go into everything in more detail. I would watch those. Even if you cant use the lenders i use, its good to see how they are doing it so you can find the right lender. Sent from i pad


  28. Great, Monica Can you please give me more information on this lenders, do they lend in Virginia? I will appreciate it.


    1. Hi Esther, i use denver mortgage company in Colorado. They lend here and in CA. I dont have any referrals for VA but i would definately call around and check out the big investment clubs for these lenders.


  29. Great concept Monica. Do you recommend a company that would do this sort of lending in Indianapolis? Kevin


    1. Hi kevin and esther, my company is denver mortgage company and they only lend in CO and CA.


    2. I have a training video on my website and u tube. I did a 2 hour long class with my lenders on this topic. They go into everything in more detail. I would watch those. Even if you cant use the lenders i use, its good to see how they are doing it so you can find the right lender. Sent from i pad


  30. Hey Ben. I see you are in ca, I beleive Denver mortgage company can do loans in ca.


    1. Thanks. I will have to check that out.


  31. Your welcome Ben. These are great deals to do and I am very passionate about them.


  32. Great article! Thanks for sharing.