Mortgages & Creative Financing

The Beginner’s Guide to BRRRR Financing with Other People’s Money

Expertise: Mortgages & Creative Financing
21 Articles Written
Real estate investment, home loan, reverse mortgage, savings to buy home concepts. House wood model, Hand putting coin into a bags on wood balance scale. depicts a funding for real estate investment.

You’ve found the most amazing deal! It’s below value, in a good neighborhood, will cash flow when you rent it, and you can push the value on the property, thereby increasing your net worth.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

The only downsides? It’s ugly (maybe even smells) and needs some serious TLC!

So, how do you seal the deal? Especially if it won’t qualify for conventional financing?

  • Do you buy all cash?
  • Leverage your HELOC?
  • Borrow from a “rich uncle”?

Outside of being able to find a smashing BRRRR deal, the next step that stops most BRRRR investors in their tracks is how to actually finance the deal.

I see many investors purchasing BRRRRs all cash with savings or HELOCs on their primary, not knowing what to do next to get their personal money out of the project in order to go buy their next one.

To be perfectly honest, I fell into the “buying all cash” trap, too. It was when I locked up over $80K of my personal HELOC in a BRRRR project for six months. Initially, I thought “six months won’t be that long!”

But it took that pain of being “stuck” that made me finally take the plunge to figure out how to use other people’s money to scale my portfolio.

3 Steps to Financing a BRRRR with OPM

The quicker you can learn how to leverage other people’s money (OPM), the quicker you can scale your portfolio and create real wealth!

So, let’s go over the most common options to finance your purchase, finance your construction, and refinance a BRRRR deal. To be sure, there are more options than just this (like seller-financing, land contracts, etc…). But today, I’m sharing my personal playbook to help you ditch the excuses, overcome fear of the unknown, and just plain get started.

Related: How to Work with Lenders for the BRRRR Method (+ a Massive Open Secret to BRRRR Success!)

Think of this playbook as a choose-your-own adventure process, where you can mix and match strategies based on your situation. Lending terms might be slightly different based on your situation, and different lending programs are coming up all the time.

For now, let’s dive in and get you moving forward!

Person sitting at a desk signing paperwork with guidance from another person who is pointing at a line item

Step 1: Purchase the Property

Strategy 1 – Purchase the property with all cash using savings or a HELOC.

  • Pros: You can close quickly (in most states 10 days) and you are not required to have an appraisal done.
  • Cons: There is no appraisal required, so you have to be 110% on your ARV in order to preserve your capital. You also limit your velocity of money, as you have quite a bit of your own equity tied up in the project (meaning you could be limiting yourself to the number of projects you can do).
  • Pro Tip: Get an appraisal to establish the current ARV for the property and post-rehab ARV of the property. This isn’t a guarantee that you will get the value on the refinance, but you will know in advance what to expect.

Strategy 2 – Purchase the property using a conventional loan.

  • Pros: Securing a conventional loan is a familiar process to most people who have purchased a primary property, and your current lender may be able to help you.
  • Cons: You are limited to the types of properties you can pick up, as they have to be free from all encumbrances (tax and title issues) and in good working condition (flooring, roof, HVAC, AC, water heater, etc). Deals with seemingly big problems that you, as an investor, can solve make the best BRRRRs! Additionally, you will need to put down around 20-25% financing of purchase price and deal with close times of 30-45 days. Lastly, you may be stuck in a seasoning period of 6-12 months to do a cash-out refinance.

Strategy 3 – Purchase the property with other people’s money (aka hard money or private money).

  • Pros: You can find hard money loans that will give you up to 90% of the purchase price and 100% of the construction (or if you have a “rich uncle” you might get 100%!). You can generally close “like cash” in 10-15 days, keeping you competitive. Your lender will want an appraisal to establish the current and post-rehab ARV—which, in my experience, is a good thing!
  • Cons: It’s not all cash and you can’t waive the appraisal, which might make a seller choose an all-cash offer over yours. You have to get your target appraisal as well to get max lending. Additionally, your property may need to meet 1.2 to 1.25 DSCR based on your lender’s criteria (meaning rents have to cover the expenses on the property plus 20-25% more as a cushion). You must purchase the property in an LLC (again, this could be a pro, as well).
  • Pro Tips:
    • Keep the LLC a single-member LLC, so you can refinance out to a conventional lender if you choose. Be sure to clear this with your lender first.
    • Make sure the purchase price and construction financing are recorded on the HUD. If not, this will slow down your refinance process due to the seasoning period in order to get all of your capital out.
    • Line up your carry out lender strategy ahead of time, so you limit your surprises!

Step 2: Finance the Rehab

Strategy 1 – Finance the rehab with all cash.

  • Pros: With an all-cash offer, you are generally funding your full construction personally, with credit, or through a personally secured loan, allowing you to move quicker in the purchase and rehab process and limiting your stakeholders in the project (fewer cooks in the kitchen).
  • Cons: You have a great cash and credit outlay, which puts your capital more at-risk and possibly slowing down your velocity of money.
  • Pro Tips:
    • Always get your property professionally inspected in addition to your general contractor's opinion. Consider getting a sewer scope, radon, and termite inspection if your area warrants it, as well.
    • Decide on your construction team and financing strategy before you purchase the property.
    • Always add in a contingency of at least 5-10% for cost overruns and those fun little surprises.

Close up view of bookkeeper or financial inspector hands making report, calculating or checking balance. Home finances, investment, economy, saving money or insurance concept

Strategy 2 – Finance the rehab using other people’s money (aka hard money or private money).

  • Pros: With a hard money loan, you can find lending up to 100% of construction costs. As noted above, these construction funds should be documented on your HUD closing statement, so you can refinance out monies quickly. Also, you will be more likely to stick to your budget and not splurge on upgrades over time, because the lender will only give you back what is on the budget.
  • Cons: You will need funds set aside as reserves to get the project started (savings, HELOC, lines of credit, etc). Once you complete each phase of the project, you can submit receipts to the lender for a construction draw. An inspector will go out to the property to ensure the work was completed before they will release funds (DO NOT rely on the inspector to identify deficiencies in work). Any upgrades and additions to your budget will come out of your pocket.
  • Pro Tips:
    • Always get your property professionally inspected in addition to your general contractor's opinion. Consider getting a sewer scope, radon test, and termite inspection if your area warrants it.
    • Just like above, always add in a construction contingency of at least 5-10% for cost overruns and those fun little surprises.

Step 3: Refinance the Property

You are one step closer to the finish line! Many investors think about their refinance strategy after they have purchased and have started the rehab. IMHO, that is wwwaaaayyyy too late.

While there are two main strategies to refinance a property, there are two types of lending you can explore with those strategies (giving you four basic options to choose from).

Related: Better Than BRRRR: Introducing the BRRRLO Model

  • Conventional financing
    • Pros: This type of financing is the most familiar type and is a mortgage backed by Fannie Mae or Freddie Mac. Currently, you can get the lowest rates, lowest fees, and no prepayment penalties with this type of lending.
    • Cons: You will have to personally guarantee the loan, and there are stringent underwriting guidelines. You can get up to 75% LTV on a refinance.
    • Pro Tip: Not all conventional lenders work well with investors, so find an investor-savvy conventional lender. My personal preference is to seek out a broker that will work across multiple states. (Bonus points if they are an investor, as well!)
  • Commercial financing
    • Pros: This type of financing underwrites the property as an income property, where you could get up to 80% LTV.
    • Cons: Often times you will have higher interest rates, prepayment penalties, and you most likely will have to sign a “bad boy” carve-out (kinda like a personal guarantee).
    • Pro Tip: There are lenders who will do both the rehab (known as fix and flip) and commercial part of the loan process which can save you time and money (and headaches). I have even seen where some commercial lenders will send the same appraiser back out to the property for the post-rehab ARV, limiting your refinance surprises.

Let’s also take a pause and acknowledge that the refinance (after the rehab) is the biggest wildcard of the BRRRR process. Here is a comprehensive guide on how to prepare for your refinance (and what to do if things go sideways).

handing-over-keys

Strategy 1 – Hold the property all-cash.

  • Pros: No refinance necessary, and you have a nice, new property with a paying tenant and a bump in your net worth.
  • Cons: Technically this isn’t a BRRRR because you aren’t refinancing. Additionally, you have considerable personal equity tied up in the property that is exposed to creditors and lawsuits (not to mention it is probably earning a low return on equity and slowing your velocity of money). If later you choose to refinance, you can do a rate and term refinance for whatever is on the HUD (see strategy 2) or wait out seasoning periods to qualify for cash-out refinance (see strategy 3).

Strategy 2 – Use a rate and term refinance.

In this type of refinance, you are "swapping" your current loan for a new loan (ideally with far better terms).

  • Pros: You can refinance nearly immediately all costs (purchase and rehab) that were on the HUD at closing. If you used a hard money loan, you can refinance your purchase and construction monies out immediately. (This is why I LOVE using hard/private money to purchase properties.) And you get that bump in net worth.
  • Cons: This strategy won’t allow you to pull additional equity out of the property (as most lenders have a small cap of $2,000 or up to 75% LTV). If you purchased all cash or purchased conventionally, you probably cannot get your construction costs out now (because they weren’t on the HUD at closing), and you will have to wait for a seasoning period to expire to do a cash-out refinance.
  • Pro Tips:
    • Line up your carry out lender strategy BEFORE you purchase the property, so you limit your surprises!
    • Start the refinance process as soon as construction is done. Some lenders will allow you to close the rate and term refinance before a lease is in place.

Strategy 3 – Do a cash-out refinance.

In this type of refinance, you are financing what is on the HUD at closing and then trying to pull additional cash out of the property.

  • Pros: If you survived the rehab and refinance appraisal with flying colors, you control a cash-flowing piece of real estate with little to no money in the project. You get a bump in net worth, as well. As of today, you can find a conventional lender who will do a conventional cash-out refinance in as little as 6 months and a commercial lender in as little as 3 months.
  • Cons: You may have to wait 3-12 months for the seasoning of the title, which could slow down your velocity of money. But if you are pulling out MORE than you put into the project… that’s a win!
  • Pro Tip: Start the refinance process a month before your title seasons, so you can close as soon as possible and move on to your next project.

Conclusion

BRRRR investors often start off with this investing strategy set on using their own cash to fund the entire project. However, there isn’t an award for doing this.

It does take time to become comfortable using other people’s money to finance your BRRRR projects. But just know, as a BRRRR investor using other people’s money, you are providing value to others by way of paying interest and giving others the opportunity to invest in your projects. You also are providing clean, affordable housing and positively impacting communities—thereby, changing lives (including your own).

Now that’s a win-win-win!

hard-money-lenders

Questions about the above? Alternative strategies/tactics you’ve successfully used? 

Comment below!

Whitney is a real estate investor and personal finance trainer whose vision is to launch 10,000 families on the path toward financial independence. After purchasing her first rental in 2002, and hi...
Read more
    Jay Johnson Specialist from Nashville, TN
    Replied 28 days ago
    Whitney Hutten: This is a very insightful and easy to understand article.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 27 days ago
    Thank you, Jay!
    Jacques Anderson
    Replied 27 days ago
    Good read.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 27 days ago
    Glad you found value, Jacques.
    Nathan Binford from Richardson, TX
    Replied 27 days ago
    Thanks for breaking this down clearly into pros/cons and bullet points. :-)
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 27 days ago
    You bet, Nathan. Using financing for BRRRRs can seem daunting, but really is not that complex if you have a plan.
    Tom Chick
    Replied 26 days ago
    Great read, thank you for the well-structured summary. I know this article is primarily focused on the financing side ("Buy" and "Refinance") of a BRRRR, but do you have any advice on the Renting strategy with a BRRRR and when you generally begin this part of the process? Or maybe you can point us to a separate post on this topic that you've seen (hopefully as well written as this was!)? Thanks!
    G. Brian Davis from Baltimore, MD
    Replied 26 days ago
    Great overview Whitney, way to keep it simple!
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 25 days ago
    Thank you!
    Matt Everling Rental Property Investor from Temecula, CA
    Replied 26 days ago
    Whitney, your insight is exactly what I needed, as I have everything else in place but a solid financing plan. I have been reading everything I can get me hands on here in BP and have been attending local REI Meetups, but your easy to read article has set my path straight. You are awesome!
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 25 days ago
    Glad you found value, Matt! This is the very post I wish I had a few years ago:)
    Curt Neider
    Replied 26 days ago
    Purchasing with cash makes no sense! Too much cheap money out there!
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 25 days ago
    Curt, I would agree. And buying all cash doesn't mitigate the two tricky parts of the BRRRR process anyways... construction and the refi.
    James Cole
    Replied 26 days ago
    Great breakdown, thank you Whitney! To you or others following this article who have experience with private money... what are some private loan structures you've used or seen? I have a verbal agreement on private money, but I'm struggling on the best way to structure it (my "lender" is as new to lending money as I am to REI, so it's a first for both of us). Would your terms vary depending on whether you go with a BRRRR plan that required seasoning vs. not? We obviously want to structure a win/win and any input is appreciated. Thanks!
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 22 days ago
    Hi James, My goal with hard or private money is to have as little of my cash in as possible. I look for 90% financing on the purchase and 100% on construction, low points, and a low rate (which comes with experience). On private money, you can look for similar terms unless you are looking for equity splits... then you are looking for an equity partner, not necessarily just a lender. PM me with Q's.
    Stuart Dangar
    Replied 26 days ago
    This article reads like my exact situation right now thank you. Bought with HELOC in partnership LLC. Only I have one other issue. House flooded, walls and floors had to be abated, insurance luckily covered, GC is stalling because I wanted floor plan change since down to studs. Everyone is on board but I’m not sure if I should proceed with changes that add about 45k to bottom line. Some like roof, plumb, elec just have to be done. The as-is floor plan is just horrible so it kills me to leave as-is when already to the studs. GC is through insurance program so I know they are good and by the book on cost, but they seem to be pensive on moving forward with my desired changes which go up and above insurance coverage. Bought for 60k, going 45k deeper. ARV $125k. Your article completely answers all my questions like “appraisal” even though bought cash, and how HM would have helped because rehab would be on HUD. I stared with HM but backed out because original rehab was so minimal I didn’t think worth cost and interest, but now see advantages. Let’s see if I can make it through this one. Great guide and thank you.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 22 days ago
    You are very welcome, Stuart!
    Michael Ward Real Estate Agent from Fayetteville, AR
    Replied 25 days ago
    Thanks Whitney. I have a question for you. Have you ever purchased a property AND financed a rehab with a construction loan? I've noticed that very few people on BP talk about this option, but in my market a construction loan is a great option. As long as it's a good deal, I can buy a house and finance the renovation with a construction loan that is interest only for 12 months. If I budget on the front end, I can even cover the interest payments by drawing from the loan. The total loan amount can be up to 80% or even 85% of After Repair Value, meaning if my purchase price and renovation budget stay below 80-85% of value, I don't have any of my own money in it on the front end. Then I can choose to roll into a commercial loan or refinance into a conventional mortgage. Have you tried this method with any of your commercial lenders?
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 25 days ago
    Hi Michael, I do 100% construction loans with the purchase with a commercial lender (the fix/flip loan)... that way I have it all on the HUD and can refi out immediately. I don't do two separate loans if that is what you are asking. You could, but I think you are then stuck with seasoning requirements.
    Michael Ward Real Estate Agent from Fayetteville, AR
    Replied 25 days ago
    I think we're talking about the same thing. No, I wouldn't do two loans at acquisition unless I had to. I feel like utilizing construction loans is a topic that not a lot of people discuss on the forums with regard to BRRRs and flips. Sounds like you're quite familiar. Thanks again for your great article
    Michelle Reid Financial Advisor from MA
    Replied 25 days ago
    Whitney, thank you for this article! I've been searching posts all over and this answered my questions. I am in a pricey area in the NorthEast. Nothing is less than $400k even if it's a mess. So 25% down payment for a conventional is $90-120k, then you have rehab. That's a lot of capital for a first deal. Therefore: "Pros: You can find hard money loans that will give you up to 90% of the purchase price and 100% of the construction (or if you have a “rich uncle” you might get 100%!)." Why would you NOT do hard money in a high price market area. I see your cons too but those seem minimal. Am I missing something?
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 22 days ago
    I personally like the safe use of hard money, Michelle. Potential challenges I see in a high priced market are volatility in the ARV and the ability to refinance out for 75% ARV. Lenders like seeing solid business plans with at least 2 exits... the more the better. They are investing in your ability to reposition the asset. I look forward to hearing other's input as well.
    Dawn Sirdar from Edmonton, Alberta
    Replied 23 days ago
    Hi Whitney, this is very interesting. We learned a few things in doing our condo that we had under a lease option. In the end we are going for a private mortgage and planning to refinance in a few months. We used our own money for the reno and found out after we should have used OPM for the renos to have out money for a down payment when they didn't want to use the equity in the property. Anyway, making it work and learning a lot. Next one will be mostly or all OPM.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 22 days ago
    Learning and lessons, Dawn! We all have them. Good for you for committing now to the next deal:)
    Nghi Le Investor / Lender from Seattle, WA
    Replied 23 days ago
    Great article with great tips, but I do want to correct some things stated when it comes to hard money, conventional, and commercial loans: 1. Hard money loans don't generally have DSCR requirements. I've seen them in 5+ unit or commercial transactions, but never in the 1-4 unit space. These are short-term bridge loans, not stabilized loans. Hard money loans usually don't even look at rents/leases; most people using hard money are buying ugly houses that aren't in a rentable condition. 2. You do not need to put a property in an LLC in order to get a hard money loan. This requirement only comes from specific hard money lenders (i.e. Lima One Capital) or from specific states (OH, NC, etc), but the vast majority of states allow you to borrow hard money as both an individual and an entity. 3. For conventional loans: On a rate-term refi, you can go up to 80% LTV for SFRs and 75% LTV on 2-4 units. On a cash-out / delayed purchase refi, those LTVs are 5% lower. If your loan officer is telling you something different, either they don't know the entire Fannie/Freddie rulebook or their company adds overlays. 4. Commercial lenders are all over the place because they get to make their own rules (as opposed to having to follow Fannie/Freddie guidelines). So technically, seasoning can be less than 3 months. There are 30-yr loans without any seasoning requirement (i.e. you can do cash-out 2 weeks after you buy the property) available in most states.
    Daniel Molina Lender from Charlotte, NC
    Replied 23 days ago
    You should not that most of the times when you place the loan into an LLC (whether required or not) you can definitely get the benefit of a non-recourse loan which is huge. Of course, this does not apply to Fannie/Freddie loan.
    Nghi Le Investor / Lender from Seattle, WA
    Replied 23 days ago
    Ahhh, I didn't realize BP doesn't allow formatting in these comments; I had typed this up in a much easier to read format (i.e. spacing in different lines and paragraphs) but it didn't come out that way. Hope my 4 points weren't too hard to read.
    Gil Segev
    Replied 22 days ago
    Whitney, this is a very well written blog and I learned several new things reading it! Your statement about fear of using OPM is bang on. I have been holding back on going into a BRRRR with OPM due to the risk (higher holding costs) and fear of working with hard money. I guess you just need to find a smoking deal and jump in.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 22 days ago
    Gil, fear will keep most investors sidelined. And the holding costs are subjective. Even if you are using your own money, you should calculate a hold cost on that money for having it tied up in the project (say a monthly interest charge comparable to the stock market... pick something). Also, calculate the opportunity cost on having your money tied up in the project (rather than doing multiple projects wisely). That will help you understand the TRUE cost of using your money.
    Ryan Campbell from Maryland
    Replied 21 days ago
    Does the hard money vs HELOC decision differ it’s my very first deal? Great article by the way.
    Ryan Campbell from Maryland
    Replied 21 days ago
    I already know I should have put more thought into that question(had one foot out the door late for my sons practice). I feel like it would be better for my first or second deal to just use my heloc because I’m already going to be overwhelmed with this new venture, dealing with a HML will just add to the chaos. Plus it may be tough to find a lender for the first deal(I’ve heard conflicting reports on this however). I would wager that as usual I’m over thinking it.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 21 days ago
    :) I think you answered your own question. It certainly may feel easier to use your HELOC. Just weigh all of the cons stated and make sure you are OK with them. I would say on your first HML, give yourself a normal closing timeline to get things figured out.
    Stephen Senior
    Replied 21 days ago
    Excellent Article... Perfect timing as I have been evaluating how I was going to BRRRR a property that I currently have under contract.. Thank you...
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 21 days ago
    You are very welcome, Stephen!
    Diego Lopez from Warsaw, IN
    Replied 20 days ago
    Another important thing to note before you ever even purchase the subject property and plan to do a cash out....make sure you are pre approved for the loan amount that you are going to be getting! If not, your capital will be stuck in the deal for a longer period of time
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 9 days ago
    Very true! I tackle how to survive the refinance step of BRRRR here: https://www.biggerpockets.com/blog/real-estate-refinancing-success-brrrr-investors
    Michael Wong Investor from Vancouver, Canada
    Replied 11 days ago
    Hi Whitney, Thank you for the article. Do you think it's possible for this scenario: Purchase the property using a conventional loan. 20% down payment using a HELOC, conventional financing on the balance. Rehab the property using more of the HELOC. Refinance with the same bank as the conventional loan. Would the same bank allow your to acquire a loan for the original purchase and a refinance? Your thoughts are appreciated.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 9 days ago
    You would have to talk to the lender about an immediate refinance, but my gut is NO unless the rehab was noted on the HUD. You could wait the seasoning period and then do a cashout refinance though and then pay off the HELOC.
    John Murray from Portland, Oregon
    Replied 9 days ago
    I've done 9 BRRRR and the initial investment was usually between $60K to $100K of my skin in the game. As prices rose the $100K was pretty much the norm by 2017. This includes all rehab, closing and other costs. It was easy in 2015 to 2017 to improve the 30% or so to refi but know it's more difficult in my market. In my market the BRRRR train left the station about 2 years ago. Time to liquidate and take profits, sell. sell sell!
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 9 days ago
    Great point, John. If BRRRR is not possible in your market, time to find another market. Also, if your return on equity has dropped, reposition the equity to grow your portfolio or risk losing it. Homes are meant to house people not money.