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

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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.

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.

Looking for the secret to creating wealth in real estate? The BRRRR method—or “buy, rehab, rent, refinance, repeat”—is our proven, easy-to-follow method to build your portfolio. When you buy a home, fix it up, improve its value, and then refinance, you’re borrowing against the value of the property at its highest. Done correctly, this allows you to recover more of—or sometimes all of—the money you invested in the property. Our guide to the BRRRR method explains each of the steps and outlines how to build wealth through real estate, one property at a time.

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!

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.

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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).

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!

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

Comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.