Down payment used for BRRRR strategy?

Question

Hi everyone my name is Andrew. I live in Northwest Indiana and am currently trying to get into real estate investing. I have been reading the BRRRR strategy by David Greene and while reading about when you refinance to recover your original invested capital I was thinking about the down payment. So when you buy a property do you use a conventional loan or something else? How big of a down payment is used if any? And then once you refinance to recover your capital what type of loan do you refinance under? How much of a down payment is put down? Obviously down payment size effects equity, how much you’ll profit each month if the property is kept, how much you are able to pull out with a refinance etc.

Dan Thomas · Answer

Kevin gave you some great advice.  The only times I have done BRRR deals they were un intentional.  As Kevin mentioned I had to buy with cash as they wouldn't qualify for conventional financing, I fixed those problems and was able to put a mortgage on the property.

Another option is private money / hard money.  It will be really tough to get 100% of the cash needed on your first deal, unless it is a family member or friend.  If you have a track record of success this may be alittle easier moving forward but lenders like to see your money in the deal, and the more of it the happier they are. I would suggest you save up as much as you can while you are doing your homework to be able to bring to the table when you find a deal that you want.  For your first deal I would reccomend having about 50% in cash or liquid assets.  Altough you may only "need" 20-30% down having reserves will go along way with a potential lender.

Kevin Sobilo · Answer

@Andrew Lopez, in MANY cases for the numbers on a BRRRR deal to work out the property needs to be very distressed and often not eligible for a traditional loan for the initial purchase. So, in a cheaper market many investors use their own cash for purchase and rehab or especially in more expensive markets they use hard money loans which are based on the deal itself and your ability to execute on it.

The refi loan type is based in part on how you hold the property (in your own name, an LLC, etc) but in general you can expect to refinance out about 75% of the ARV (After Repair Value).

So, if you buy a property in a cheap market for $30k cash and invest $30k cash to rehab it and then it appraises for $80k after rehab you can refinance out your entire $60k investment and hopefully have a good cash-flowing rental.

Andrew Lopez · Answer

So I’m actually interested in both renting and flipping. Buying to rent would be better for my current financial situation however. I know flipping I’ll need more cash on hand and more time. I already have the tools and knowledge to fix up a property. Just don’t have the extra cash and time currently.

I don’t know any real estate investors in my area. I actually don’t know any real estate investors in general. I also don’t know any lenders. I’m not really sure how to go about finding investors in my area or a group/team to work with. I’m hoping I’ll either get a tip on what direction to look into or possibly even get connected with an investor.

Do you think it’s easier to start off with turnkey properties? I could see it being easier because you focus on the investment side and the buying/selling side of things rather than having to do all that and simultaneously either fix the place up or manage the rehab. I’ve always been more drawn to properties in need of rehab because they can be had for cheaper and I enjoy turning them Into something new and nice. But that being said I can definitely see them being a lot more of a headache to starting out.

Dan Thomas · Answer

That is a questions you need to answer for yourself.  They are two very different strategies.  Flipping is more of a job and is usually much more hands on.  Renting should be more passive but still requires being hands on at some level.  You need to figure out which interests you more and learn all you can about it.

Flipping and BRRR are similar and require a similar skill set.   I agree that BRRRR isn't the easiest but I wouldn't say it isn't the best, that will depend on the specific deal.  I would suggest really focusing on what you want to do and learn as much as you can about it while looking for your first deal.  Do you know any real estate investors in your area you could partner with for your first deal to minimize some risk and to use as a learning opportunity?  Reading about real estate is great but you will learn 10x what you can in any book by actually closing on your first investment.

My first properties were through turnkey providers.  I bought at a lucky time, before covid.  It allowed me to get my feet wet and get comfortable with real estate as an investment.  After a few of those I felt comfortable enough to start investing in deals I sourced and managed.  I am getting out of turnkey and moving that money into investments that I manage now.  I don't think there are as many turnkey deals out there that cashflow these days but it may be worth a look??  There are enough turnkey providers that contribute on BP, I'm sure they would have a conversation with you.

John Mason · Answer

Maybe Buy and Hold if its a good location

Andrew Lopez · Answer

Thank you very much! In your opinion what would be the best strategy to get into either flipping or renting? Seems like the BRRRR strategy isn’t necessarily the best/easiest

Simon Ashbaugh · Answer

Hey Andrew, conventional loans offer lower interest rates but they require 20% down payment. This creates more immediate equity but it might limit your initial investment options. On the other hand, hard money lenders can be more flexible with down payments and its about 10-15%, this frees up your capital for renovations. You'll need a clear exit strategy to refinance or sell the property before the loan term ends to avoid penalties. You should also expect significantly higher interest rates with them. Hope this helps!

Down payment used for BRRRR strategy?

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