BRRRR - Financing Up Front

11 Replies

@Account Closed

Best way to BRRRR if possible is with cash up front and then refi in 6 months after the seasoning period.

The reason for the cash up front is to buy you time to do your rehab and add/restore the value to the property.

You can BRRRR with a hard money loan up front but it make your numbers tighter so you need to get the property even cheaper.

I completely disagree with @Geordy Rostad .  Paying cash for a property is not a good idea.  

The reason one buys with hard money is to keep your out of pocket expenses to a minimum and maximize your return on capital gain. Most hard money lenders will lend up to 70% of the ARV on the property. The buyer only keeps the hard money loan for a very short period of time (until the rehab is done and a tenant is in place) then refinance into a long term conventional loan. Your out of pocket expenses are cut dramatically, even if you are paying high interest rates during the hard money carrying period.

Keep more money in your pocket. Use the hard money lenders correctly, run your numbers before you purchase, and every time new numbers are available (desktop appraisal for ARV which the hard money lender will require, written quote from contractor for repairs, etc) ensuring you have at least a 100% return on capital gain, and will get at least a 10% cash on cash return after tenant in place and refinance. Then you'll have more money to do another BRRRR using the same method. More properties equals more unrealized capital gain and more cash flow which is the reason for investing in real estate in the first place. Pay cash and wait 6 months before doing another, and you'll be missing out on a lot of properties, and your percentage returns will be terrible.

Thank you Don. Great information. 

In your opinion, can the hard money lender be substituted with a traditional lender? Or would using a traditional lender make it harder to refinance after the renovations?

@Account Closed

There's a couple of advantages to hard money or cash on the initial buy:

1) Very quick to close. This allows you be much more competitive on your offers.

2) Allows you to buy a property that might have issues that prevent traditional financing.

Originally posted by @Account Closed :

Thank you Don. Great information. 

In your opinion, can the hard money lender be substituted with a traditional lender? Or would using a traditional lender make it harder to refinance after the renovations?

Conventional loans dont tend to, for instance, cover the rehab/repairs costs. Will your bank lend you for an investment property prior to it being fixed/stabilized? HML will likely offer 100% of rehab money on top of a hefty % of purchase. You can then refi once you have forced appreciation.

There are other pros and of course cons to using Hard Money, but the pros (no income verification, speed of closing, rehab money etc...) are why so many BRRRRs turn to HMLs.

@Account Closed   Don't substitute a hard money lender for a traditional lender.  Only use hard money for the initial purchase and rehab, and until the home is rented.

Before you get into a hard money loan, you should be pre-approved with a conventional lender.  You will want to be certain you can refinance the home into long term conventional financing when  you're ready.  Hard money loans are high interest, short term loans.  

Using a traditional lender for the initial purchase and rehab should not make it harder to refinance, but your out of pocket will be higher.  Traditional financing of 20% down of the PURCHASE price, and add rehab and carrying costs out of pocket is often a big chunk of cash.  The hard money lenders lend on the AFTER REPAIR value of the home, allowing you to finance the home and the repairs.  This cuts your out of pocket and raises your percentage returns.

Connect with me and send me your email privately.  I'll show you an example of a conventional loan v a hard money loan evaluation for the same property (using hypothetical numbers) so you can see the difference the out of pocket expenses are, and the percentage returns.  You will see if you buy right, you'll make a lot more money.

@Lucas Webb

I've done BRRR a few ways. Every strategy has advantages and disadvantages. I recommend finding a private lender that you can negotiate your own terms. We've nearly lost deals before trying to go conventional, just because the processing time is so long. But here's breakdown of pros and cons I've found:

Conventional loan: Pros: low interest, longest loan term, multiple reviews to ensure it’s a “good” deal. Cons: long closing period (risk losing the deal), highest upfront cost for services required by lender.

True Cash: Pros: lowest cost; Quickest/easiest close process; no maturity date. Cons: You’re making all the decisions without 2nd set of eyes, so you’d better know your sh*#. Need cash.

Hard money: Pros: Fast close; 2nd set of eyes on deal to ensure it’s good investment. Cons: highest interest; many upfront fees; short loan term; construction draws may require inspections to release funds.

Private Money: Pros: negotiate your own terms; Quick/Easy close if lender trusts you. Cons: Not everybody knows someone with that kind of cash; it’s their personal money so emotions are involved; unless they are a seasoned RE Investor, they are not a reliable 2nd set of eyes on the deal.

Note: regardless of strategy, I always recommend finding who you plan to use for refi up front and ask their advice. Every lender is different so you want to establish the relationship early and make sure you’re on the same page so there’s no surprises when it’s time to refi.

@Account Closed point that you should be approved w/ a lender before getting a hard money loan. Hard money loans are typically 6-12 month terms and if you don't have a clear take out then you may have to sell the property (that you were otherwise hoping to keep) or risk paying default interest daily/foreclosure. 

There are lenders (non-bank) that can do both the initial hard money, or bridge, loan for the purchase & rehab portion of the deal and then refinance you into a 30 yr rental loan. Happy to provide more info; feel free to connect/pm me. 

Originally posted by @Jesse Swagerty :

@Lucas Webb

I've done BRRR a few ways. Every strategy has advantages and disadvantages. I recommend finding a private lender that you can negotiate your own terms. We've nearly lost deals before trying to go conventional, just because the processing time is so long. But here's breakdown of pros and cons I've found:

Conventional loan: Pros: low interest, longest loan term, multiple reviews to ensure it’s a “good” deal. Cons: long closing period (risk losing the deal), highest upfront cost for services required by lender.

True Cash: Pros: lowest cost; Quickest/easiest close process; no maturity date. Cons: You’re making all the decisions without 2nd set of eyes, so you’d better know your sh*#. Need cash.

Hard money: Pros: Fast close; 2nd set of eyes on deal to ensure it’s good investment. Cons: highest interest; many upfront fees; short loan term; construction draws may require inspections to release funds.

Private Money: Pros: negotiate your own terms; Quick/Easy close if lender trusts you. Cons: Not everybody knows someone with that kind of cash; it’s their personal money so emotions are involved; unless they are a seasoned RE Investor, they are not a reliable 2nd set of eyes on the deal.

Note: regardless of strategy, I always recommend finding who you plan to use for refi up front and ask their advice. Every lender is different so you want to establish the relationship early and make sure you’re on the same page so there’s no surprises when it’s time to refi.

What a cool little summary analysis.  This could be an article.