BRRRR strategy question

8 Replies

Hi BP - I'm a newbie investor in real estate and trying to better understand the BRRRR strategy. I watched this video from Bigger Pocket's newbie guide to BRRR investing: https://www.youtube.com/watch?v=FBci62dfqaY&t=796

General questions about BRRRR:

1. Do you have to use a private lender or org to initially borrow money? What happens if I have the capital to purchase the property using cash (for lower priced properties of course), or would this be a bad decision?

2. Is there a reason why (or why not) go to a bank for the initial loan to purchase the home vs. using a private lender? 

Thanks,
Jordan


@Jordan Leu

To be able to refinance and get your capital out, the method works best if you can "force appreciation" by fixing it up. It's basically like a flip, except you hold it. So, the properties in the worse condition won't qualify for conforming loans which require. "functional" house. Private money or hard money loans allow for buying properties in almost any condition, similar to cash.

@Jordan Leu

Oh, you also asked about cash. I think that would be great to purchase in cash if you have it. It's a stronger offer, and it saves you one loan and associated fees since you will have to refi later..

@David M. - thanks for jumping in! Super helpful as I'm still learning the ropes. Ok, that makes sense. So my understanding is that most banks will give you loans on these types of properties. 

Follow up question, if the property is bad (but not awful) and there is a bank that would approve a loan, should I still go with a private money or hard money loan? I would still plan to rehab the property, but might not require as much rehab costs.

Jordan, Keep in mind you also have "Fix & Flip" loans where you have renovation funds available and flip in 12 months or extend loan for up to (3) quarters. You can use loans like 203K, Fannie/Freddie rehab loans, VA (Military rehab). I think it is a safer bet right now to use the banks money since mortgage rates are at an all time low. Why tie up your money if you do not have to just use the banks money. If something happens your not stuck holding a property with no renter or sitting on the MLS for a long period of time.

One major benefit of using your money for the initial purchase is the reduced expense. In my market, hard money lenders are charging 2-3 points upfront and 12% on the loan. That means that if you buy a $100k house and it takes you 6 months to rehab it and refinance it (some banks won't refinance before the 6 month mark), you will spend around $9000 just to the hard money lender. By using your money, you assume the risk, but you also shave a good amount of money off your project. 

With that said, it also depends on how many houses you are planning to renovate at one time, and how much capital you have available without using a hard money lender. 

@Jordan Leu

Sure, go with the cheapest money possible. You have to realize that what makes real estate investing "interesting" is that there are so many ways to go about doing a deal. You need the right tool for the deal. Furthermor, you need the right deal for you. So, it also depends on your investment strategy and goals. As your questions started on the brrr methodology. One goal of the brrr is to get all your capital out at the end. Maybe a more turnkey property might work for you, but you have to leave some capital in the property. If have something cash, maybe it's not a problem for you. Many others have posted about what to do because that leaves with insufficient cash for their next deal.

The loans have their degrees of difficulty to get. In some ways this is just whining, but I bring it up because sometimes you want to choose your headaches. Sometimes, loans can be a pain — it varies.

So, when it comes to financing keep finding more info about the loans, and see which loan works best, both for you and the deal, for what situation. Maybe there are situations / deals that aren’t for you. There have been many potential deals that I have walked away from because they weren’t for me.

I hope that helps.

@David M. @Thomas Garza @Jason Wray  

Thanks for all chiming into my question. This is why I love the BP community. :) 

Although it would be great to save money on the loan costs, it looks like using my limited capital most likely won't be able to scale after 1-2 deals. I'll have to start looking for different financing options. 

Thanks for the help/advice! 

@Jordan Leu Just know that on BP you are going to get several points of view and much of it will be based on personal experience or local markets.  

I personally do not recommend using your cash to buy real estate.  Cash is king and if you tie up your money in one deal it doesn't allow you to scale and you are putting a lot of your money at risk without knowing what the future holds (i.e. Covid).  

I would rather pay the hard money costs or interest to your private money lender just so that my money is not tied up in a deal. Imagine an amazing deal is presented to you while you are in the middle of a rehab and you have to pass on it because all of your money is tied up because you bought with cash.

Now if you have a million dollars in the bank and are talking about using cash to buy a $100k house, I would probably say go for it.  But 99% of the time I recommend using other people's money.

Good luck!