Cash Offer or Financing when starting out with BRRRR?

Question

I've been going back and forth on it if makes sense to get started with BRRRR investing with an all cash offer or to leverage financing. I am diversifying out of my company stock and will have $200K to invest within the next 1-3 months. The way I look at is I can purchase 1 unit all cash or put down 20-25% on 4-5 units with the cash I will have ready.

Is there one strategy better than the other? Look forward to your input!

Doug Lovett · Answer

@Mike Amann it depends on how fast you want grow and your experience level.

If you don’t have much (or any) experience in doing a BRRRR, doing the first few with cash could make sense so that you don’t have an interest clock working against you.

As you get more experienced and are ready to grow faster and handle more projects at once, I’d find a hard money/private money lender and use your cash for down payments and reno and build your portfolio more quickly.

Greg Kasmer · Answer

Mike - The other item I would mention is that speed of financing comes into play as well. Having some private money at 8-12% annually that can be accessed quickly may be more advantageous than working on a deal with traditional financing with a bank/credit union when they want to due a pre-renovation valuation/appraisal and post-renovation valuation/appraisal and then go ahead and set up a draw schedule to align the funding with the project timeline and any inspections of the property... That is assuming you can get a bank to lend at 20-25% of value on a property that needs heavy renovation - I found that to be rather difficult myself. Perhaps the best way would be to go find a few properties that your foresee using the BRRRR approach with and then present/show them to: 1) Bank/Credit Union, 2) Hard Money Lender, and 3) A few private lenders and see what each say. Their reaction and interest level should tell you a lot - So, when you have the cash in 1-3 months you'll know your strategy.

Mike Amann · Answer

@Greg Kasmer  Makes sense and that is what I was thinking as well. The only other hurdle I see is being able to scale a bit faster with leverage than going all cash for 1-2 properties as I might only be able to repeat that process once a year going all cash. Or like you mentioned, aligning with PM or HML moving forward.

On a side note, I used to live in Philly for 12 years in the Fairmount/Art Museum area and had a few rentals there. I should have hung on to them!

JD Martin · Answer

I started out doing all cash deals, as I wanted to play it real conservative. Looking back I would have been a little more willing to use financing, because I let a lot of good deals pass by waiting until I bundled up my next round of cash before buying again. I'm not complaining - I've done real well, better perhaps than I ever thought - but I played it too safe when there were a lot of bargains to be had.

Ashley Cross · Answer

It definitely depends but I will always lean on the financing side of things. I'm also a lender with a MBA in finance and I understand the power financing can have with scaling your business quicker so I may be biased. If you have the capacity to get 4-5 deals done go that route but be sure you have your team and processes in line to get it done effectively.

Greg Kasmer · Answer

@ Mike - Somewhat depends on the market and the homes you are targeting, but to keep things simple let's assume your "All In" costs (purchase and renovation) for a house is $100k. In that case, I would actually get two properties using all cash and then refinance after you complete the renovation and have a tenant in 6-9 months.  Typically what I find it that you can get a slightly better deal (i.e. lower purchase price) with all cash. The other benefit is that if you buy with leverage on the purchase you wind up paying loan fees, costs, twice - once on the purchase and then again on the refinance. So, if you buy for cash up front and then get long-term financing afterwards (6-9 months) I think that will be best approach from a cost standpoint. The downside is that if you find other opportunities while you're rehabbing the two homes, you'll be unable to buy the deal. However, in that scenario, you might want to consider private money or hard money. Good Luck!

Cash Offer or Financing when starting out with BRRRR?

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