Confusion on funding for the BRRRR Method

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Confusion on funding for the BRRRR Method

Adrian Hollifield
Rental Property Investor · Santa Monica, CA · Member since 2018 · 24 posts · 7 votes

Hello,

I am still trying to understand the real estate process and am having trouble understanding how to fund the BRRRR method. Maybe you guys can clarify for me?

I have heard of people being able to use a conventional loan with 20% down to buy a SFH that they plan to BRRRR, but I have also heard that many banks will not loan to people who are purchasing SFH that are not considered a "livable" condition upon purchase. Is it common to get a conventional loan for the BRRRR method?

I understand that another route would be to use a private lender or HML, but if it is your first real estate purchase/rehab are they even going to be willing to work with you? I would imagine that they would want you to have some experience prior to working with them. If that is the case how are you supposed to get experience if you can't BRRRR with a conventional loan and you can't use a private lender because you don't have experience?

If anyone can describe how they funded their first BRRRR method I would greatly appreciate it!

Thanks everyone!

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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8y

Most of mine have been purchased with cash (private lender fixed rate with no fees, heloc or myself) or seller financing. I do not pay bank loan costs twice. Nor would I pay HML costs up front if I could avoid that. The cost of capital can get up to 25%+ if not careful.

My next one will be $97k cash out (actually just a rate & term refi to my entity I 'borrowed' from) and will only cost $2900 In lending fees (lenders insurance & appraisal mostly), net of pre-paids.  Last one costed $2800 but I only got $34k out. So right around 8ish %.  10% cost of capital total is my max. Establish a relationship with a lender/bank directly to keep borrowing costs down as much as possible. 

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  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    8y
    @Adrian Hollifield I funded my first BRRR with hard money to purchase and paid for the rehab with cash. Then did a cash out refi w a commercial lender. You can get a conventional loan on the property, just find one that is livable! HML will work with you on your first deal, the rate just might be higher!
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  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    Howdy @Adrian Hollifield

    I understand your confusion and frustration. The best BRRRR deals are what I would call Cash purchases. You use your actual cash, cash from a Hard/Private Money Lender, or Cash from other sources like a HELOC, LOC, and Credit Cards. Or any combination of these.

    If you put together a good package that makes sense to these lenders you will be able to get your deal done.  You may have to shop around, but, they are out there.  If you have your own money to contribute to the deal it makes it easier to find them.

    I use a combination of a Private Lender, HELOC, and a LOC to do most of my deals.

    3Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    8y

    I don't see very many people get a conventional loan on the front end with the BRRRR method. You can, but then you have to pay two sets of origination fees as no bank will lend on the appraised value when you're purchasing.

    But there are plenty of banks (mostly community banks) that will lend on properties that need to be fixed up. They will put the money for the fix up in escrow and will release it as you fix up the property.

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y

    Most of mine have been purchased with cash (private lender fixed rate with no fees, heloc or myself) or seller financing. I do not pay bank loan costs twice. Nor would I pay HML costs up front if I could avoid that. The cost of capital can get up to 25%+ if not careful.

    My next one will be $97k cash out (actually just a rate & term refi to my entity I 'borrowed' from) and will only cost $2900 In lending fees (lenders insurance & appraisal mostly), net of pre-paids.  Last one costed $2800 but I only got $34k out. So right around 8ish %.  10% cost of capital total is my max. Establish a relationship with a lender/bank directly to keep borrowing costs down as much as possible. 

    4Reply
  • Adrian Hollifield
    OP
    Rental Property Investor · Santa Monica, CA · Member since 2018 · 24 posts · 7 votes
    8y

    @Lee Ripma Ok that is good to know! I am getting the feeling that HML is the way to go if presented properly. Was this your first venture into real estate or did you already have prior experiences?

    Thanks for responding!

    @john 

    @John Leavelle Yes, the details of the BRRRR method are a little confusing, but I think that I am starting to understand. I agree with you that a well put together package would be key to getting approved.

    @Andrew Syrios Ok thank you for confirming what I was thinking about the conventional loan approval. I will definitely look to local community banks as an option as well!

    1Reply
  • Adrian Hollifield
    OP
    Rental Property Investor · Santa Monica, CA · Member since 2018 · 24 posts · 7 votes
    8y

    @Steve Vaughan It seems to me that this would be possible once a relationship has been built between an investor and lender. Did you start with private money for your first BRRRR?

    0Reply
  • Josh Lyons
    Charlotte, NC · Member since 2016 · 82 posts · 41 votes
    8y
    @Adrian Hollifield I’m working to buy my first rental and I got approved with a HML with no problem. The plan is to used that money to buy and rehab and then refi with a bank. The bank will refi cash out on the appraised value after 6 months.
    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y
    Originally posted by @Adrian Hollifield:

    @Steve Vaughan It seems to me that this would be possible once a relationship has been built between an investor and lender. Did you start with private money for your first BRRRR?

     Nope, good private money took years to cultivate. I focused on seller financing.   I like tired landlords from the area, not OOS.  Most were 10% down at 6% over 24 yrs.  They carried a mortgage and I owned the property, not like a land contract.

    As conventional rates dropped to 4%, I refinanced with a bank and took out what i could up to 75% LTV. I needed more of a reason than just velocity of capital. Its too painful and expensive to trade loans.

    Now I have a couple private lenders (previous sellers) if I need them.  60-70% 1st mortgage at 6% with no points.  Took years of on-time payments to get down to that. Sad thing is, they are 74 and 80.  I better get crackin for some 'fresher' capital LOL.

    4Reply
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    8y

    @Adrian Hollifield  

    Yes I used HML for my first. You will make a lot of mistakes on the first one, no matter what you read and have had exposure to. HM is really expensive so just be careful when using it. I'm not saying don't use it, I'm just saying be really conservative with the timelines for getting things done, it will take you longer to learn. You could consider partnering with someone who has done it a lot to learn.

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  • Adrian Hollifield
    OP
    Rental Property Investor · Santa Monica, CA · Member since 2018 · 24 posts · 7 votes
    8y

    @Josh Lyons It's comforting to know that people get approved from HML's on their first rentals. Good luck on the rehab!

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  • Adrian Hollifield
    OP
    Rental Property Investor · Santa Monica, CA · Member since 2018 · 24 posts · 7 votes
    8y

    @Lee Ripma Thanks for the great advice! Partnering is definitely something that I would like to do and am taking into consideration. 

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  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    8y

    Also, value add is easier when you can be all cash. At least all cash on the rehab is easier. But that shouldn't stop you from getting started. Good luck! 

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  • Mark Doty
    Developer · San Diego · Member since 2018 · 65 posts · 75 votes
    8y

    @Andrew Syrios, @Lee Ripma, @Steve Vaughan, @Adrian Hollifield, @John Leavelle

    Great thread and comments!

    What do you guys see as the disadvantages vs. advantages of using BRRRR, purchased with cash (either pooled or saved)?  What am I missing?

    Disadvantages:

    -hard to save the cash or find the money

    -finding the bank to do the refi

    -meeting the appraisal amount to match or exceed your cash in

    -opportunity cost of having the money tied up

    Advantages:

    Easier to win deals (taken more seriously by deal finders)

    Lower holding costs

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y
    Originally posted by @Mark Doty:

    @Andrew Syrios, @Lee Ripma, @Steve Vaughan, @Adrian Hollifield, @John Leavelle

    Great thread and comments!

    What do you guys see as the disadvantages vs. advantages of using BRRRR, purchased with cash (either pooled or saved)?  What am I missing?

    Disadvantages:

    -hard to save the cash or find the money

    -finding the bank to do the refi

    -meeting the appraisal amount to match or exceed your cash in

    -opportunity cost of having the money tied up

    Advantages:

    Easier to win deals (taken more seriously by deal finders)

    Lower holding costs

    Cash every time if possible. No checking with a lender or partner, no HML deadlines and risk, minimal costs, fast closings, ability to buy houses that need too many repairs for a bank loan or able to buy 'unique' property like mobiles on land, industrial or commercial hybrid like an office with self-storage in back.

    My closing costs of my last one were $471. Just 1/2 escrow and title search fees.

    Your cons are spot on. Finite amount of money. Takes time to save or line up.  Opportunity costs. Illiquidity...

    When using cash, I like to put a deed of trust on it from one of my generic sounding entities for PP + rehab amount so it just turns into a rate and term refi and gives them a number to shoot for. From what I understand, that can waive the seasoning requirement a cash out refi would have and may have better terms.  I will try and update if I decide to refi my latest, scheduled to be stabilized at end of August.

    3Reply
  • Mark Doty
    Developer · San Diego · Member since 2018 · 65 posts · 75 votes
    8y

    @Steve Vaughan - thanks for the feedback...I need to do some more homework on the implications of the deed of trust component and effect on seasoning requirement.

    3Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    @Mark Doty

    Yours question is a little confusing. Are you asking what are the Advantages/Disadvantages using cash in the BRRRR strategy? Or just using the BRRRR strategy versus other strategies?

    Just so you know I currently only do BRRRR deals. I rarely use any of my own cash. I primarily use a Private Lender for property acquisitions. I use a HELOC and personal LOC for the Rehab, Holding and Closing costs. I do maintain a sufficient cash reserve to satisfy Lenders.

    I like using this strategy for several reasons.

    1.  I do not have to wait until I save enough cash for new acquisition down payments or to complete Rehabs.  In other words I can grow my portfolio quicker.

    2.  I can purchase properties at greater discounts.

    3.  the biggest advantage is the return on my money.  Most deals I get infinite Cash on Cash Returns.  Not 2%, 5%, 12%.  INFINITE!  That means by the end of the process I own a like new cash flowing property for free (so to speak).

    The main disadvantage I guess would be the increased debt.  But that is an acceptable risk I am willing to take.

    I currently do not have problems finding refinance lenders.

    I am not concerned about appraisal being too low. I'm confident my team gets the ARV/Appraised Value pretty close. I include a buffer amount in my analysis to compensate for Rehab cost overages or lower than expected appraisals. So far it hasn't been an issue. That doesn't mean it can't happen in the future.

    Not sure about your lower holding cost. 

    3Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    8y
    Originally posted by @Mark Doty:

    @Andrew Syrios, @Lee Ripma, @Steve Vaughan, @Adrian Hollifield, @John Leavelle

    Great thread and comments!

    What do you guys see as the disadvantages vs. advantages of using BRRRR, purchased with cash (either pooled or saved)?  What am I missing?

    Disadvantages:

    -hard to save the cash or find the money

    -finding the bank to do the refi

    -meeting the appraisal amount to match or exceed your cash in

    -opportunity cost of having the money tied up

    Advantages:

    Easier to win deals (taken more seriously by deal finders)

    Lower holding costs

     The biggest disadvantage with using cash (as opposed to a private loan) is, in my mind, that it's difficult for most people to save up that much before starting. You also aren't fully taking advantage of other people's money and some banks are hesitant to give cash back or at least a large amount of cash back.

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  • Mark Doty
    Developer · San Diego · Member since 2018 · 65 posts · 75 votes
    8y

    @John Leavelle

    Thanks for your response...my question was specifically about using all CASH to buy versus 20-30% down, specifically on BRRRR deals. I think I got your answer...all CASH is better for you.

    However, your response triggered a couple other questions...

    When you use your Private Money Lenders, when and how much do you pay them out?  Is it at REFI and somewhere around 8-10%?  Do they ever want in on the cash flow?

    Thanks again!

    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    8y

    @Adrian Hollifield , Alex Felice wrote a great article filled with tips for using the BRRRR strategy. Check out https://www.biggerpockets.com/renewsblog/work-with-lenders-brrrr-method/

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  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    @Mark Doty

    All Private Money deals can be different.  Mine is a personal friend.  I pay him 10%.  Monthly Interest only payments until the Refinance.  I have not used anyone else to date.  I'm still a part time investor.

    You can make other arrangements including shared cash flow.

    1Reply
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    8y

    I'm currently paying 10% interest only for private money to a friend to fund my rehab. Then I'll do a commercial cash out when I'm done. Give him is money back. 

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  • Adrian Hollifield
    OP
    Rental Property Investor · Santa Monica, CA · Member since 2018 · 24 posts · 7 votes
    8y
    @John Leavelle Many of the reasons that you listed are why I would like to go into BRRRR myself.
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  • Adrian Hollifield
    OP
    Rental Property Investor · Santa Monica, CA · Member since 2018 · 24 posts · 7 votes
    8y
    @Mindy Jensen Thank you! I will definitely take a look at that! I’m a big fan of the you and the money podcast! I look forward to the episodes every week.
    1Reply
  • Adrian Hollifield
    OP
    Rental Property Investor · Santa Monica, CA · Member since 2018 · 24 posts · 7 votes
    8y
    @Andrew Syrios Would you mind elaborating on what you mean by some banks are hesitant to give cash back? Thanks!
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  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    8y

    Banks often want you to have skin in the game. So if you're all in at 200k and you project is now worth 300k they wont' want to give you 75 LTV because you'd have not capital in the project AND you'd get 25k out. In that case they would maybe do 80 LTC and give you back 160k so that you have 40k in the deal. I've seen this play out. The max they want to do is 85 LTC.

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