Can you BRRRR with financing, or just hard money/cash?

22 Replies

Starting out with REI and the BRRRR process seems great. For someone with minimal connections and little capital ($50k) it will be difficult to do a complete BRRRR project. Almost everything I've read or listened to in the BP podcasts and forums showcase doing the BRRRR strategy with hard money loans or cash.

Is it possible to do the BRRRR method with financing to start the process off (buy), then refinancing after the seasoning period? Say doing a conventional 5% DP loan to purchase a property, then doing a refinance after the appraisal after the rehab? Is there any major negative or downsides to doing it this way? Or am I missing something and this wouldn't really work?

The problem is that your typical brrrr home is in very rough shape and needs to be almost completely redone. This makes it difficult to get a bank to give you a loan since no bank wants to lend money on a piece of $#!* house. There are programs such as the FHA 203k loan, which lets you purchase a fixer upper and include the cost of rehab in the loan, but as with other FHA loans you must intend to live there which can cause problems depending what you wanted to do with the house. Also you can't do any of the repair work yourself and must hire a contractor which defeats most of the benefits of a live in flip. Finally the interest rates on the 203k loan will likely be roughly a full % point higher than a normal mortgage interest rate.

You can talk to your local credit unions and see what programs they offer.  Theoretically since they are holding onto the loan instead of reselling it they can do whatever they want, its just a matter of convincing them that this is a good enough deal.  Although often times they will want you to have some sort of a proven track record when it comes to deals such as this.

I'm hoping someone with more experience comes in to add to this, but I believe one of the big reasons cash/hard money is typically used is that it is the best method of getting the best deal on a property. A seller is more likely to take a low-ball cash offer because it reduces their risk of financing falling through in the 11th hour. Additionally, the properties that the BRRRR method works best for are the ones that need a decent amount of that second R (Rehab) and lenders/appraisers aren't big fans of those. That's just what I can think of, but I haven't actually been through the process yet. So someone that has can likely provide more insight.

@Devin Hughes - thank you for the insight. That does make sense. Getting better deals with cash is always a leg up on getting the deal that you want, not the deal that you settle with.

@Bob Daniels - gotcha... that makes sense. Banks wouldn't let you do a conventional 5% on a trashed up area. I don't think they'll even loan on a house that inhabitable. 

What about if I have a paid off house and have a HELOC? Would that be something that could replace the hard money loans/ cash needed?

I'm not 100% knowledgeable on HELOC's but if I have a $200,000 home paid off, and get a HELOC of 70% then I could essentially have a $140,000 line of credit to use to buy and rehab, then refinance and pay back my HELOC, rinse and repeat? Am I missing something with this train of thought, or is that essentially how it would work?

@Josiah Sia - Yes, that would work! David Greene talks about that in his BRRRR book as a creative method of financing. Also, I have heard many people on the podcast say that they went that route as well. That's a great tool to have available when you need it!

Money withdrawn on a heloc is yours to do with as you please.  Renovate your current kitchen, take the family to disneyland, gamble it away in vegas, or buy another investment property.  The choice is yours.  

Just make sure you know the details of your heloc. Some are variable APR and some are fixed, some have interest only repayments during the first 10 years, and then jumps up to fully amortizing over the next 20 years. This makes the repayment significantly higher once the 10yr mark passes and you don't want something like that to catch you off guard. Also many of the heloc's Ive seen have an early closure fee, if you repay the entire balance off within a 36 month period. So if you planned on refinancing your BRRRR to pay off your higher interest rate heloc, you could incur some extra fees unless you leave a small balance on the heloc until the 37th month.

Originally posted by @Devin Hughes :

@Josiah Sia - Yes, that would work! David Greene talks about that in his BRRRR book as a creative method of financing. Also, I have heard many people on the podcast say that they went that route as well. That's a great tool to have available when you need it!

Excellent! Thank you for clarifying. I might just do something like that then and pay off my house early so I can borrow against it over and over. Sounds easier if I want to go fast as the hare but not really sonic the hedgehog fast. 

Originally posted by @Bob Daniels :

Money withdrawn on a heloc is yours to do with as you please.  Renovate your current kitchen, take the family to disneyland, gamble it away in vegas, or buy another investment property.  The choice is yours.  

Just make sure you know the details of your heloc. Some are variable APR and some are fixed, some have interest only repayments during the first 10 years, and then jumps up to fully amortizing over the next 20 years. This makes the repayment significantly higher once the 10yr mark passes and you don't want something like that to catch you off guard. Also many of the heloc's Ive seen have an early closure fee, if you repay the entire balance off within a 36 month period. So if you planned on refinancing your BRRRR to pay off your higher interest rate heloc, you could incur some extra fees unless you leave a small balance on the heloc until the 37th month.

Thank you Bob. That makes sense. I read about that too when I found out about HELOCs. Gotta make sure every bit of it is understood. Thanks for looking out.

@Bob Daniels - I thought a HELOC is closer to a low interest credit card that can be used (partially or fully) paid off and used again. A home equity loan is the lump sum with the potential variable rate and such, right? I didn't realize they would have those types of stipulations. Thank you for the info!

Originally posted by @Devin Hughes :

@Bob Daniels - I believe a HELOC is closer to a low interest credit card that can be used (partially or fully) paid off and used again. A home equity loan is the lump sum with the potential variable rate and such, right? I personally would go with the HELOC over the home equity loan so that it remains available. It also seems as though it would be a perfect finance source for the BRRRR method.

Yup! That's right! The Home Equity Loan is more a lump sum that you get as a second mortgage paid off over time, usually fixed interest if I recall.

The HELOC is more like a CC that I can use (but usually with a variable interest), pay off, use, pay off in usually a 10-15 year time frame. I think I have a new tool in my belt now! I'm excited.

@Josiah Sia  We have helped people finance with hard money, and then actually give them a "LTV/Cash Out Draw" at the end of our loan (if they want to maximize the equity in the property). This allows them to maximize their cash out of their equity they just built, while allowing them to do a rate/term refinance with their takeout loan.

This helps with two things:
- Rate/term refinance doesn't have any seasoning requirements like a cash out refinance would, so you can get it completed quicker
- Rate/term refinance will have lower rates than a cash out.

So even though you do have some fees, depending on how much you are saving on the rate/term rate and on the purchase due to closing with cash, it could make a lot of sense and save you money over the long term.

Originally posted by @Josiah Sia :

@Devin Hughes - thank you for the insight. That does make sense. Getting better deals with cash is always a leg up on getting the deal that you want, not the deal that you settle with.

@Bob Daniels - gotcha... that makes sense. Banks wouldn't let you do a conventional 5% on a trashed up area. I don't think they'll even loan on a house that inhabitable. 

What about if I have a paid off house and have a HELOC? Would that be something that could replace the hard money loans/ cash needed?

I'm not 100% knowledgeable on HELOC's but if I have a $200,000 home paid off, and get a HELOC of 70% then I could essentially have a $140,000 line of credit to use to buy and rehab, then refinance and pay back my HELOC, rinse and repeat? Am I missing something with this train of thought, or is that essentially how it would work?

I've done a couple BRRRR using my primary home Heloc, it's great that it's at 3.99% also. Looking to get a heloc on a rental that has a lot of equity in it (one of my BRRRR's) so I can also tap that money when needed. Once you have a little experience, you can get loans to do those type of deals. I have an 800k LOC for my LLC that I flipped a few houses with last year, I can use it for BRRRR also. It's more expensive than my Helocs so I prefer not to use it unless the numbers are great. I've also used private money a couple of times.

@Josiah Sia some great advice has already been given here. The heloc is an awesome option. And you don’t have to be paid off entirely to use it.

In regards to the initial question; I bought my first few rentals needing cosmetic rehab, using traditional down payments. A few years later I refinanced them and pulled all my down payment money out plus some equity from appreciation. I considered this a slow BRRRR. It worked great. Best of luck!

@Josiah Sia This is the #1 question I get from members of BP that reach out to me about the BRRRR strategy.

The issue is in a lot of compeitive markets you can't get a house that is conventionally financiable at enough of a discount for the numbers to work with a BRRRR. The homes are just simply in to good of shape to sell at a significant discount. This is why properties that don't qualify for conventional financing due to condition typically work better for a BRRRR. Less people willing to take on the perceived risk of a property that needs a ton of work.

@Josiah Sia

Sure. You will find HM lenders here in Texas that offer temp-to-perm loans. Find a few of them in your area and get the details.

That $50k should be set aside as reserves and maybe working capital. Try not to use more than $25k, keep the rest back for ‘just in case’ needs.

You can find a small 3/2 with a $150-$160 ARV and maybe get it for $100 or less. Figure you will put $20-$25k into it assuming it is in OK condition. You can borrow about $110 of this from a HM lender, if they agree with your numbers.

@Mike Zins - That's interesting. Is that a special type of loan that you do as a lender or is there a standard name for that type of loan? That sounds right on point with what you would want for BRRRR strategies!

@Lee S. - That's perfect! Good to know that it's working out for some others as well. Hoping this will be the tool I need to really add some gas to the fire. 

@Will Pritchett - Oh, that's another plan of attack. If a property isn't in TOO much distress but needs some TLC to get back its worth and increase its ARV, then a "low and slow" BRRRR sounds like a good tactic to have in the back pocket. Thanks for sharing Will!

@Michael Noto - That makes sense. Thanks for clarifying Michael. It's either too good that you can just conventional loan it and can't really BRRRR it well, or it's too distressed that you can't conventional loan and will need to use another financing method.

@Mark Sewell - Woah, I've never heard of a temp-to-perm loans. I'll definitely look into that. Is that something most banks/ credit unions do? Or is that more of a special plan they would have to create for an investor has a good deal presented? Also, GREAT advice on the starting point cash reserves. I'll definitely do that right NOW and adjust my starting point to allocate half to a "rainy day" scenario. I really appreciate that, thanks for looking out. 

@Josiah Sia

It can be done I've been able to pull it off a few times, but like many others have said it really is best designed for cash paid deals for a number of reasons.

With that said don't be discouraged if your not in a position to pay cash give it a shot. Just keep in mind takes patience and persistence to find the right under market deal that can be financed! Also don't be disappointed if you're not able to pull your entire initial downpayment out. The best deals IMO are a those that cash flow well and can be bought with some equity potential.

Originally posted by @Mike Barry :

@Josiah Sia

It can be done I've been able to pull it off a few times, but like many others have said it really is best designed for cash paid deals for a number of reasons.

With that said don't be discouraged if your not in a position to pay cash give it a shot. Just keep in mind takes patience and persistence to find the right under market deal that can be financed! Also don't be disappointed if you're not able to pull your entire initial downpayment out. The best deals IMO are a those that cash flow well and can be bought with some equity potential.

Thanks for the advice Mike. Right now I'm trying to decide if I want to just jump in and get a "turn key" type investment under my belt so I can get my feet wet. Something with minimal renovations needed. Or to save up for 1-2 years to be able to do the whole BRRRR process as it was meant to be done.

Decisions decisions...  

@Josiah Sia Having a HELOC of $140k is gold if your all-in cost for purchase and rehab is comfortably under $140k. The downside is that you will have a large monthly payment to cover the interest on the HELOC so you'll need to make sure that your primary income source is comfortably higher than your normal monthly living expenses plus the HELOC payment. The upside is that your spread is going to be pretty large since you won't have to account for points and origination fees that HML charge. Your monthly interest rate will also be much lower than a HML would charge.

I personally think you don't really learn this game by buying a turn-key investment.  The only lessons you can really learn are how to manage a property manager, if that.  Some of these turn-keys even provide the PM for you.  So are you looking to make a little cash?  Or are you looking to grow?

Even if you buy a great turn key property in a cash flow market, that $50k will net you like $4,500 in your first year.  To me, that's way too low of a return on all of your reserves.

I personally think all beginners should start with a small rehab project. You have enough to get a hard money loan. Network with wholesalers. You mentioned that you have interest in BRRR so I know you're interested in the rehab side of this game. What better way than to start a rehab project tomorrow.


Originally posted by @Spencer Cornelia :

@Josiah Sia Having a HELOC of $140k is gold if your all-in cost for purchase and rehab is comfortably under $140k. The downside is that you will have a large monthly payment to cover the interest on the HELOC so you'll need to make sure that your primary income source is comfortably higher than your normal monthly living expenses plus the HELOC payment. The upside is that your spread is going to be pretty large since you won't have to account for points and origination fees that HML charge. Your monthly interest rate will also be much lower than a HML would charge.

I personally think you don't really learn this game by buying a turn-key investment.  The only lessons you can really learn are how to manage a property manager, if that.  Some of these turn-keys even provide the PM for you.  So are you looking to make a little cash?  Or are you looking to grow?

Even if you buy a great turn key property in a cash flow market, that $50k will net you like $4,500 in your first year.  To me, that's way too low of a return on all of your reserves.

I personally think all beginners should start with a small rehab project. You have enough to get a hard money loan. Network with wholesalers. You mentioned that you have interest in BRRR so I know you're interested in the rehab side of this game. What better way than to start a rehab project tomorrow.

I actually have a little side thing going where I want to try to convince my friend's family who doesn't live in one of their homes anymore for me to use it as a rehab project. I want to buy it from them cash and flip it. Not sure how that'll go but it'll be a good first time project for hopefully low cost. (for the property purchase anyway)

Do you know what the average interest is on a HELOC? You mention that the monthly payment on the HELOC will be large. What would the minimum payments be on a HELOC usually be? I need to look more into how this all works!

 

@Josiah Sia

A property that needs renovation probably will not qualify for traditional financing. 

There are conventional renovation loans that you can use for the first few properties to get you started. 

I buy properties for half ARV. Kind of have to have cash for these gems. Bankers can't stomach the before pictures.

Shawn Coverdell

Homes in the Hood