Real Estate Agent · Cincinnati, OH · Member since 2015 · 19 posts · 4 votes
Sorry if this question has been asked before, but I’m s little confused. Hopefully you all can help.
If I use Hard money to purchase and rehab the property, considering the HML gave me 70% ARV, how will I get any cash back when I Refi and pay the HML back. After I rehab then go to bank to Refi the bank will only give me 70%. So I use that to pay my original HML. After that wouldn't I just be back at square one with no cash for the next deal.
I understand I will then have a property. But , the way I understood BRRRR is having to have your own capital then getting that back plus more when I Refi? Am I missing something here?
Rental Property Investor · Fort Worth, TX · Member since 2019 · 35 posts · 30 votes
7y
Hey @Steven Sturman, you just have to factor the interest into your calculations to determine your purchase price. I like to divide my refi amount (75% ARV) by the interest rate. You'll need to convert your 12% interest rate to 1.12 for your calculation. For example...
ARV: $160,000 Refi amount @75% LTV: (.75 x 160,000) = $120,000 Repairs: $20,000 Hard money loan for purchase + repairs: 120,000/1.12 = 107,142
Max purchase amount: 107,142(HML loan) - 20,000(repairs budget) = $87,142
So you would purchase this home for $87,142 put $20,000 into it for repairs, rent it out, and refinance, which will get you $120,000. now you have to pay back your HML with interest, which will be the principal (107,142) + interest (107,142 x .12 = 12,857) which equals....$120,000
Don't forget that even these numbers are over-simplified, as you'll need to also consider other fees your HML might charge, holding costs while you are doing the renovations, and potential closing costs on the refi (unless your bank is willing to roll those into your loan.) I hope this helps!
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
8y
It would be hard with a hard money loan because of the points and high interest rate. But if you get a good enough deal, you could still "BRRRR out" with a traditional bank loan once the property has been rehabbed and rented.
Katy, TX · Member since 2017 · 149 posts · 72 votes
8y
I understand your confusion as I am having the same issue as a first time investor. I have reached out to about 3-4 HML and plan on meeting with them and running a hypothetical scenario with one of the many wholesale emails I get.
The wholesalers provide a detailed rehab cost assuming I sub it out myself. Then they also provide a ARV based upon comps. Now before I go any further I would ABSOLUTELY VERIFY there numbers before I ever made an offer. However I will only assume all is accurate so I can use their numbers as a hypothetical scenario when speaking with a HML.
I figure if they want my business they will sit down with me and run through this scenario and so far they all seem pretty keen on it.
Also one HML I am working with won’t even sign the dotted line unless they know you can refi-out and they will help with that step if needed. Which I feel is a good indicator of their intentions.
Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes
8y
@Jason Smith HML's really won't fund your deal 100%, at least not for a brand new investor. You wouldn't want them to either. You HAVE to have money for any rehab overages, interest payments, earnest money deposit, etc. Most are going to require 10-25% down. Most will also require you to pay some portion of the rehab. What they fund will also depend on what the property appraised for which you won't know until you are already under contract and moving forward with the deal.
Now, if you find a really great deal that you are able to be all in for less than 70% of ARV that's how you refinance out and pay yourself back as well as the HML along with points, interest, and closing costs. Maybe there are HML's who would fund 100% of costs up to 70% ARV for the right deal and if they already work with whoever you use to get and rehab the deal but it's probably very rare. Point is, you want and need to have plenty in reserves plus your 10% plus down.
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
8y
It seems to me that you are assuming that you are buying a property at retail and not taking in to account your forced appreciation, which defeats the whole purpose of investment. True, it will be tougher with hard money, but it's still possible. Here's a simplified example: you find a fixer that has an ARV of $100k, but you can get it for $65k. You spend $10k fixing it up. Now you owe $75k, but the house is worth $100k. You go to a bank and do a cash out refi- they give you 75% LTV, which would be $75k, you use that to pay off your HML with that money and rent the property out. Now you go back to your HML and do it all over again.
1. It depends on the HML, but some will fund all the purchase and rehab. Many will want to see that you are pre-qualified with the long term lender for the refinance before they will lend on the property.
2. HML may go up to to 70% of ARV. Take out lender may lend up to 75% of ARV (depends on how many properties you have), so you are just doing a rate and term refinance to cover the HML and cover some or most of the closing costs on the back end. This isn't a cash out refi.
You've built the equity into the property with the rehab, so you aren't having to bring 25-30% down like a turn key rental with conventional financing.
This is a great strategy that many of our clients do using HML and refinancing out.
You aren't doing this to pull cash back out on each, you can just keep using the same strategy to build a portfolio of property with not as much of your own money in each one. The cash flow from each will build up your liquid reserves and eventually you could do it with your own cash, but doing this strategy keeps you liquid and not having to tie up your funds in each property.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
8y
What you are not considering is that you will have to have a down payment with the lender, which you will get back on the cash-out, to use again for the next property. For example, you have a property you purchase for $100k, requires $25k in rehab, and worth $180k. You'll have to put down, probably, at least 20% of the purchase price. So your loan will be the $80k for the purchase, and $25k for the rehab. When you cash out, you'll get a loan for $125k, pay back the lenders $105k, and get your $20k down payment back to use again.
Real Estate Agent · Cincinnati, OH · Member since 2015 · 19 posts · 4 votes
8y
thank you everyone. I guess I’m just trying to figure out a way to start the process. Got about 15K to start I’m not sure how to go about starting the Brrrr process without having cash for the purchase
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
8y
With $15k you'll likely have to come up with some creative ways to get the ball rolling. You could go the hard money route, but you'll need more cash. Even if you can cover the down payment, HMLs mainly use a draw system for rehab payment, so you have to front the money and get reimbursed. Do you have home equity? You could take out a HELOC. I've taken personal loans to cover and then pay back. A little risky buy credit card are an option as well. There are ways to jump in, especially because Cincinnati is a lower priced area, you'll just have to be a little unconventional.
Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
8y
@Jason Smith Rate and term refinance will pay back HML you won't get cash back unless you wait for 6 month. 6 month waiting period is worth it if you think there will be enough equity to cash out because you can go up to 75% ltv in 1 unit.
Real Estate Investor · Cincinnati, OH · Member since 2015 · 33 posts · 12 votes
8y
Depending on your construction experience - you could buy the property with a construction loan (one year, interest only) at an inflated rate for your GC services and self performed work. At the end construction or at the end of the term you get a standard mortgage based on the value of the home.
Rental Property Investor · San Antonio, TX · Member since 2011 · 513 posts · 290 votes
8y
@Jason Smith, did your question get answered? What if you found a private lender or partner to fund the purchase? If you find a deal at 75% of ARV minus repair costs, you could do this. ex. ARV 100k, repairs 20k, you pay (.75x100,000) - 20,000. Purchase price is 55k. Your parter funds the purchase and repairs and you do the work or contract it out. Then you refinance the deal with your 15k reserves in the bank. The partner gets something like 10 percent interest and has a first position lien on the property. This may require a slightly higher rate if it's your first project. This is just an example.
Another option is to sell the house to generate some cash and be better prepared for your next one. Not sure if any of this helps but it seemed like you still had questions. Also, you would need to wait six months for the refi, as Harjeet said, to get your lender paid off completely (loan based on 75% of the new appraised value after your forced appreciation). This stuff does work. It all comes down to finding really good deals.
San Diego, CA · Member since 2018 · 22 posts · 6 votes
7y
You are correct that in your hypothetical example you will be right back to square one, but the fact that you have a property is very important and shouldn't be overlooked. You are in the exact same position you were in except you now have a cash flowing property.
Now you can go back to the hard money lender and do the same thing again and then you will be in the same position except you now have two properties. Plus the more deals you do and the more experience you get the better loans you will be able to get from a HML. Eventually you may want to see if you can into private money since you can get much lower rates.
The key thing about growing your wealth with BRRRR is that last R. You are right that looking at BRRRR from the first deal things may not look to different but if you look at it after you have done a few then that's when the real wealth is built.
I'm still missing something - what happens to the 12% or similar amount of interest that has to be paid to the hard money lender, how is that covered by the 70% cash out through refinancing?
That is a loss that you paying every month to the hard money lender. That is why you want to either refinance (there is no seasoning period with a refinance and no cash out) or cash out refinance (waiting period of 6 months, but can be started prior to 6 months, you have to close after 6 months) asap to get rid of that high interest.
Rental Property Investor · Fort Worth, TX · Member since 2019 · 35 posts · 30 votes
7y
Hey @Steven Sturman, you just have to factor the interest into your calculations to determine your purchase price. I like to divide my refi amount (75% ARV) by the interest rate. You'll need to convert your 12% interest rate to 1.12 for your calculation. For example...
ARV: $160,000 Refi amount @75% LTV: (.75 x 160,000) = $120,000 Repairs: $20,000 Hard money loan for purchase + repairs: 120,000/1.12 = 107,142
Max purchase amount: 107,142(HML loan) - 20,000(repairs budget) = $87,142
So you would purchase this home for $87,142 put $20,000 into it for repairs, rent it out, and refinance, which will get you $120,000. now you have to pay back your HML with interest, which will be the principal (107,142) + interest (107,142 x .12 = 12,857) which equals....$120,000
Don't forget that even these numbers are over-simplified, as you'll need to also consider other fees your HML might charge, holding costs while you are doing the renovations, and potential closing costs on the refi (unless your bank is willing to roll those into your loan.) I hope this helps!