BRRRR question... funding

14 Replies

New guy here looking to get into my first rental and a thought popped into my mind that I have no answer for.

The house I am looking at is $110,000. I am planning on using 20k to update the house. When I get a mortgage loan and we're at closing, do I just tell my agent whats happening and they'll have the check of 20k ready for me, and the rest of the money would just go to the old owner? Basically my mind doesn't know or understand how I would get my rehab money as I've never rented before and usually at closing all of the money goes to the seller...

Sorry for the basic question. Thanks for your help!

Hopefully you are using a local lender.  Sounds like you should explore more lending options.  Mortgages arent necessarily the best way to go.  I prefer commercial loans.  They are a little cheaper up front, although the interest rate is typically higher.  

You can also tell your bank you are going to upgrade the house and they may consider after repair value (ARV). This means they will value the house at what it would sale for after your repairs are complete and then loan certain percentages up to that amount.

If it were me, I would use the $20k as a down payment on my commercial loan.  This would mean that you would bring a $20k cashiers check to closing and give it to the title company (or attorney based on location).  That third party would take care of getting everyone their money.  Then for the repairs, I would draw on my loan and basically finance them into the monthly payment.  After its all said and done, you'll be refinancing anyway.  This question always gets several different strategies.  In the end, just go with what you are most comfortable with!  Good luck and have fun!!

Billy,

My overall goal was to try to pay down the loan asap by using the cashflow from the property to make extra payments, which if my research was correct isnt the best if I had a commercial loans as theres typically fees associated with doing that. Just to clarify, my first couple years my plan is to save all cashflow in order to have a nest egg for cap-ex, etc. Then make extra payments. The cashflow, dependent on a few factors should be between 200-450 a month. The biggest factor of that is property taxes, which I cant predict but I have done the numbers from way too high to what I think they should be, and that's where I lie.

With all that being said, I dont have to do that of course. I have not done much research at all towards the commercial loan aspect of things, but will dig in today to see how it looks. Never too many options to look at

Originally posted by @Richard McCaig II :

Billy,

My overall goal was to try to pay down the loan asap by using the cashflow from the property to make extra payments, which if my research was correct isnt the best if I had a commercial loans as theres typically fees associated with doing that. Just to clarify, my first couple years my plan is to save all cashflow in order to have a nest egg for cap-ex, etc. Then make extra payments. The cashflow, dependent on a few factors should be between 200-450 a month. The biggest factor of that is property taxes, which I cant predict but I have done the numbers from way too high to what I think they should be, and that's where I lie.

With all that being said, I dont have to do that of course. I have not done much research at all towards the commercial loan aspect of things, but will dig in today to see how it looks. Never too many options to look at

 Have you looked into a 203k loan?  It lets you roll the reno (upt to 85K I believe) into the loan.  Matt Porcaro is an expert in this.

Originally posted by @Scott Wolf :
Originally posted by @Richard McCaig II:

Billy,

My overall goal was to try to pay down the loan asap by using the cashflow from the property to make extra payments, which if my research was correct isnt the best if I had a commercial loans as theres typically fees associated with doing that. Just to clarify, my first couple years my plan is to save all cashflow in order to have a nest egg for cap-ex, etc. Then make extra payments. The cashflow, dependent on a few factors should be between 200-450 a month. The biggest factor of that is property taxes, which I cant predict but I have done the numbers from way too high to what I think they should be, and that's where I lie.

With all that being said, I dont have to do that of course. I have not done much research at all towards the commercial loan aspect of things, but will dig in today to see how it looks. Never too many options to look at

 Have you looked into a 203k loan?  It lets you roll the reno (upt to 85K I believe) into the loan.  Matt Porcaro is an expert in this.

 Not until you mentioned it. But after researching it today I found the attached pics which won't work for me it seems... unable to rent for 12 months, unless this is old znd maybe it changed? Have you used them before?

I recommend reading the BP ultimate beginners guide. Its a free pdf that gives some options for lending. Also the brrrr book by David Greene has valuable information as it goes through the process.

Originally posted by @Richard McCaig II :
Originally posted by @Scott Wolf:
Originally posted by @Richard McCaig II:

Billy,

My overall goal was to try to pay down the loan asap by using the cashflow from the property to make extra payments, which if my research was correct isnt the best if I had a commercial loans as theres typically fees associated with doing that. Just to clarify, my first couple years my plan is to save all cashflow in order to have a nest egg for cap-ex, etc. Then make extra payments. The cashflow, dependent on a few factors should be between 200-450 a month. The biggest factor of that is property taxes, which I cant predict but I have done the numbers from way too high to what I think they should be, and that's where I lie.

With all that being said, I dont have to do that of course. I have not done much research at all towards the commercial loan aspect of things, but will dig in today to see how it looks. Never too many options to look at

 Have you looked into a 203k loan?  It lets you roll the reno (upt to 85K I believe) into the loan.  Matt Porcaro is an expert in this.

 Not until you mentioned it. But after researching it today I found the attached pics which won't work for me it seems... unable to rent for 12 months, unless this is old znd maybe it changed? Have you used them before?

You mentioned an FHA loan in your original post, which also has a 1 year primary residence requirement. So that won't work for you either.

@Richard McCaig II  In short:

  • There is no real advantage to using a lender local to your area, unless you're getting residential financing from a credit union.
  • You should really start contacting a number of Realtors as soon as possible, all of whom should be able to explain to you exactly how things will play out
  • You should also have some conversations with licensed loan officers. Considering the purchase price and the required down payment, you might have a little bit of difficulty finding a lender who will work with you. Lenders are paid based on the loan amount and unfortunately, most lenders are more interested in big loan amounts and commissions than in helping new investors such as yourself.
  • If the property is priced at $110,000 and requires $20,000 in work, it's very likely that FHA will not give you financing at all. FHA loans are decent ideas on paper but fall apart when you actually try to utilize them, especially if the house itself isn't 110% absolutely perfect. And if it needs that kind of work for that kind of purchase price, I'm guessing there's a lot going on with that property the FHA will have a problem with. Sure, there's the FHA 203(k) loan, but the restrictions and issues you'll have with that terrible program will cause you enormous suffering.

  • Lastly, and I cannot understate the importance of this, avoid using a commercial lender at all costs!!! There are plenty of very good residential lenders out there and commercial lenders are not bound by the regulations and restrictions of Frank-Dodd, and frankly are in existence solely to take your money.

But also know that in any real estate transaction there are going to be a whole number of people to assist you. In no particular order, they include:

  • -Your real estate agent - try to find some agent in the top 20% in your area who is also investment minded and familiar with all forms of financing
  • -Your loan officer/originator - please use a residential lender. Your future self will thank you.
  • -A title officer - depending on your jurisdiction, this might be a real estate attorney
  • -A closer/escrow officer - these are the people who helped coordinate closing and should be able to clear up any confusion about the process
  • -An appraiser - this will depend on your financing but most likely an appraiser will be involved at some point
  • -A home inspector – optional, but always a good idea to use one

What typically happens is that you will find a property with the help of a real estate agent, submit an offer, get it accepted, deposit earnest money within two business days of the seller accepting your offer, secure financing over the following days and weeks and you will be notified well in advance about who gets your down payment, when, and how it is to be handled.

If I were you, right now I would focus on trying to find two people in particular: a real estate agent and a licensed mortgage loan originator. The rest is pretty easy 😊

Originally posted by @Patrick Britton :

@Richard McCaig II  In short:

  • There is no real advantage to using a lender local to your area, unless you're getting residential financing from a credit union.
  • You should really start contacting a number of Realtors as soon as possible, all of whom should be able to explain to you exactly how things will play out
  • You should also have some conversations with licensed loan officers. Considering the purchase price and the required down payment, you might have a little bit of difficulty finding a lender who will work with you. Lenders are paid based on the loan amount and unfortunately, most lenders are more interested in big loan amounts and commissions than in helping new investors such as yourself.
  • If the property is priced at $110,000 and requires $20,000 in work, it's very likely that FHA will not give you financing at all. FHA loans are decent ideas on paper but fall apart when you actually try to utilize them, especially if the house itself isn't 110% absolutely perfect. And if it needs that kind of work for that kind of purchase price, I'm guessing there's a lot going on with that property the FHA will have a problem with. Sure, there's the FHA 203(k) loan, but the restrictions and issues you'll have with that terrible program will cause you enormous suffering.

  • Lastly, and I cannot understate the importance of this, avoid using a commercial lender at all costs!!! There are plenty of very good residential lenders out there and commercial lenders are not bound by the regulations and restrictions of Frank-Dodd, and frankly are in existence solely to take your money.

But also know that in any real estate transaction there are going to be a whole number of people to assist you. In no particular order, they include:

  • -Your real estate agent - try to find some agent in the top 20% in your area who is also investment minded and familiar with all forms of financing
  • -Your loan officer/originator - please use a residential lender. Your future self will thank you.
  • -A title officer - depending on your jurisdiction, this might be a real estate attorney
  • -A closer/escrow officer - these are the people who helped coordinate closing and should be able to clear up any confusion about the process
  • -An appraiser - this will depend on your financing but most likely an appraiser will be involved at some point
  • -A home inspector – optional, but always a good idea to use one

What typically happens is that you will find a property with the help of a real estate agent, submit an offer, get it accepted, deposit earnest money within two business days of the seller accepting your offer, secure financing over the following days and weeks and you will be notified well in advance about who gets your down payment, when, and how it is to be handled.

If I were you, right now I would focus on trying to find two people in particular: a real estate agent and a licensed mortgage loan originator. The rest is pretty easy 😊

With the fha part, the house is worth 150-160k as it sits, so i was i guess kind of hoping that the loan of 130k could be split, 110 towards the seller 20k for me for repairs.


I'm in the process of getting my llc stuff thru the state now too, can an llc get a standard mortgage, not a commercial? Or should I put it in my name then try to transfer it to the llc....? 

@Richard McCaig II What advantages are there (to you) if held in an LLC? Keep in mind, while there are some benefits to owning property in an LLC, those benefits vary significantly from person to person, from deal to deal.  Most "regular" investors, such as myself, receive no NET benefit from an LLC.  

If you buy and hold a property in an LLC, you'll be FORCED to use a commercial lender, and they will NOT allow you to live there. Your interest rate will be much higher, there will be a pre-payment penalty, and the lender will charge excessive fees, points, and will likely make a number of mistakes YOU will pay for down the line.

Even if the property is truly worth $150,000, if you're buying it for $110,000, the FHA appraiser will say that it is worth $110,000. I'm sure there are some exceptions throughout the course of human history, but I have never known an FHA appraiser to give the property more worth than the purchase price in as-is condition. And I've been a part (as an agent, lender, investor, homeowner, etc.) of over 100 appraisals.

"With the fha part, the house is worth 150-160k as it sits, so i was i guess kind of hoping that the loan of 130k could be split, 110 towards the seller 20k for me for repairs."  

If you are going to use an FHA loan, the minimum down payment is 3.5%. so in this instance it looks like this:

Purchase price x 3.5% plus closing costs minus seller credits (if any) = total cash to close

This means that a good chunk of your $20,000 will be going mostly to the cash to close assuming the following rough numbers: $110,000 x 3.5% + FHA upfront mortgage insurance premium (1.75%) + $2,000 (depends on local customs)
= $3850 + $1857 + $2000 

= $7,707

So you're left with about $12,000 for repairs in this instance.

And I'm very sorry if this is not what you want to hear.  But it's the truth.  And it's better to know now, before you get too eager and excited about this place.  

Originally posted by @Patrick Britton :

@Richard McCaig II What advantages are there (to you) if held in an LLC? Keep in mind, while there are some benefits to owning property in an LLC, those benefits vary significantly from person to person, from deal to deal.  Most "regular" investors, such as myself, receive no NET benefit from an LLC.  

If you buy and hold a property in an LLC, you'll be FORCED to use a commercial lender, and they will NOT allow you to live there. Your interest rate will be much higher, there will be a pre-payment penalty, and the lender will charge excessive fees, points, and will likely make a number of mistakes YOU will pay for down the line.

Even if the property is truly worth $150,000, if you're buying it for $110,000, the FHA appraiser will say that it is worth $110,000. I'm sure there are some exceptions throughout the course of human history, but I have never known an FHA appraiser to give the property more worth than the purchase price in as-is condition. And I've been a part (as an agent, lender, investor, homeowner, etc.) of over 100 appraisals.

"With the fha part, the house is worth 150-160k as it sits, so i was i guess kind of hoping that the loan of 130k could be split, 110 towards the seller 20k for me for repairs."  

If you are going to use an FHA loan, the minimum down payment is 3.5%. so in this instance it looks like this:

Purchase price x 3.5% plus closing costs minus seller credits (if any) = total cash to close

This means that a good chunk of your $20,000 will be going mostly to the cash to close assuming the following rough numbers: $110,000 x 3.5% + FHA upfront mortgage insurance premium (1.75%) + $2,000 (depends on local customs)
= $3850 + $1857 + $2000 

= $7,707

So you're left with about $12,000 for repairs in this instance.

And I'm very sorry if this is not what you want to hear.  But it's the truth.  And it's better to know now, before you get too eager and excited about this place.  

 Lot of good info here, thanks for posting. My closing costs were going to come out of pocket, as my mental plan goes.

As far as the llc goes, I was hoping for 2 things to get out of it. First was tax incentives as, if I'm being honest, I did not know if those could be claimed If I did not own a business or llc. I am completely tax law illiterate and don't claim to know any of that, so that was (still is) my assumption on taxes. Secondly but most importantly for me is to not lose my house in the event of Any lawsuit. My house is paid for and I would very much prefer to NOT lose it for any reason, and my understanding of an llc is it provides protection from personal property vs commercial property if it is set up correctly. 

So youre saying that I still receive tax benefits for having a rental in my name without having a llc?

@Richard McCaig II I also consider myself to be tax illiterate :) And while there seem to be some tax advantages, most of those advantages can be applied to your personal tax return through a schedule E. So quite frankly, given the additional costs of forming an LLC, maintaining the LLC every year, paying someone to do the taxes on the LLC, paying a significantly higher interest rate because you're using a commercial loan because it's an LLC, etc., I don't see how the tax advantages exceed those costs. They certainly do not in my specific case.

But full disclosure, I am not a CPA, I'm not a tax accountant and I'm certainly not an attorney. I am however someone, who did exactly what the textbooks tell you to do (use an LLC to buy rentals financed by a commercial lender) and I will be paying for these mistakes for the next decade.

As for losing your own house in the event you get sued and whatnot, I had a very lengthy call with my attorney a few weeks ago about this very matter. He reiterated that no fewer than six separate, horrific things would have to happen for your primary residence to be at risk:

  1. something has to go horribly wrong with your property/tenant
  2. the person who is “wronged” would have to file a lawsuit against you (this means they would need some money to get the process going as well as some education on how that's actually done)
  3. arbitration would have to fail
  4. it would have to go to court
  5. you would have to lose
  6. you would have to lose so much that the only way to make up for the difference would be to take equity out of your house

And sounds like you're in the position of being able to lean on the equity in your house as opposed to being forced to sell it.

Yes, the probability of all these things happening is non-zero, but it's still incredibly small.  In a way, you are paying for “insurance” against an event that we hear about on the news sporadically, but doesn't really happen very often. It's like asteroid insurance. Sure, your house could get hit by one, but what are the chances?  And more importantly, what are the costs of that insurance?

Also, my attorney reiterated that simply having adequate homeowner’s insurance, especially with an umbrella policy, would be a much cheaper alternative.  Not surprisingly, this was confirmed by my insurance agent.

Very interesting stuff. This site has been a wealth of knowledge and information for me. Thank you all. My wife and i were looking last night at a few apartment complexes for sale locally, and she actually seems interested (let's be honest though, we probably wouldn't qualify for financing) however the door to other venues is open and I actually believe we might be upgrading from this one house to multifamily buildings within a few years. Still doesn't mean we need an llc at this very moment, but its still something we're looking into for the future.