1st time BRRRR finace strategy

[Greg Cook]

My partner and I currently have 4 LTR and are wanting to do our first BRRRR to raise some more capital. We have $35,000 cash on hand and wanted to explore our lending options. Would we be better off buying a distressed home with that cash, then getting a construction loan, or finance the home with a loan through a local bank and use the cash for the rehab? We also understand we may need a bit more capital for the rehab so would we be able to add more to the home loan? We understand it's difficult to receive a conventional loan on such a small purchase price. Are there options other than hard money?

[Kevin Sobilo]

@Greg Cook, if you are purchasing a property that is functional but dated even with a low purchase price you could likely get a loan. Look for a portfolio loan rather than a conventional loan. A portfolio lender is lending their own money and keeping the loan versus making a conforming loan they will resell. Smaller local/regional banks and credit unions are good places to start for those. They commonly make these kinds of loans. They MIGHT even lend on a more severely distressed property but probably only after you have experience doing the rehabs.

If you are able to buy a dated but function home with a loan like that then you will have your cash on hand to use for the rehab work.

If you are looking to buy a severely distressed home then options become more limited with your lack of experience and funds. Hard money would be the typical route and even then many lenders prefer someone with experience. Perhaps find an experienced partner to join you so you can do a couple deals and get the experience for the future. 

[Jack Mawer]

Are you against a construction or hard money loan?

[Greg Cook]

Quote from @Jack Mawer:

Are you against a construction or hard money loan?

We are not. We just wanted to vet out all options.

[Matthew Crivelli]

A good hard money lender would be able to help you acquire the subject property and give you the rehab money to fix the property up.

The subject will still have to fix in a box, low purchase price is usually not a huge issue. The rehab budget should NEVER exceed the purchase price and what you need are comparable sales within 3 miles to justify your ARV. These comps should ideally be sold within the last 6 months. Zillow can be a great tool in helping you comp a property out. (using recently sold) You will also need an LLC setup and at least one borrower should have decent credit. With this combination hard money will work! @Greg Cook 

[Steven Goldman]

If you are looking for a hard money loan than depending on your credit score and the amount financed, you should have enough money to buy something around 100K and rehab 60k. The ARV would have to be around 225K. You would still need money to start the project before you could draw on the reserve construction fund. As has been suggested some credit unions might help you with the purchase. Be forewarned very small projects are hard to finance in todays market. So buying something for 30k and than expecting to borrow for construction financing is going to be difficult. I would run any project by a broker or lender before you enter into the agreement of sale. A good fix and flip broker, or originator, should be willing to run the numbers on any deal and make sure they work prior to you entering into contract.

[Mike Klarman]

With that capital, you can float the capital needed for a property with a 110k - 120k purchase price and like no more than 30k rehab.  That deal would cost about 35k for everything: downpayment, fees, closing costs, figure 3 - 6 debt payments.

[Ryan Deasy]

@Greg Cook

hard money! this is a great option for you. rehabs always go higher than anticipated. at least with the HML i work with, he will finance 100% of the rehab this is huge. use the 35k to get into the deal, but then use the rehab funds to fix the place up and then flip or do a BRRRR.

[Robert Brunson]

@Mike Klarman as a rookie this may be a stupid question but would a local bank do this loan or only a PM or HML ?

[Mike Klarman]

The best a bank would do is lend you on a purchase, the money to improve the value is up to you. So you either need a second loan or have the money. HML is made for the investor looking to pick up the value add property and flip it.

Honestly, after lots of thinking and listening to seasoned investors and being on the inside of these deals on the lending side, what I plan to do is churn and burn this residential/suburban real estate around three major cities. Hold nothing and use this is Capital generation to pick up the quality stuff that could be a STR or LTR. Hopefully multi-families. The down payments on that multi-family stuff can be 150k. That's why I'll always be flipping, hopefully doing more than 1 deal at a time eventually, then using the capital to pick up the stuff worth holding.

I’m not gonna take out a mortgage that has a payment of 1,100 and collect 1300 in rent.  Im so not interested in cash flow like that.  Much rather pick up that property for 130k, put 30k into it and sell for 190k than try and make 200 per month.