Why is it recommended to purchase with all cash on your first BRRRR property?

Question

My husband and I have two properties and are looking to buy our third but planning on using the BRRR method for the first time. We are currently reading the book, but can someone help me understand why david recommends using cash to buy your first property instead of taking out a loan? How does this change the amount you refinance for?

Alex Bekeza · Answer

@Peyton Payne I wouldn't personally recommend going all cash.  Use a high leverage (85%-90% LTC) purchase and rehab hard money loan without a prepayment penalty and then refinance into a DSCR loan as early as 90 days of ownership once leased where you can use up to 75% of the new appraised value for cash out into a 30 year fixed term.

Greg Kasmer · Answer

Peyton - As others have mentioned I don't think there's a "right or wrong" way to obtain funding for your first BRRRR. However, with your very first BRRRR the hard money will likely be even more expensive that if you had experience/done a few BRRRs already, so just account for that in your estimation for the cost of your funds. Also consider that you can "split the difference" and use some of your own funds and complement with hard money. You can build experience with a lender and not be as much exposed to the interest rate than if you would use a loan for all the funding. Good Luck!

Bob Stevens · Answer

Why, you get the best deals. All my deals, ( about 500 of them ) have all been cash, All with 10% net cap or better

Robin Simon · Answer

Generally, you should have less risk and be more conservative whenever doing something for the first time, especially real estate investing / BRRRR method.  It simply puts less pressure on the deal since you have more room on your numbers since you don't have interest expense.  However, the flip side is that it will take a lot of people a lot more time to save the entire money for a purchase, so you could definitely argue its better to take a hard money loan and jump in instead of being delayed for years if you are having trouble building capital

Tony Ngo · Answer

If you have luxury with all cash on BRRR is always the best.  You have good bargain power on the offer compared with financing.  After you purchased the property, it will take some time to do remodel.  The holding cost is also major factoring into your profit if you have a loan.  You will also feel stress out that interest accrued over time.  May be you can consider with partners to team up the purchase.   Be sure you explore the partnership to ensure it's also worth it.

Alecia Loveless · Answer

@Peyton Payne I’m doing my first real BRRRR and the real reason I’m paying cash is because I lost a great deal on a property I offered on with conventional financing to someone who offered $20,000 less but cash last month. This deal has a great upside due to horrible management and I will be ready to refi in 6-9 months depending on how many of the tenants leave or end up being evicted when rents get brought to market value. I’m an extremely fair landlord and my units are reasonably priced so I don’t feel guilty asking my full price which is $400 less than the nasty units close by.

When I complete the Refi I likely won’t get my full purchase price back but I will have doubled the buildings value and created great equity for myself and improved my DTI while giving myself a good cash flow to move towards my personal goals.

Kevin Sobilo · Answer

@Peyton Payne, I think @Greg Kasmer is leading you in the right direction.

With BRRRR you are usually doing a significant rehab not just a cosmetic one. That is typically the only way to force enough additional value to refi out all of your money. That often means buy homes that won't qualify for conventional financing.

If you look at a hard money lender instead, they finance based on the deal AND ALSO YOU! The second part is key as some may not finance at all to a newbie and those that do will likely charge a premium on top of already high rates and fees because its riskier to lend to someone who hasn't done a project/deal like this before.

Once you have some deals under your belt, your experience will let you get more favorable hard money financing.

Also factor in your inexperience to your own risk. With expensive hard money financing, when time slips away during a rehab the costs add up FAST and compound your issues. If a contractor bails on you it not only costs you time but also MONEY with that expensive financing. Not so when using your own cash.

So, working with your own cash if possible is not a bad way at all to start.

Eliott Elias · Answer

Cash is most likely recommended to cushion any falls and mistakes you make. Having a loan, most likely hard money, will put a gun on your back. You will learn lessons the hard way when you have short term debt.

Why is it recommended to purchase with all cash on your first BRRRR property?

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