Obtaining Initial Financing for BRRRR
Successfully completed my first house-hack / investment property this year (woohoo!) and am now educating myself on the BRRRR strategy after I've gotten my feet wet. My first property needed a new roof, water and sewer main, and extensive electrical work, so I feel pretty confident with those rockstars in my corner. My agent the first time around was great and I didn't have any issues with my lender, so I feel good about my team there as well.
The BRRRR process makes sense, and I'm ready to dive in, but I'm still hung up on the initial financing. I don't have enough equity for a HELOC, nor do I, or anybody I know, have a pile of cash to throw at a property. Hard-money seems like my only option. Is this correct? If so, do I get the loan before I find a deal, or put in an offer and then go to a hard-money lender? This seems risky, but it also seems risky to take out some monstrous 9% interest loan and have to sit on it for 2 months while deals fall through. Any advice?
Hey Griffin - There are private and hard money lenders that will do rehab loans (a percent of the purchase and a percent of the rehab). They'll obviously be a little more expensive than conventional financing and there's a second closing that has to happen to get into permanent financing, but it's a way to get the money to get the deal. :)
Thanks Erin. I suppose I should probably do what I did for my conventional loan on my house-hack - shop around with different institutions and find the best terms.
Hard-Money is still a bit hazy to me, like, are these brick-and-mortar institutions where I can take a Saturday and drive around and collect information from them all? Or are they predominantly online and I just need to Google my way to terms from different companies
Most HML's will only loan to a business so make sure you check that out. You will most likely need to set up an LLC if you use a HML
You should start talking to lenders now to get an idea of what you can realistically qualify for. Both traditional (since that is where the bulk of the money is coming from) and hard money (for the rest). You're in NY so I imagine there are a ton of options for both, just get to googling, going to RE meetups, etc.
Best of luck!
Quote from @Griffin Malcolm:
Thanks Erin. I suppose I should probably do what I did for my conventional loan on my house-hack - shop around with different institutions and find the best terms.
Hard-Money is still a bit hazy to me, like, are these brick-and-mortar institutions where I can take a Saturday and drive around and collect information from them all? Or are they predominantly online and I just need to Google my way to terms from different companies
Hey Griffin,
To my knowledge, these are a hunt online kind of thing. :) You wouldn't be able to look up terms in most instances, you'd need to actually talk to someone with the company. Honestly, I'd suggest setting aside a couple hours (maybe not all together), looking for the companies that are recommended on BP and by other investors in your area, reach out to them, explain what you hope to do, and see what's possible. Some will ask for an address so they can run numbers for you. It's fine if it's a house you're just considering for them to run numbers (obviously, make it clear that you're not UC). Also, @David Paull makes a great point, so make sure you ask if you need to close in an LLC or if you can close in your personal name. (You may want to close in an LLC regardless.)
Very good luck in finding a lender that makes sense for your next deal! :)
Thanks so much everyone! These are some clear action items for me to take. I looked into an LLC as well after David's comment and was surprised at how inexpensive it is to start one in NY.
@Griffin Malcolm BRRRR was an outstanding strategy when money was dirt cheap. When rates were 3%, it was possible to buy a house, rehab it, re-rent it, and refi the rehab debt into a new mortgage that had such a low rate it more than covered the entire cost of the rehab. I executed this strategy as often as possible back then--those were the days!
Today, pulling off a BRRRR is a lot trickier because you'll be refi'ing into a comparatively higher rate than before, and this often means the numbers don't pencil...not saying it's impossible, it's just a LOT harder to find anything that will pencil out.
However, the good news is that you've done your first house hack and it sounds like you've gained a lot of experience and resources from that. If the first house hack worked, why not repeat that over and over until it doesn't work anymore? House hacking has SO many advantages over other REI strategies (it's relatively straightforward, it tends to be much more forgiving to error and less risky than other strategies, it can produce excellent returns, it provides you with invaluable experience, it allows you to leverage owner occupant debt--which has the best terms, etc., etc.). Plus, a HH can be combined with other strategies (like value add approaches).
House hack a new place every year for 10 years until you hit the limit on owner occupant mortgages, and in a relatively short time frame, you can build up a very strong portfolio. There are plenty of multi, multi millionaires who built most or all of their fortunes via repetitive house hacking.
As you progress, you can work your way up to larger and nicer properties (house hacking doesn't require you to live with housemates--you can use owner occupant debt to househack a small multifamily property up to four units).
...and to clarify: I'm not talking about hypotheticals. I built a substantial portion of my own portfolio via repetitive house hacks. I've executed all sorts of REI strategies over the years, but some of my best returns have been via house hacks--it's a very powerful tool.
Good luck out there!
#3 House Hacking Contributor
- Cleveland, OH
Griffin,
Put some consideration into house hacking again!
The details that @Leo Ray listed out are excellent. Something to consider in this market for sure.
Could try to find an owner willing to carry the note.
-
Real Estate Agent Washington (#129777)
- [email protected]
Quote from @Leo Ray:
@Griffin Malcolm BRRRR was an outstanding strategy when money was dirt cheap. When rates were 3%, it was possible to buy a house, rehab it, re-rent it, and refi the rehab debt into a new mortgage that had such a low rate it more than covered the entire cost of the rehab. I executed this strategy as often as possible back then--those were the days!
Today, pulling off a BRRRR is a lot trickier because you'll be refi'ing into a comparatively higher rate than before, and this often means the numbers don't pencil...not saying it's impossible, it's just a LOT harder to find anything that will pencil out.
However, the good news is that you've done your first house hack and it sounds like you've gained a lot of experience and resources from that. If the first house hack worked, why not repeat that over and over until it doesn't work anymore? House hacking has SO many advantages over other REI strategies (it's relatively straightforward, it tends to be much more forgiving to error and less risky than other strategies, it can produce excellent returns, it provides you with invaluable experience, it allows you to leverage owner occupant debt--which has the best terms, etc., etc.). Plus, a HH can be combined with other strategies (like value add approaches).
House hack a new place every year for 10 years until you hit the limit on owner occupant mortgages, and in a relatively short time frame, you can build up a very strong portfolio. There are plenty of multi, multi millionaires who built most or all of their fortunes via repetitive house hacking.
As you progress, you can work your way up to larger and nicer properties (house hacking doesn't require you to live with housemates--you can use owner occupant debt to househack a small multifamily property up to four units).
...and to clarify: I'm not talking about hypotheticals. I built a substantial portion of my own portfolio via repetitive house hacks. I've executed all sorts of REI strategies over the years, but some of my best returns have been via house hacks--it's a very powerful tool.
Good luck out there!
Thank you for the detailed reply! I definitely intend to keep house hacking. I've been looking into BRRRRs since I don't hit one year in my primary residence / first house hack until May of 2024 and want to grow my portfolio before then potentially, but if the rates are still really high it might be best just to wait. I don't want to force anything.
Quote from @Griffin Malcolm:
Quote from @Leo Ray:
@Griffin Malcolm BRRRR was an outstanding strategy when money was dirt cheap. When rates were 3%, it was possible to buy a house, rehab it, re-rent it, and refi the rehab debt into a new mortgage that had such a low rate it more than covered the entire cost of the rehab. I executed this strategy as often as possible back then--those were the days!
Today, pulling off a BRRRR is a lot trickier because you'll be refi'ing into a comparatively higher rate than before, and this often means the numbers don't pencil...not saying it's impossible, it's just a LOT harder to find anything that will pencil out.
However, the good news is that you've done your first house hack and it sounds like you've gained a lot of experience and resources from that. If the first house hack worked, why not repeat that over and over until it doesn't work anymore? House hacking has SO many advantages over other REI strategies (it's relatively straightforward, it tends to be much more forgiving to error and less risky than other strategies, it can produce excellent returns, it provides you with invaluable experience, it allows you to leverage owner occupant debt--which has the best terms, etc., etc.). Plus, a HH can be combined with other strategies (like value add approaches).
House hack a new place every year for 10 years until you hit the limit on owner occupant mortgages, and in a relatively short time frame, you can build up a very strong portfolio. There are plenty of multi, multi millionaires who built most or all of their fortunes via repetitive house hacking.
As you progress, you can work your way up to larger and nicer properties (house hacking doesn't require you to live with housemates--you can use owner occupant debt to househack a small multifamily property up to four units).
...and to clarify: I'm not talking about hypotheticals. I built a substantial portion of my own portfolio via repetitive house hacks. I've executed all sorts of REI strategies over the years, but some of my best returns have been via house hacks--it's a very powerful tool.
Good luck out there!
Thank you for the detailed reply! I definitely intend to keep house hacking. I've been looking into BRRRRs since I don't hit one year in my primary residence / first house hack until May of 2024 and want to grow my portfolio before then potentially, but if the rates are still really high it might be best just to wait. I don't want to force anything.
How about this perspective… buy now, if rates drop, you refi again. When rates drop, there’s going to be another wave of buyers flooding the market that have been on the sidelines and guess what happens to those properties? They get bids 50k+ above asking and now you’re stuck competing. Buy when others are fearful. Block out bad advice and people telling you it’s not a good time.