The Financing Step of BRRRR ?

Question

Hi

I need some help understanding the steps to financing a BRRRR.

If you're using hard money, do you secure financing before or after finding a distress property to purchase and rehab, or do you get pre-approved and that will tell you how much they are willing to give you, and then you will have a certain amount of time to find a distress property, and once you do, they can actually lend you the funds.

If someone could please explain the financing process and the step by step on how to do it, I would really appreciate it.

Joe Davis · Answer

Really good responses on here! My advice is to build the team before you do anything and have them to fall back on for advice.

From your question, the first person you are looking for is a private lender who can get you pre-approved but also can be an additional set of eyes on a deal for you.

Mathew Pezon · Answer

Here are the steps:

1) Find a great deal and sign and agreement of sale

2) Find a bridge lender to lend you 90%+ of the purchase price and 100% of the renovation costs (assumes all in you are 75% of ARV of less)

3) do the work, manage the contractors

4) When the work is done, submit a loan request package to a local bank subject to the property being rented. The local bank pays off the bridge lender

5) Once you have a signed lease, finalize the refinance and have the permanent lender pay back the bridge lender

6) Repeat

I hope this helps!

Andrew Postell · Answer

@Elie Merisier there's almost no downside to getting prequalified for a Hard Money Loan first.  Should be free to do as well. Get prequalified and then you'll know what numbers you are working with.  Sometimes, those numbers will affect our offer on a property as well.  Maybe you can get more than you think.

John O'Leary · Answer

Hi Elie,

If you're considering using Hard Money for property rehab, you typically start with a Bridge Loan. Most lenders offer financing between 80-90% of the Loan to Cost (LTC) plus 100% of the rehab costs, provided this does not exceed 75% of the After Repair Value (ARV). These loans usually have a 12-month term (though some offer 6 months). Opt for the 12-month term, as many lenders require a minimum of 6 months of seasoning before you can switch to long-term debt. However, some exceptions allow for shorter seasoning if you can document the completed rehab.

For those following the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat), it’s crucial to underwrite the long-term financing portion, or Debt Service Coverage Ratio (DSCR), at the property's purchase time. "Cashing out" can range from 70-80% depending on the lender. The interest rate is determined by the Loan to Value (LTV) ratio and your credit score. Imagine an X & Y axis on a graph: the more cash you want to extract, the higher the interest rate. It’s important to ensure that the market rent aligns with your DSCR ratio. Most lenders look for at least a 1-1 DSCR ratio, though some may accept negative ratios with added interest rate or by escrowing payments for a year. Remember, the payment includes principal, interest, taxes, insurance, and HOA fees.

A common mistake among investors is not factoring in the DSCR numbers at the time of purchase. Depending on market conditions, this oversight could force you to consider alternative exit strategies. The BRRRR strategy works exceptionally well in markets with lower property prices or when interest rates are low. Locally, we advise investors to engage in a mix of flipping, wholesaling, or a few wholesale deals to maintain steady cash flow. This approach can lead to a rate and term refinance instead of a cash-out option, resulting in a lower LTV, more favorable interest rates, and maximized cash flow.

I hope this helps some. If you ever want to connect I'm in Orlando, so not too far away.

Greg Downey · Answer

@Elie Merisier, I literally just had this conversation with a borrower about 10 minutes ago and really have this question asked at least 2x per week.

Here is how I handle this with my clients. For context I work in private institutional lending.

I like to have an introductory phone call where we get to know the client, their experience and what type of properties they are looking for. Based on THAT information, we then describe the loan products that are avaiable and HOW they work. The intention is that the borrower can then follow those rules to assess properties. If they are actively looking, We typically prequalify the borrower on the phone at that time BUT I ask for a call at least on the first few properties that the borrower is looking at to make sure that they aren't misscalculating the numbers or something else.

You can not get pre-APPROVED in the private lending space since the asset is the primary focus of the underwrite. Once you are under contract, the lender can THEN underwrite and close the loan.

So, at this point, at least my recommendation would be to get on the phone with your lender and get a good understanding of the rehab products that they have so that you can get under contract on a property that they can close on.

Ryan Davies · Answer

You can chat with hard money lenders directly to see how they can help on specific deals. That will help you learn more about the process. Most work this way:

• Rates: 10% to 14% (Most Deals are 12%)
• Terms: 1 Day - 24 Months (Most Deals are 6 months)
• Fees: 2-5 points(%) of loan amount paid at closing (Most Deals are 3 points(%))
• Minimum Loan Amount: $50,000 
• Max Loan: 65-70% of After Repair Value(ARV)
• 100% Rehab Financing Available (Most Deals require 20% of purchase price down payment or cross-collateral)
• Closing Timeframe: 48 Hours - 3 Weeks (Most Deals are 10 business days)
• NO PRIMARY RESIDENCES, NON-OWNER OCCUPIED ONLY, BUSINESS AND COMMERCIAL USE ONLY.

Ryan Muska · Answer

With traditional lending, get preapproved first. Hard money, find a property and tell them the scope of work you are trying to do as well as what you are willing to put down.