Buy + Rehab Financing
Member since 2023 · 21 posts · 16 votes
Buy + Rehab Financing
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Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
2yIt's rare (and challenging) to fund a deal where you get a loan to purchase, a separate loan for rehab, and then refinance later.
The more common approach is your 2nd option. Take a hard money loan or a 203k loan to purchase and rehab. Then refinance into a conventional loan when you're done.
42 Replies
- Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes2y
It's rare (and challenging) to fund a deal where you get a loan to purchase, a separate loan for rehab, and then refinance later.
The more common approach is your 2nd option. Take a hard money loan or a 203k loan to purchase and rehab. Then refinance into a conventional loan when you're done.
- 2yMatthew CrivelliBusiness MemberLender · MA · Member since 2021 · 1k+ posts · 1k+ votes
One loan for the initial purchase & rehab. Hard Money works well for this. Then refi into a long-term loan to stabilize the property after the rehab is completed.
You don't need prior experience for hard money, you just need skin in the game, maybe 20%-30% down payment. Also with hard money you are using an LLC so its easy to bring on a partner onto the deal. If they have experience, you can piggy back off of them and get better terms.
Freedom Capital Funding, LLC523 Reviews - Lender · PA · Member since 2019 · 535 posts · 461 votes2y
Quote from @Aaron Freeman:
There are so many loan options out there, that I need help focusing my education to the most important ones, and that raises the first question I am having a hard time understanding.
For the experienced BRRRR investors, are there typically three loans in play or just two?
1) Loan to purchase the property
2) Loan to rehab the property
3) Refinance loan
Or are the experienced investors typically seeking to combine steps 1 and 2 into a single loan (e.g. fix-and-flip, or some alternative)?1) Loan to purchase and rehab the property
2) Refinance loanGood Morning! Very few lenders will lend you rehab funds, after you have acquired the property. Rehab. lenders want to lend you the purchase price and the rehab funds based on a formula which takes into account the ARV and then calculates a loan to cost approach. Three factors effect the rate and LTV. Credit score, previous experience and the spread between the total loan and the ARV. If the spread is wider than the amount you need to contribute becomes smaller and the reverse is true as well. You should also plan to fund the beginning of construction as few rehab lenders will not advance you money prior to the conclusion of the first phase of the construction. So you need funds to get started. Also be aware some lenders charge you interest on the entire holdback amount others, only on what has been advanced.
Many borrowers look for private funds for rehabs. A private lender will usually charge you a higher rate and also will charge you for the entire rehab amount form one month on. Some private lenders will not hold back the construction funds, allowing you more flexibility and the ability to access the construction funds immediately after settlement. A good mortgage broker is an essential part of your team. Your mortgage broker should have options for you and advise you on your financing decisions. Good luck and keep moving forward!
- 2yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Aaron Freeman I absolutely want to use lenders that give me the purchase price + rehab. There are enough lenders out there that will do that. In nearly every case, I have used hard money to do so. Now, not all Hard Money Lenders (HML) are the same. I want HML that will lend me 75% of the ARV. That's usually the most flexible and the maximum amount that we can receive. None of this "we lend 100% of purchase price + 80% of rehab" stuff. That's not as good as borrowing 75% of the ARV.
Please understand that I'm not answering anything about how you calculate the ARV or how you calculate the rehab or how to negotiate the price or any other skill that is needed to execute on a BRRRR. I'm only answering your lender question.
Hope all of this makes sense.
- Member since 2023 · 21 posts · 16 votes2y
Quote from @Matthew Crivelli:
You don't need prior experience for hard money, you just need skin in the game, maybe 20%-30% down payment. Also with hard money you are using an LLC so its easy to bring on a partner onto the deal. If they have experience, you can piggy back off of them and get better terms.
Interesting, I have a Subchapter S established, but not an LLC. Can you give some details on why I would need an LLC for a hard money loan?
- Member since 2023 · 21 posts · 16 votes2yVery helpful. From a pre-screening standpoint, I feel comfortable guestimating an expected ARV for my own purposes based on comps and what I am seeing in the market, but how do lenders ultimately establish an ARV for a purchase and rehab loan?
Quote from @Steven Goldman:
Good Morning! Very few lenders will lend you rehab funds, after you have acquired the property. Rehab. lenders want to lend you the purchase price and the rehab funds based on a formula which takes into account the ARV and then calculates a loan to cost approach.
...
Also be aware some lenders charge you interest on the entire holdback amount others, only on what has been advanced.
...
Many borrowers look for private funds for rehabs. A private lender will usually charge you a higher rate and also will charge you for the entire rehab amount form one month on. Some private lenders will not hold back the construction funds, allowing you more flexibility and the ability to access the construction funds immediately after settlement.
Also is there industry jargon for a loan where a lender is charging interest on the entire holdback vs amount advanced? - 2yMatthew CrivelliBusiness MemberLender · MA · Member since 2021 · 1k+ posts · 1k+ votesHi Aaron,
Quote from @Aaron Freeman:
Quote from @Matthew Crivelli:
You don't need prior experience for hard money, you just need skin in the game, maybe 20%-30% down payment. Also with hard money you are using an LLC so its easy to bring on a partner onto the deal. If they have experience, you can piggy back off of them and get better terms.
Interesting, I have a Subchapter S established, but not an LLC. Can you give some details on why I would need an LLC for a hard money loan?
You can use an S CORP if you wanted to. Hard Money loans typically require the borrower to be an entity. One of the main reasons is that commercial bussiness loans have very few regulations.Freedom Capital Funding, LLC523 Reviews - Member since 2023 · 21 posts · 16 votes2yDefinitely makes sense, and it definitely helps me to set an expectation with what can be found. Thank you!
Quote from @Andrew Postell:
@Aaron Freeman I absolutely want to use lenders that give me the purchase price + rehab. There are enough lenders out there that will do that. In nearly every case, I have used hard money to do so. Now, not all Hard Money Lenders (HML) are the same. I want HML that will lend me 75% of the ARV. That's usually the most flexible and the maximum amount that we can receive. None of this "we lend 100% of purchase price + 80% of rehab" stuff. That's not as good as borrowing 75% of the ARV.
Please understand that I'm not answering anything about how you calculate the ARV or how you calculate the rehab or how to negotiate the price or any other skill that is needed to execute on a BRRRR. I'm only answering your lender question.
Hope all of this makes sense.
- Member since 2023 · 21 posts · 16 votes2y
Quote from @Matthew Crivelli:
Hi Aaron,Quote from @Aaron Freeman:
Quote from @Matthew Crivelli:
You don't need prior experience for hard money, you just need skin in the game, maybe 20%-30% down payment. Also with hard money you are using an LLC so its easy to bring on a partner onto the deal. If they have experience, you can piggy back off of them and get better terms.
Interesting, I have a Subchapter S established, but not an LLC. Can you give some details on why I would need an LLC for a hard money loan?
You can use an S CORP if you wanted to. Hard Money loans typically require the borrower to be an entity. One of the main reasons is that commercial bussiness loans have very few regulations.Ahhh, so it's common for a BRRRR investor to create an LLC for each investment?
- Member since 2021 · 2 posts · 3 votes2y
If you own less than 10 properties it makes sense to have each in their own LLC. If a tenant slips and falls and sues LLC 1, all your other LLC properties are protected. After 10 or so you may want to consider groups of properties in different LLCs, just to keep things organized without being untenable.
- Lender · Tampa, FL · Member since 2020 · 202 posts · 116 votes2y
@Aaron Freeman, great questions and I know it can be overwhelming. As a direct portfolio lender for over 9yrs, and now a fund manager I have loaned out over 150+ loans and deployed 25M+ in capital. I've had bad loans and good loans, bad borrowers and good borrowers and Im confident in how I manage each one of these. If I may share some of my experience,
your first scenario (3 different loans) exists but its much more expensive. Your rehab would be in 2nd position which is hard to get as well very expensive.
Your second scenario is the most widely accepted and used in the industry, 2x loans, first for acquisition + construction, the second for the refi.Also be aware that conducsting the BRRRR strategy will always leave untapped equity from your refinance. Happy to discuss my solution for this if youd like
- 2yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Aaron Freeman:
There are so many loan options out there, that I need help focusing my education to the most important ones, and that raises the first question I am having a hard time understanding.
For the experienced BRRRR investors, are there typically three loans in play or just two?
1) Loan to purchase the property
2) Loan to rehab the property
3) Refinance loan
Or are the experienced investors typically seeking to combine steps 1 and 2 into a single loan (e.g. fix-and-flip, or some alternative)?1) Loan to purchase and rehab the property
2) Refinance loanHi - check out this article published on BP on this exact topic! It goes into all the options and pros/cons of each
https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...
Harpoon Capital514 Reviews - Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes2y
So there are two loans involved in the BRRRR. The bridge loan with rehab and the 30 year DSCR refi.
The first loan is a 12 month interest only payments loan with no PPP and the loan includes rehab funds needed to fix the house, the second loan is a LTR refi using your DSCR ratio. 30 year loan, lower rate and fully amortized.
Other investors like to do turn key purchases on rent ready properties, that is a 30 year DSCR purchase loan which is similar to the DSCR refi.
I price out lots of DSCR loans at my day job. This is what I can tell you, given the current state of interest rates right now, and the tightening up of key Appraisal numbers like value and market rent, lot's of leverage has been getting cut on the DSCR for the SFH stuff. People come in all the time and think they will get 2k/month for a house and then the market rent comes in at 1600 and now the loan amount needs to be cut so it works with the DSCR ratio.
Right now, do not look to hold a lot of the SFH inventory. Risky right now. You may have to bring money to refi table and not cash out. I have a client now that has a payoff of 120k on a bridge loan, but the market rent came in 20% lighter than he thought and now his refi loan amount can only be 110k to fit the DSCR guidelines, so he has to bring 10k to the table to refi.
I oversee lots of bridge loans for investors. I can tell you, what works right now in the DSCR environment are duplexes, triplexes, and quads. One of my clients is about to close on a Triplex for 130k. He's putting 100k in and the ARV came back 345k. Market rents bring in 4700 for the 3 units, and even at max cash out leverage his loan payment will only be 3k. That's a 1.6 DSCR which is great.
I'd sell all the SFH inventory right now and look to hold those 2 - 4 units buildings when they pop up until rates fall to a sensible level where there's still a few hundred to be made again per door on the SFH inventory.
- St.Pete · Member since 2022 · 9 posts · 2 votes2y
Quote from @Barton Thomas:
If you own less than 10 properties it makes sense to have each in their own LLC. If a tenant slips and falls and sues LLC 1, all your other LLC properties are protected. After 10 or so you may want to consider groups of properties in different LLCs, just to keep things organized without being untenable.
Isn't that a lot of paperwork every year? Also, does it make the refi harder owning them in an LLC?
- Member since 2023 · 21 posts · 16 votes2y
Quote from @Edwin Epperson:
Also be aware that conducsting the BRRRR strategy will always leave untapped equity from your refinance. Happy to discuss my solution for this if youd like
Interesting! Yes, please share on how a BRRRR leaves untapped equity and your solution. I'll definitely learn something and maybe others watching this thread will too.
- Member since 2023 · 21 posts · 16 votes2y
Quote from @Robin Simon:
Hi - check out this article published on BP on this exact topic! It goes into all the options and pros/cons of each
https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...
Ah, nice, I will definitely read this!
- 2yMatthew CrivelliBusiness MemberLender · MA · Member since 2021 · 1k+ posts · 1k+ votes
Quote from @Aaron Freeman:
Quote from @Matthew Crivelli:
Hi Aaron,Quote from @Aaron Freeman:
Quote from @Matthew Crivelli:
You don't need prior experience for hard money, you just need skin in the game, maybe 20%-30% down payment. Also with hard money you are using an LLC so its easy to bring on a partner onto the deal. If they have experience, you can piggy back off of them and get better terms.
Interesting, I have a Subchapter S established, but not an LLC. Can you give some details on why I would need an LLC for a hard money loan?
You can use an S CORP if you wanted to. Hard Money loans typically require the borrower to be an entity. One of the main reasons is that commercial bussiness loans have very few regulations.Ahhh, so it's common for a BRRRR investor to create an LLC for each investment?
Yes it is very common.
Freedom Capital Funding, LLC523 Reviews - Lender · Tampa, FL · Member since 2020 · 202 posts · 116 votes2yHappy to share, I also created a video that goes into detail why this is the case, but I cannot post video links here. 50,000 ft view for the purchase + reno side, the most that you will be able to get access to is 75% of ARV, though in today's environment the norm seems to be 70% Max LTARV. This means even in the case of you having 800+ credit score the most that you could qualify for on a Rate and Term is 80%, and the most for a Cash Out is 75%. No matter what you will never be able to qualify for the Rate and Term, and be able to pull out at least your downpayment. So this means you will always have 25% - 30% equity in your deal, and you will always have 5 - 10% of tappable equity untapped. If you would like to see the video (about 20 min) where I break down the numbers to help it make sense, shoot me a PM, and I'll share the link to the video.
Quote from @Aaron Freeman:
Quote from @Edwin Epperson:
Also be aware that conducsting the BRRRR strategy will always leave untapped equity from your refinance. Happy to discuss my solution for this if youd like
Interesting! Yes, please share on how a BRRRR leaves untapped equity and your solution. I'll definitely learn something and maybe others watching this thread will too.
- Member since 2023 · 21 posts · 16 votes2y
Quote from @Edwin Epperson:
If you would like to see the video (about 20 min) where I break down the numbers to help it make sense, shoot me a PM, and I'll share the link to the video.Found it by searching your name and brrrr. It's very interesting, and I think I get it. Going to watch the final example once more to be sure. :)
- Member since 2023 · 21 posts · 16 votes2y
Quote from @Mike Klarman:
I oversee lots of bridge loans for investors. I can tell you, what works right now in the DSCR environment are duplexes, triplexes, and quads. One of my clients is about to close on a Triplex for 130k. He's putting 100k in and the ARV came back 345k. Market rents bring in 4700 for the 3 units, and even at max cash out leverage his loan payment will only be 3k. That's a 1.6 DSCR which is great.I'd sell all the SFH inventory right now and look to hold those 2 - 4 units buildings when they pop up until rates fall to a sensible level where there's still a few hundred to be made again per door on the SFH inventory.
Very helpful insight.
- Lender · Riverside, CA · Member since 2017 · 248 posts · 98 votes2y
@Aaron Freeman I think it's probably most common to do HML for the purchase and rehab on interest only terms for up to 13 months and then refinance once the rehab is complete and there is a tenant in place. I've used private money for the purchase and funded the renovations myself and used HML for both purchase and rehab. Both were pretty easy processes. There are some options that allow you to do this as a loan that can convert the rehab loan into something more permanent for lower points, but I think you often sacrifice your rate for this, but definitely worth exploring. Reach out if you want to talk more.
- Lender · Austin, TX · Member since 2021 · 448 posts · 441 votes2y
Hi Aaron,
I suggest going with a lender that offers both products (you can find many investor-friendly lenders in BP's Find a Lender Tab).
With one of these lenders, you would typically do a hard money bridge loan covering the majority of the purchase cost and all of the rehab. Then after the rehab is completed, you would just have to refinance the loan into a DSCR loan. The main benefit of using the same lender for both, is the refinance process is a lot smoother than if you use different lenders, mainly because a lot of the loan requirements can be satisfied in-house.
- Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes2y
@Aaron Freeman- there are indeed loans that can be used to purchase and rehab at the same time. Depending on the needs / amounts / occupnancy plans - these programs may or may not make sense
- Member since 2023 · 21 posts · 16 votes2y
Quote from @Edwin Epperson:
Happy to share, I also created a video that goes into detail why this is the case, but I cannot post video links here. 50,000 ft view for the purchase + reno side, the most that you will be able to get access to is 75% of ARV, though in today's environment the norm seems to be 70% Max LTARV.
...
So this means you will always have 25% - 30% equity in your deal, and you will always have 5 - 10% of tappable equity untapped.Dumb question time!
In your video you show that a property purchased for $100k that requires $60k in renovations would only require a $20k down payment (20% of the purchase price). So that means typically we do not have to make a down payment on the rehab portion of an initial loan? - Lender · Tampa, FL · Member since 2020 · 202 posts · 116 votes2y
@Aaron Freeman no such thing as a dumb question, the only "dumb" question is the one never asked. Every lender is different, and some may lend the renovation amount + purchase/ refi, others only the purchase/ refi. The percentage can also change based on the lender and other factors not being covered in the video. The video I made made general sweeping statements, based on industry averages. Also, words are important.... very important. Words carry specific meaning and with that meaning covey expectations, truths, facts, etc. You mentioned "...downpayment on the rehab portion..." I'm not entirely sure what you mean by that. The term downpayment is normally inferred when considering how much of the purchase the lender WILL NOT FUND, thus the Borrower must bring to the table. As far as construction funding, the term "downpayment" cannot be used. Do you mean to ask if a lender may require 20% D.P. on the entire Loan amount (purchase + rehab) instead of just the purchase? If that is your question, no. I have never seen a lender require a D.P. percentage based on the total loan amount. Almost always the lender is looking at the value of the property or the purchase amount, whichever is more, and requiring the D.P. percentage off that amount, not the full loan amount.
Now that being said this is where newer investors may be confused as to WHEN they can access the construction funding. Most lenders, myself included, fund construction in "Arrears". This means the borrower's money must first be in the project before gaining access to the construction funding. There are several reasons for this but the short answer is it allows the lender to protect themselves, as well as shift more risks to the borrower, which is the name of the game for lenders. SOOOO.... in a sense there is the concept of a construction "downpayment" but it's not called that and it's not realized at the closing table. It is realized through the draw process and when the borrower gains access to the funding. I can explain more in detail but this post is already long enough.
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