Best financing options for a first time investor?

Question

While it appears many rookie investors tend to struggle to hit the ground running due to lack of capital / financing, I have the opposite problem. I've never purchased an investment property but want to begin my investing journey in 2025. My wife inherited a duplex from her mother that we have rented out since 2019 and we purchased our own home in 2020. Conservatively speaking, we probably own $70k in equity in the duplex and $50k in our own home.

In the limited research I've done, a HELOC seems like an ideal form of financing a BRRRR property. However, a relative of mine has also expressed interest in investing their own funds into this venture and splitting the proceeds.

Again, i'm as new as can be to the world of real estate investing. can anyone offer advice on which form of financing might be the most advantageous for a first time investor? Thank you!

River Sava · Answer

Hi Jacob -

Have you looked into DSCR loans? I have linked an article below that goes over how they tie into BRRRRs. Happy to connect and chat further if you have questions!

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

Bryan Maddex · Answer

@Jacob Hrip congrats on taking steps to hitting your investing goals!

1st, lets talk about equity in your homes. You have some, but not as much as you think.

Primary Homes - most banks will easily do 80% of the value of your home, some will go up to 89.9% loan to value (LTV). Some credit unions will go to 85%-95%, but there are just a few that will do 100% loan to value! Check out Tower Credit Union as one option for 100% loan to value. Rates will range from Prime (currently at 7.5%) to Prime + 4% (11.5%). The higher you go on the LTV, the worse the rate will get. Also, some helocs will offer Interest Only payments, some that go above 90% LTV may ask for 1% of the outstanding balance or 1.5% of the outstanding balance. These payment options can get up there! Shop LTV (or cLTV which is combined Loan To Value, basically your first mortgage and 2nd mortgage combined loan to value), rates, payment terms, time to close, and draw period (how long you can go into and out of your heloc).

Investment Property - Most banks and credit unions will tell you that a heloc on investment property is not possible. TD bank is the only major bank that I know of that does helocs on investment properties, and last I checked they would only go up to 65% of the value of your home. As a broker, I do have access to about 15 companies that do helocs on investments! Most will go to 80% of the value of your property, some limit to 70% max. Rates on i
Heloc is a great way to come up with down payment money, but i would not do your rehab out of a heloc. You want this to be your backup plan if things take longer than anticipated, you do not want to dip into personal credit cards so i would use a heloc to help with down payment but try to keep a nice available balance on a heloc as your insurance policy.
Rates will usually be in the Prime + 3-4% range if you are trying to max out how much of a line you can get.

Private Money vs Hard Money:
Primate money is negotiable. Hard money is usually "take it or leave it". Hard Money Loans are generally speaking institutional money so they make the rules and you either like it and take it, or move on to another lender. You generally cannot negotiate.
Hard Money will usually finance 90% of your purchase price and 100% of your repair cost up to 70 or 75% ARV (after repair value). Many hard money lenders will offer the best terms once you get 5 "completions" or "exits" from hard money loans (sell the property or refinance out). Most hard money lenders do not have prepayment penalties and most will be in the rate range of 10-13% with 2-4 points as upfront cost.

Private Money is whatever you can work out! 100% financing, no payments, financing in extra "cash out" money upfront so you can do a rate/term refi once you pay them off... equity splits, no experience... whatever you can work out!

Because private money can be so flexible, it is often times better than hard money loans but not always. Private money may be cheaper, but may be more expensive if they are doing something that most hard money lenders wont do.

BRRRR out of your flips is great way to keep some of your properties! Many lenders will allow you to do a BRRRR and take cash out, even without owning the property for 6 to 12 months. Setting up your purchase money loan to allow better refinancing is advised when possible. (Get 100% financing plus cash out from your 1st lender would allow almost all lenders to do a rate/term refi once your rehab is completed. You can go up to 80% LTV on rate/term refis with some lenders!).

Nicholas L. · Answer

@Jacob Hrip

hello. the issue is that HELOC money is expensive money. yes, you could use the HELOC as a down payment on a hard money loan, and then the hard money loan for the rest. (most hard money loans require 10-15% down depending on the split between purchase price and rehab). but that is both (1) risky and (2) expensive, as you're paying interest every month on 100% of the borrowed funds.

private money is fine, you're just bearing a lot of risk and also involving the relationship in your very first deal. that doesn't seem ideal - i think people should build up a track record before borrowing private money and putting it at risk.

BRRRR is still doable but is very, very tough right now. there is tremendous demand for inventory by both investors and retail buyers which is making it tough for the casual investor to succeed.

it's great that you're thinking about getting your financing in order. you also need to source the property, and for BRRRR you need a goldilocks property - something that is distressed enough that you can buy substantially below market, but not so distressed that it's not worth fixing up.

hope this helps - happy to help further

Caleb Brown · Answer

70K and 50K is not a ton of equity to start solely on. Do you have savings besides that? Hard money is a pretty common loan type for BRRRs or flips, it is handy to start.

Andrew Syrios · Answer

HELOCs are definitely a good option for financing BRRRRs. For a first time investor, I definitely recommend house hacking for most people as homeowner loans are by far the best in terms of rate and LTV.

Then after that, Fannie will lend on up to 10 for any one investor. Then your best bet are probably community banks which have more flexibility (albeit worse terms) than larger banks and also worth looking into are DSCR lenders.

Stacy Raskin · Answer

Using the equity you have as a down payment can work depending on what market you're buying in. From there you can use DSCR loans to scale depending on your goals.

More on DSCR loans: DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Jake Baker · Answer

@Jacob Hrip

When paying with cash, you have fewer closing costs (no lender fees) and fewer holding costs (no interest payments). Thus, you will have a higher profit margin.

You will have added closing and holding costs when paying with Hard Money. However, your investment in the deal is far less. Thus, your profit margin is lower (than the all-cash offer), but your ROI is higher.

Savvy or more experienced investors may have access to Private Money. This can provide more lucrative opportunities by allowing you to take advantage of lower closing and holding costs while keeping much or all of your money out of the deal.

Every investor starts somewhere. Hard Money is often the first stop. A private investor will want to see a few successful deals before taking out large sums as a debt loan. Even still, investors will often want equity in the projects.

I agree with @Caleb Brown that you don't have a lot of equity to stand on for a HELOC solely. As @Nicholas L. said, HELOC and Hard Money is very expensive money right now. It is rather difficult to make BRRRRs pencil out right now, so you should budget to leave some capital in the deal on the refinance.

Ashish Acharya · Answer

@Jacob Hrip For a first-time investor, financing options like a HELOC or private funding depend on your strategy and risk tolerance. A HELOC on your duplex or home offers flexible, low-interest financing ideal for BRRRR, with potential tax-deductible interest if used for property expenses. Private funding from a relative may provide flexible terms and reduced financial risk, but formal agreements are necessary, and interest paid is deductible for you but taxable for them.

Traditional investment property loans offer stability and tax benefits like deductible interest and property taxes but require larger down payments. Combining HELOC and private funding is also viable.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Jacob Hrip · Answer

Thanks for the response, Caleb.

Not a ton of savings that I could allocate towards a BRRRR. Maybe $15k or so. Do you mind sharing the benefits of using a hard money loan as opposed to private money? I've also seen DSCR mentioned on more than one occasion in the forums. Thanks!

Best financing options for a first time investor?

Best financing options for a first time investor?

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