BRRRR - Questions on Hard Money Lending, Reserves, DSCR

[Michael Ochoa]

Hello BP Community!

I have a couple of questions about the BRRRR strategy.

First, if I'm doing my first BRRRR and don't have reserves or capital (assuming the hard money lender covers 100% of the purchase price and rehab costs), is there a way to roll the monthly HML payments into the loan, or would I need to bring in a partner with reserves to cover those payments until I reach the rent/refinance stage?

Second, what are the key numbers and metrics I should focus on when doing a BRRRR? I know building equity is crucial for using as a down payment on the next deal, but how should I factor in cash flow? What calculations help confirm it's a solid BRRRR deal? Would this be projected rents, cash flow, and/or equity? And what about using a DSCR loan for the refinance? Any tips there? I'm assuming the goal is to secure the best possible interest rate.

I’ve been learning a lot lately and feel like I’m at the point where I want to take action, even though I’m nervous. I’m pretty introverted and usually keep to myself, but I believe I have a rough outline of the steps:

1. Talk with HML, shop for one that makes sense.

2. Find a distressed property that makes sense (through a realtor or other means).

3. Work with contractors for the rehab.

4. Rent the property out (1% rule, or compare nearby rents with the same kind of property), with a property manager in place 8-10% of the total monthly cash flow.

5. Refinance with a bank (DSCR or other favorable mortgage).

6. Pay off the mortgage throughout the amortization and use equity for the next deal.

Any insights, advice, or things you’d point out would be greatly appreciated!

[Patrick Roberts]

100% financing is a pipedream, especially as a first time investor. Expect to bring at least 10% down to the transaction, with 15%-20% being more realistic. Some lenders will allow the monthly interest to accrue, but most will expect the interest to be paid monthly. 

Once the rehab is completed, you can use a DSCR loan or similar loan to payoff the hard money. Most refinances are going to be limited to 80% or less of the new value, so if you owe more than this when the rehab is complete, you will need to bring cash to close. The majority of lenders will also want to see reserves on these loans, which is a multiple of the monthly payment. So, if the new monthly payment will be $2k, expect to need to be able to show $6k+ in liquid assets leftover after closing.

It seems like you have 0 cash right now. This is not a no-money game; you will need capital. You're best bet might be to find a partner who can bring the capital in exchange for you doing the work.