New investor and new to BRRRR, I understand the principle of this process but the one thing I can't seem to figure out or maybe it just me, is how do you cover your holding costs? In the purchase phase you typically buy in cash, however one goes about that makes sense, but do you build in holding costs to those loans like you do for rehab? Second part, I guess depends on how your deal is structured with your lender, is do you make monthly payments for said holding costs (taxes/interest) or do you pay it all back at once after you refi and pay off original loans. Just want to see what other BP members have done and what you prefer. Thank you all for the information!
It's all in how you negotiate the funds for purchase. Let's say you use a HELOC that requires P&I payments. You can either fund those with actual cash reserves, or factor that into the rehab cost portion and roll it into a request for funds with a private lender. If you get purchase funds from a private lender and have some relationship with them, they may allow you to do a balloon payment at the end of the period, but not sure a first time private lender would be comfortable doing that if you don't have a strong established history of success. That way you don't have any debt payments, but your holding costs for utilities, taxes, and insurance still need to be handled so again, you can ask for more in the private loan or use reserves/rehab funds for them.
Personally, I was using a HELOC for purchase and rehab and paying holding with cash reserves.
So this will vary from lender to lender. Some lenders will allow you to roll costs into the loan and them to be paid off upon selling or refinancing. However I am not sure that lenders will pick up all of the holding costs such as water, trash, electric, etc. In most cases when you are getting pre-approved/approved by a lender they will make sure that you have reserves set aside for holding costs including monthly interest only payments.
I would suggest that when you are running numbers on properties that you also estimate holding costs and have 3-6 months of those costs set aside.