Best Method To Finance BRRRR?

Question

Hello,

I have a question about the BRRRR method - actually, it may not be about the BRRRR method, but rather the best method to finance single family homes (SFH) used for rental purposes.  Here is my situation:

- My primary residence has about 300k (3.125%) remaining on a 17 year mortgage and has a current market value of about 850k (I currently do VRBO / AirBnb rentals and has an IRR of ~15%).

- I have condo that I own free and clear and is worth approximately 200k (I do rentals on this as well).

- I have a vacation home that own that was purchased 3 years ago for 340k (3.5% for 30 years) with 10% down is now worth at least 380k, but probably closer to 400k (currently rented long term with an IRR of ~15%)

That being said, I'm looking to purchase my next investment (SFH) which would be 3bd / 2ba home in a nearby market that would cost up to 200k.  I know how much this home would need to rent for based upon for a decent IRR (+10%), but I am trying to determine the best method to finance.

Since this will be an investment home, it will require 20% down + plus closing costs.  My questions are:

- Should I get a HELOC on one of my existing properties to use for the 20% down payment?  If so, which property should I use?

- Should I just save up the 20% with my partner instead?

- I would start with a single, SFH and get it rented out, and then purchase a second home, and repeat.

My plan is not necessarily to rehab (unless it is needed), but rather to find homes in areas with low price-rent ratios and rent them out straight away.

Any help or advice is greatly appreciated.  Thanks in advance!

Gil Happy · Answer

Thank you for this.... Unfortunately my partner and I are unable to come up with the 20% in a timely fashion.  I am currently reaching out a couple of bankers to see what my HELOC options are.  I guess I would need to figure out what the opportunity costs are on the 20% we could raise if we ended up having to.

Gil Happy · Answer

Thank you so much JD.....  this is great information.  As mentioned, I'm in the process of reaching out to some lenders discussed on BP for a HELOC.

Jerry Padilla · Answer

@Gil Happy

A HELOC can be very difficult to find on rental properties. Your other option is cash out refinancing. A rental property cash out refinance is going to be 75% for a SFR and 70% on a MFR. A primary home is about 5% higher LTV.

Seth Wilcock · Answer

The minimum down payment on 1-unit investment properties is actually 15% down under Fannie Mae & Freddie Mac.

Also, Fannie & Freddie currently allow for up to 10 financed investment properties plus a financed primary (11 total).

You have a lot of options here. The key will be finding the lowest cost strategy to tap into your equity for the new acquisition.

JD Gunter · Answer

I would recommend talking to a lender first. They are going to have strong opinions about how you should structure the deal. You may find that the mortgage lender you have worked with in the past cannot get you financed on a 4th residential investment. Usually, once you get four, they make you bundle into a commercial line of credit. The exception in your case is that you own your condo. Maybe it won't be a problem with this next one but could be a problem after that. I only know of one traditional mortgage lender in Colorado that will let you get a mortgage on a 4th property. That's the problem I ran into and I ended up getting a commercial line. They will also have requirements for your working capital based on expenses.

If you have the option of saving up 20% down in a reasonable amount of time, it's less risky than doing 100% financing every time, plus your cashflow will be better. I would recommend getting the largest HELOC you can to give you greater flexibility, then use the HELOC when it's necessary for rehab, etc. Hopefully your income is relatively high because some lenders will count your HELOC as debt, even if you haven't drawn on it. 20-25% down will get you better terms and more flexibility, plus it forces you to stack cash. People doing 100% financing can easily be overextended in a downturn.

Gaspare U. · Answer

I think the real answer is:

Can you and your Partner come up with the 20% cash needed in time? If no, you don't have this as an option. If yes, then:

Contact a few bankers and see what it will cost you to raise more capital on the equity built into the homes you have. Then contact your accountant and see what the real cost to borrow is. Once you have those numbers compare that cost vs the cost that you missed investing on the 20% you and your partner raised.

Make sense?