All Forum Posts by: Michael Kinsella

Hi Christian!

Below are some suggestions that may be helpful...

- The ‘Network’ tab on BiggerPockets has a hard money lenders tab, and you can search by state.

- Local meetups

- Speaking with local realtors

- Speaking with title companies

Additionally, speaking with investors who focus on your specific property type/deal can be helpful. If they've had a good experience with a lender, then chances are you are setting yourself up for success down the road.

Lastly, online search/databases - Simply by searching online you can find a number of quality reputable national lenders. If you want to get more specific, then you can type in your location, e.g. 'North New Jersey' along with your hard money lender search query. 'North New Jersey hard money lender' would be a reasonable starting point.

Hope this helps!

Hi Fareed!

You can certainly talk to some local banks about what options they might have for your investing goals. Their cost of capital will almost certainly be cheaper than hard money lenders, although generally bank capital is also a bit slower and less flexible.

In the event that you do choose to pursue the hard money route to finance the rehab as you mentioned above, below are some tips on how might find some good ones...

- The ‘Network’ tab on BiggerPockets has a hard money lenders tab, and you can search by state.

- Local meetups

- Speaking with local realtors

- Speaking with title companies

Additionally, speaking with investors who've used a specific lender can be valuable. If they've had a good experience with a lender, then chances are you are setting yourself up for success down the road.

Lastly, online search/databases - Simply by searching online you can find a number of quality reputable national lenders. If you want to get more specific, then you can type in your location, e.g. 'New York' along with your hard money lender search query. 'New York hard money lender' would be a reasonable starting point.

Hope this helps!

Hi Ty!

Happy to help answer your first question,

Some of the items that you will want to evaluate when speaking with different lenders to see which one’s terms fit you best are,

• Loan amount: What will the loan amount be? Is it at a desirable level?
• LTC/LTV restrictions: "Loan-to-cost" and "Loan-to-value" restrictions will vary by lender, but lenders are generally within 5-10% of each other for a given product type. For example, a lender might offer you 85% LTC (loan-to-cost)/65% LTV (loan-to-value).
• Interest rate: What will you be paying to borrow the money? For the type of rehab loan you're describing, interest rates from hard money lenders generally range from the high single digits to the low/mid double digits.
• Points: What will the lender charge to originate the loan? If using a hard money lender, you can expect to pay at least a couple of origination points (% of the loan amount) at closing.
• Other fees: The cost of the appraisal, any underwriting fees, etc. These figures all contribute to your total cost of capital, and represent important points to consider as you go about obtaining a loan.
• Term length: How long is the loan? Do you have enough time built in for the rehab + refinance strategy you describe above?
• Is interest charged on the full loan amount or just funded amounts?: This is a seemingly smaller point, but still one that's important to consider, particularly if you end up with a significant rehab budget. If interest is charged on the full loan amount as opposed to just funded amounts, and you have a significant rehab budget, you could end up paying a significant amount for funds you aren't using immediately.
• Lender reputation: Is this lender trusted amongst investors? Have you spoken to other investors who have successfully employed your strategy and gotten positive feedback from them?
• Time to fund: How quickly does the lender move? What is their median time to fund?

The above list is not exhaustive, but serves as a reasonable starting point from which you can evaluate lenders. Asking these questions lets a lender know that you are serious and informed about the process, even if you are a new (or newer) investor.

Hope this helps!

@Nancy Nakamura Congratulations on a successful flip! Always a plus if you can learn a lot and make money while doing so!

@Brandon Jefferies,

@Dalyn Hazell's answer is extremely helpful.

Coming from the lender side, I'll supplement Dalyn's first answer to your question,

Here are some additional places that you can look to find lenders that may be able to help assist you;

- The ‘Network’ tab on BiggerPockets has a hard money lenders tab, and you can search by state.

- Local meetups

- Speaking with local realtors

- Speaking with title companies

Additionally, speaking with investors who are more experienced can be helpful. If they've had a good experience with a lender, then chances are you are setting yourself up for success down the road.

Lastly, online search/databases - Simply by searching online you can find a number of quality reputable national lenders. If you want to get more specific, then you can type in your location, e.g. 'Memphis' along with your hard money lender search query. 'Memphis hard money lender' would be a reasonable starting point.

Hope this helps!

Hi Maya,

Happy New Year to you as well!

I can provide some perspective from the lender side as to why those loan minimums are in place, as well as some suggestions on how to find additional lenders. If you exhaust those routes, then you may be looking at obtaining private money from an individual lender, using your own cash to finance the project, or moving onto a different project with more significant amounts involved.

Firstly, why are those loan minimums in place?

The lender is looking at the downside. If you fail to repay the debt and the lender has to foreclose on and take back the property, the legal costs can add up quickly. These costs eat up the profit margin for the lender when they have to sell the property, so, as @Danté Belmonte pointed out, these deals are often not worth the time spent or the risk involved from the lender's point of view.

Here are some additional places that you can look to find lenders that may be able to help assist you (forgive me if you've already tried some or all of these);

- The ‘Network’ tab on BiggerPockets has a hard money lenders tab, and you can search by state.

- Local meetups

- Speaking with local realtors

- Speaking with title companies

Additionally, speaking with investors who focus on lower-value properties can be helpful. If they've had a good experience with a lender, then chances are you are setting yourself up for success down the road.

Lastly, online search/databases - Simply by searching online you can find a number of quality reputable national lenders. If you want to get more specific, then you can type in your location, e.g. 'New York' along with your hard money lender search query. 'New York hard money lender' would be a reasonable starting point.

If you've exhausted those above options, then you might, as mentioned, try looking at individual private money lenders, financing the deal out of your own pocket, or focusing on deals where the loan amounts are higher to entice a wider pool of lenders.

Hope this helps!

Ramon,

Below are a few good starting points with regards to your lender search…

- The ‘Network’ tab on BiggerPockets has a hard money lenders tab, and you can search by state.

- Local meetups

- Speaking with local realtors

- Speaking with title companies

Additionally, speaking with more experienced investors can be helpful. If they've had a good experience with a lender, then chances are you are setting yourself up for success down the road.

Online search/databases. Simply by searching online you can find a number of quality reputable national lenders. If you want to get more specific, then you can type in your location, e.g. 'Vermont' along with your hard money lender search query. 'Vermont hard money lender' would be a reasonable starting point.

Hope this helps!

Hey Luke!

Happy to help provide some perspective from the lending side.

The basic process of obtaining a hard money loan will generally look something like;

Preliminary application -> Preliminary underwriting (the borrower (you in this case) will often a purchase agreement and scope of work at this point) --> Appraisal --> Final underwriting --> Closing --> Servicing --> Payoff (sale or refinance)

This is a somewhat simplified workflow, but hopefully it gives you some idea of the process.

The first step in the process would be to speak with some hard money lenders about the deal you have in mind, and see what their preliminary applications/preliminary terms look like.

To give you an idea of what interest rates might look like - think high single digits, or low double digits. Somewhere between 8-13% is a reasonable range.

Additionally, I would encourage you to look at some of the other factors that contribute to your total cost of capital, such as the fees and origination points a lender charges.

Hope this helps!

Michael

@Josh West I think there are some awesome replies in this thread; I think @Rene Owczarski and @Bonnie Low hit the nail on the head. I've put a few of my thoughts on the topic below that I hope you will find clarifying and thus helpful.

One of the more, if not the most appealing aspects of the BRRRR strategy is the concept of 'Infinite Return'.

Josh, you provided an example above that is as follows;

Purchase price: $500k

Rehab: $50k

ARV: $550k

However, as @Rene Owczarski pointed out, if you sell the property in this example, there is no profit for you! You put $550k in (excluding financing and other costs for simplicity) and got $550k out (assuming you sold the property at $550k).

Let's use a different example where we can see the real 'magic' of Infinite Return and the BRRRR strategy at play.

This example will be one where you find a severely undervalued property and do some work that adds some, but not a ton of value to the property.

Example:

As-is value of the property: $200k

Purchase price: $120k

Rehab: $50k

ARV: $270k

Initial hard money loan at 85% LTC, or $144,500

'Cash-out refinance' at 70% LTV, or $189,000

Okay, let's break all of this down, as the "cash-out refinance" is really where the magic happens. However, in order to get to the point, we need to cover the steps leading up to it.

In this scenario, you found a heavily discounted property; the as-is value of the property is $200k, and you are buying it for only $120k (what a steal!). In accordance with the second 'R' of the BRRRR strategy, you rehab the property, and it costs $50k to do so.

The total project cost is $170k or the purchase price ($120k) + rehab ($50k). So that you didn't have to carry the burden of this cost entirely yourself, you found a rehab lender who was willing to lend you 85% LTC (loan-to-cost), or $144,500. At this point, your equity, or money in the deal, is $25,500, or simply $170,000 (the total project cost) - $144,500 (the rehab loan)

Now, after you've finished rehabbing the property, it's worth $270k (the ARV). In accordance with the BRRRR strategy, you rent the property out to a suitable tenant and you wait a few months before you go to a new lender (oftentimes a bank) who can offer you a long-term, cash-out refinance.

Now remember, you've still got a loan of $144,500 from the rehab lender, and you need to pay that off. The bank (or other long-term lender) offers you a 70% LTV (loan-to-value on the after-repair value of the property) or $189,000 loan.

Now, where do the proceeds for this $189,000 loan go?

Well, a portion of them, $144,500, goes to paying off the rehab lender. The remainder, $44,500 ($189,000-$144,500) goes into your pocket.

So, you had $25,500 of equity in the deal, and now you are receiving $44,500 in addition to owning the subject property.

This is the magic of the BRRRR strategy, and this last point is what investors refer to as 'infinite return'.

You no longer have any of your own money in the deal (you had $25,500 in and you got $44,500 out), and now you own the subject property.

There are a couple of key points or takeaways;

1. You need find value or create it. You can buy a property at a steep discount, or you can do work that improves the value of the property above and beyond the cost of the work. In other words, you can buy a 100k property for 50k, you can do 50k of work that adds 100k of value, or you can do both!

2. You need a rehab lender and a takeout lender. The latter will allow you to cash-out refinance, which is where the infinite return happens.

3. The BRRRR strategy is special because, when executed effectively, it allows the investor to get back all of the equity he or she put into the project, and still own the subject property at the end of the day.

Hope this helps!
Michael

Matt,

I really like @Zach Westerfield's answer above.

I'll add a few supplementary points...

If you are looking to employ the BRRRR strategy, then you will likely be looking at two different types of loans; the first is a bridge loan, which you and Zach mentioned above, and the second is a long-term loan, which you will use to refinance (the penultimate 'R' in BRRRR) the bridge loan.

Above, you mention 3 products;

1. Fix and flip
2. Rental
3. Bridge

The differences between these products are as follows...

The fix and flip product offered by a hard money lender is intended for a rehab and then sale of the subject property. The difference between this product and one that would be acceptable for a BRRRR is the exit from the financing. In a fix and flip, the exit is a sale of the subject property from which the proceeds pay off the existing loan. In the BRRRR strategy, the exit is a refinance of the existing loan.

The rental product offered by a hard money lender is a long-term product. This is for properties that are rented out and stabilized, and these products typically have seasoning requirements. Banks are a very common route for refinancing (they generally offer cheaper rates), but in the event that someone doesn't want to use a bank, hard money lenders have developed a product that can be used to refinance out of a short-term loan.

The bridge product is an umbrella term as Zach mentioned above. The fix and flip product is a type of bridge product, but it is not the only type of bridge product. In your case, you will likely use a bridge product as the first loan in order to acquire and rehab the subject property.

You can speak with this specific lender about your strategy (BRRRR), and they will likely point you towards their bridge product.

Below are a few additional items (beyond what Zach laid out above) to consider when evaluating the bridge loan:

1. Loan amount (particularly what it is subject to in terms of LTC and LTARV)?

2. Is interest charged on the total loan amount or just funded amounts?

3. Loan fees in addition to origination points?

Hope this helps!

Michael