If you were already financially set, you would have your business manager running around while you signed checks for your next investments. But, most of us need some combination of our own money, and the money of third parties, to finance our BRRRR journeys. According to billionaire investor, George Soros, “It is much easier to put existing resources to better use than to develop resources where they do not exist.” Using the money of others will enable you to scale your real estate investing business and gain momentum to achieve the last R of BRRRR – Repeat – over and over again!
With a BRRRR deal, you potentially need financing at 3 different stages of your project:
– Financing to Buy
– Financing to Rehab
Perhaps, one day, a bank manager somewhere will come up with a BRRRR loan that covers all aspects of your BRRRR project from start to finish, but in the meantime, you’ll need to look at the funding options that are available and decide which kind of financing fits best for each stage of the BRRRR process.
Own Cash or Find a Partner. You will need some cash to get started. I’m grouping two sources of cash, i.e. own cash or that of a business partner, together because they function very similarly. BRRRR investors often use available cash as a down payment when purchasing a property and/or for covering the costs to rehab the property. For the period that the cash is being used, whether tied up as equity or paying for kitchen cabinets and flooring, you lose liquidity. You should be sure that you can spare the cash until such time as you can refinance and get it back out. If you are using the money of a partner, there should be a clear agreement as to the loan period and the return you are offering them for using their funds. Get legal advice on drawing up a partnership agreement, a handshake is not enough!
Cash from Equity. One way to get started with BRRRR is to get cash from the equity you have in a current property. This can be in the form of a HELOC (home equity line of credit). Typically, the interest rate on a HELOC is lower than on a credit card or a hard money loan. However, banks often impose restrictions on what the loan can be used for. You may not be able to use the loan to finance
the purchase or renovation of another property. Of course, if you are further along in the BRRRR journey, you can also get cash from refinancing a previous property.
Hard Money. The term hard money comes from this loan type requiring a “hard asset” to be provided as collateral. Hard money is most frequently used when financing to buy or for rehab costs, but can also be an option for refinancing. Hard money lenders are not under the same regulation as conventional banks and can offer very flexible loans. However, interest rates are typically higher than on conventional loans. Carefully calculate the holding costs of the property, your rehab costs, and the cost of the loan to ensure that the costs don’t outweigh the benefits.
Conventional Loans. What makes loans conventional is that they are offered by so-called “traditional lenders,” – banks, credit unions, and specialized mortgage banks. Conventional loans are most often used for financing to buy a property and to refinance the loan after rehab is complete. Bear in mind, banks may not be willing to give you a conventional loan for purchasing a BRRRR property, especially one that is run-down and needs a lot of work. Also, when financing to buy, banks may require a seasoning period before you’re allowed to refinance which can really slow down the BRRRR cycle. Although conventional loans are much less flexible than other financing options, and the underwriting process is intense, they do offer the best conditions and the lowest interest rates.
Specialized Rehab Loans. If you’re not using one of the other options for the rehab portion of your BRRRR project, you do have the option of getting a specialized loan for rehab costs. Not all lenders offer these products and even fewer offer loans for rehab on a house that won’t be your primary residence. Do your research and use online search tools to find lenders and mortgage consultants that will work with you. Planning and accurately costing out the rehab of your BRRRR property is critical. Cost overruns and time delays can severely impact your cash situation during the rehab and will directly influence how much cash you can get out when refinancing.
Commercial Loans. This category includes portfolio loans and so-called “landlord loans” and are offered by lenders as financing for income properties. Once you start to accumulate more properties, commercial loans are a conventional alternative to hard money loans and offer a fair amount of flexibility. As you scale your business, definitely get offers for these more conventional loans and compare carefully to the terms and conditions being offered by hard money lenders.
“Other” strategies. It’s only called a problem if you haven’t found a solution yet! If, for whatever reason, the above financing options don’t work for you, here are two additional strategies that deserve mention: (1) Seller Financing where you obtain a lease directly from the seller and pay them back over time or until you can refinance into one of the other loan types. (2) Lease to Own is where
you lease a property with a clause that gives you first option to purchase the property within a specified period at an agreed price. Now, there is a risk to this strategy, not least of which is the owner refusing to sell the property to you once it’s all fixed up, so make sure you have an iron-clad contract in place. And do your math carefully to ensure that whatever purchase price you agree to is below the ARV!
As we start to see the back of the pandemic, home sales and home prices are predicted to stay on an upward trend in 2021, although at a slower rate than 2020. Predictions for the mortgage industry are that mortgage originations will increase slightly but refinance originations are expected to decrease by between 10% (according to Fannie Mae) and 25% (according to Freddie Mac). Each year brings its challenges but BRRRR investors should stick to the fundamentals of finding deals at the right price, forcing appreciation in ways that increase your returns, and finding the perfect financing option to make it all happen.