Different Ways to Finance Your Next BRRRR
Different Ways to Finance Your Next BRRRR
A big question for most buy-rehab-rent-refinance-repeat (BRRRR) investors is where they will find the financing they need for their deals. This article will dive into several strategies you can use to finance your upcoming BRRRR deals. We would love to chat with you about other options you are considering or how you might structure a combination of the below and how that would look financially based on your situation.
Use Your Cash
Naturally, one of the best ways to finance your new BRRRR property is to use cash that you have available. This obviously makes things easiest for you – no dealing with lenders prior to purchase, ability to close quickly, likelihood of receiving better deal terms since paying in cash and ability to avoid interest payments and fees on bank or hard money loans. The downside of funding your deal with cash is that it will be tied up in your project until you are able to refinance your BRRRR – potentially six to 12 months following purchase. Whether or not to use your own cash will likely come down to a question of availability and quantity. Obviously, if you do not have the cash available, you will want to explore the other funding methods below. Even if you have cash available, you may be better off not tying up that cash for an extended period of time if it will limit your ability to do other deals. The answer will vary person-by-person and of course be linked to individual goals.
Getting a Loan
Cash may not always be an option for you as an investor. Below we will discuss several loan options for getting your next BRRRR project off the ground.
Bank Loan: Loans from a traditional bank may be an option for you for financing your next purchase. At the time of writing this article, we are currently closing on our next BRRRR using a traditional bank loan. We will look to rehab the property and then evaluate financially whether a refinance makes sense. This traditional bank loan option makes sense for this BRRRR since interest rates are currently so low (about 4% per year) and are substantially lower than those provided by hard money and private lenders (discussed more below). The downsides of a traditional bank loan are going to include, at a minimum, (1) jumping through hurdles to satisfy the bank’s underwriting department and (2) limited options for financing rehab costs. Getting a bank loan, honestly, is a chore. Extensive paperwork and back and forth are involved. Just remember that if investing were easy everyone would do it. This also may not be the best option for you if you will be doing a substantial rehab. Absent using specific loan products like the 203(k) rehab loan or another available product, banks are not going to lend you construction costs, which can be an issue if your cash is limited and the rehab will require substantial out-of-pocket costs.
Note also that most banks will require at least 20% of the purchase price for your BRRRR in the form of a down payment, which is something to keep in mind when evaluating the cash you need on hand at the time of purchase.
Hard money: You could also consider a short-term, hard-money loan or even a private money loan from a lender.
Short-term hard money loans are a very common option for those who are looking to BRRRR a property. The strategy here is that you use the loan proceeds to acquire the property and potentially also to rehab it, and then pay back the loan after refinancing the newly renovated property with a bank loan at a lower interest rate. The idea is to go from a high-interest, short-term hard money loan to a lower-interest, longer-term traditional bank loan through your refinance that is paid for by rental income from your BRRRR property.
Hard money loans almost always carry a higher interest rate than loans available from a traditional bank, in addition to fees (often a few percentage points of the total loan due upfront). These loans will also likely require some cash upfront for a down payment on the property as hard money lenders often do not issue loans equal to 100% of the property cost and construction costs.
Private Money: A private money loan is another option. These are often asset-based loans that can be a good choice for a real estate investor. The private lender will use the BRRRR property you are buying or other properties you own as assets and collateral for the loan. There are many lenders who are willing to provide private money loans, and as long as you have collateral, they tend to be easier to get than a traditional loan. Private money loans are generally short-term loans, as well. However, they will often have a longer term than the short-term hard money loans mentioned above. They might have a term of six months to 24 months.
The private money loans are a fantastic option for those using the BRRRR strategy. You can close quickly and purchase more properties all without the massive upfront capital that you would need otherwise.
Cash from Equity
If you already own a piece of property, then you have likely been building equity in it. It is possible to pull cash out of the equity in your home, or another property that you own, with a home equity line of credit (HELOC).
A HELOC is secured by the property that you own, and it can provide you with a revolving line of credit that you can use for various large expenses. These types of loans have the benefit of having a lower interest rate than what you would find with a typical hard money or private loan. As long as you have equity in a property and decent credit, you should be able to get a HELOC on that property. You will generally be able to borrow up to 75%-85% of the value of the home minus how much is still owed on it under any existing mortgage. Banks may impose limitations on whether a HELOC can be taken on an investment property. In many cases, such loans are limited to your primary residence, but it is worth having the conversation.
You could use the money from the HELOC as a means to help purchase the next property, or you could use it for the money that you need for rehabbing that property – whatever would best serve your project.
Partner with Someone Who Has Cash
If you don’t have cash and find that you have a hard time getting the financing you need for your next property, consider bringing in a financial partner. The partner doesn’t necessarily have to be well-versed in the BRRRR strategy at this point. They simply need to want to find a quality investment that you can bring to the table in the form of a property that you can rehab, rent and refinance. If they have the money and you have the knowledge, it can make for a great working relationship.
You can then teach them more about the concept of BRRRR and even move forward together with future projects. It allows you to get the money that you need for financing the properties, and you can then share in the profits. It has the potential to be a winning situation for everyone involved. Structuring a partnership can be a challenge. Contact our team for guidance and we would be happy to help you structure your partnership and check on financial returns.
Seller Finance Acquisition
Another option to consider that might work in some cases is seller-financing. Here, you will buy the property and the seller will take a mortgage on the property just as a bank would. The seller would be your bank. As the buyer, you would enter into an agreement with the seller to make a mortgage payment to the seller. Once the mortgage is paid, you would own the property free and clear just as with a traditional bank mortgage. You would pay the interest and the principal to the seller, as you would with any other lender.
Some sellers might be interested in this option because it can provide them with a cash flow stream higher than they would receive through other types of investment and they can potentially avoid the big tax hit that comes from selling a property at one time.
With this option, it is important that the terms of the agreement are clear and that both the buyer and the seller are able to ensure that their financial interests are safe. Getting legal support here is likely in your best interests for structuring this appropriately and properly establishing the mortgage.
Lease to Own
You could also consider the lease to own option if you don’t have enough cash to buy the property that you are looking at outright. With this option, you would lease the property from the people selling the home, but you would have the option to buy the property at a set price usually for a limited duration, say one to two years.
We like this option in connection with the BRRRR strategy. Here, you can lease a property without a down payment, rehab it (make sure your lease agreement permits this) and then get a traditional bank loan to complete the purchase, which loan will be based on the value of the house after your rehab, hopefully allowing you to recover through that loan all costs put into the project. The risk you face is rehabbing a house that you ultimately do not buy that is turned back over to the seller/landlord. This is avoidable though by simply understanding from your lender upfront what loan amount you would qualify for and then making sure that loan amount covers your purchase price. Hopefully that loan also covers any rehab costs you put into the property. Remember, traditional lenders will usually lend 70-75% of your after rehab value of the property, so make sure the purchase price of the property and your rehab costs do not total more than 70% of whatever the property is likely to appraise for after rehab.
This can be a good way to lock down a property that you really want to buy and that you believe has a lot of potential.
Refinance an Existing Property and Pull Out Cash
If you have other properties that you already own, there is always the option of refinancing. When you refinance, you will often be able to pull cash out of the home and then put it into your new project. When you refinance the property for more than what you owe on it, you can take the additional money in cash and then use that for your next BRRRR.
This is an option that many BRRRR investors choose when they don’t have other options available to them. Keep in mind that you will need to meet certain requirements for your credit score and debt to income ratio in order to qualify for refinancing in most cases.
You Have Many Options
As you can see, there are many different options for getting the cash that you need for your next BRRRR project. Take the time to consider your current finances, the amount of money that you need, and then choose options that will work best for your current situation. Don ́t forget, we are here to help.
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