Newbie Question on BRRRR

Minneapolis, Minnesota
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Newbie Question on BRRRR

Trevor J Dammon
Member since 2022 · 26 posts · 3 votes

Hi All,

Newbie here. I've been creating some spreadsheet, analyzing deals, and researching properties as much as I can. I'm now starting to look into the BRRRR method and have a couple questions.

First Question: Why do I need to purchase the property with cash or hard money. A lot of sources claim that I need to buy the property either with cash, a HELOC, or with hard money so that I can refinance after the rehab. Why can't I get a standard loan to buy the property and then refinance after the rehab?


Second Question: How are you finding distressed properties? Currently I use the MLS, which I know isn't the best way to find home runs. It seems like most properties there are already in pretty good shape. I could contact realtors but realistically I am not looking to buy for another year at least. I've heard of driving for dollars or investors mailing out letters but again I think I am a little new to the game to do that. I'm not sure I could have a fully competent conversation if I did get a response from a letter.

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Ryan Lockstein
Involved In Real Estate · Langhorne, PA · Member since 2013 · 38 posts · 20 votes
4y

There are 2 big reason people typically use hard/private money or cash for the initial purchase of a house they plan to refi and pull all or most of their money out of.  

1.) A lot of properties (not all but most) you buy at a steep enough discount to be able to make the numbers work to pull out all of your cash on the refi require a lot of rehab. Conventional / FHA loans have a minimum standard for the condition of the property they will lend on (ie must be livable, have working stove and heat). So in a lot of instances the good deals won't qualify.

2.) You will most likely need money to finance your construction/rehab. Conventional/ FHA loans (not accounting for FHA 203k) do not lend you money for construction. So in addition to using one of these types of loans, you will then need to go find money for the repairs. On the other hand, hard money lenders will include your construction money in their loan, typically in draws.

In my experience finding off market discounted properties (I have done hundreds of deals) direct mail has been my best marketing strategy.  Like you said though, it takes some time and a lot of setting up of systems to make that strategy work efficiently though.  My other biggest off market deal finding strategy has just been buying from wholesalers.  Get on their email lists and check them religiously.  You will find 50 ****** deals for every 1 good one from a wholesaler list but if you are consistent with analyzing them as they come in, you will consistently find deals (for free!).  

I hope that helps.  


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  • Ryan Lockstein
    Involved In Real Estate · Langhorne, PA · Member since 2013 · 38 posts · 20 votes
    4y

    There are 2 big reason people typically use hard/private money or cash for the initial purchase of a house they plan to refi and pull all or most of their money out of.  

    1.) A lot of properties (not all but most) you buy at a steep enough discount to be able to make the numbers work to pull out all of your cash on the refi require a lot of rehab. Conventional / FHA loans have a minimum standard for the condition of the property they will lend on (ie must be livable, have working stove and heat). So in a lot of instances the good deals won't qualify.

    2.) You will most likely need money to finance your construction/rehab. Conventional/ FHA loans (not accounting for FHA 203k) do not lend you money for construction. So in addition to using one of these types of loans, you will then need to go find money for the repairs. On the other hand, hard money lenders will include your construction money in their loan, typically in draws.

    In my experience finding off market discounted properties (I have done hundreds of deals) direct mail has been my best marketing strategy.  Like you said though, it takes some time and a lot of setting up of systems to make that strategy work efficiently though.  My other biggest off market deal finding strategy has just been buying from wholesalers.  Get on their email lists and check them religiously.  You will find 50 ****** deals for every 1 good one from a wholesaler list but if you are consistent with analyzing them as they come in, you will consistently find deals (for free!).  

    I hope that helps.  


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  • Hunter TerrynPro Member
    Birmingham, AL · Member since 2021 · 79 posts · 68 votes
    4y

    Great response from @Ryan Lockstein. Only thing I'd add is the typical "seasoning" requirement from conventional lenders. They want to see you own the home for a period of time before they'll refinance (usually 6 months). So if you finished the rehab and put a renter in in 3 months, you'd be stuck with the rehab costs for another few before you could cash-out. Private/hard money lenders don't have the same seasoning requirements. 

    As for finding the deals, there are a lot of ways to funnel inventory your way. But once you set something up you should be prepared to follow-through with any good leads and be in a position to buy. No sense in driving for dollars if you're not ready to pull the trigger on a good deal that comes of it. Definitely some value in learning how to analyze and nailing down that process. So I like the wholesaler list approach until you're ready to rock. Once you're in a good position to buy, get with an agent who specializes in investment properties and they'll be your boots on the ground. 

    Good luck out there!

    [email protected]205-546-2231
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  • Trevor J Dammon
    OP
    Member since 2022 · 26 posts · 3 votes
    4y

    @Hunter Terryn and @Ryan Lockstein thanks for the replies! All good advice!

    0Reply
  • Ryan Deasy
    Lender · Farmington, CT · Member since 2015 · 542 posts · 321 votes
    4y

    @Trevor J Dammon

    good questions. most times your best choice with conventional lender is a 203k loan which i have heard is a bit of a pain in the butt to deal with. hard money lenders will normally give you 100% of the rehab funds that you need and can get the deal closed fast. for these reasons, i have always gone with an HML over conventional if i am buying a property to add value to it.

    we find properties via cold calling, ringless VM, text and post cards. these have all been great strategies for us!

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  • Mike Klarman
    Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes
    4y

    HML fix and flip loans allows you to secure the purchase and construction costs in one loan. Very convenient for an investor.

    0Reply
  • Jacob Carroll
    Investor · Minneapolis · Member since 2022 · 74 posts · 25 votes
    4y

    Great feedback here from the prior comments. Just an FYI - We are presenting on the BRRRR methodology / topic this coming next monthly meetup. You can sign-up shortly (@David Plaunt is creating an event) and you can also follow the FB group Minneapolis Real Estate Investor Meetup. Cheers!

    1Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    4y

    You don't need to purchase the property with cash or hard money (I actually would recommend against hard money because it's so expensive, try to find a private lender or use cash if at all possible). The problem with closing with a bank on the front end is they will only lend on your costs (i.e. 75% of what you use to buy and rehab it, plus they will escrow the rehab funds until the work is done). If you then refinance on the back end too, you have two sets of appraisals and loan costs and all the hassle of going through a bank. We also buy a good amount, so we like to go to banks with portfolios of properties to refinance (usually 3 to 10) which makes my life and their's easier. So there's no reason you can't go to the bank up front, it's just not ideal for those reasons.

    As far as where to find properties, the MLS is not a great source. It used to be when there were REOs all over the place, but those days are gone. Occasionally one slips through, but it's not often. Wholesalers can be better, especially if you get in with one. But the best ways are direct-to-seller marketing and SEO (although that's a bit of a winner takes all game and takes time to get your site to the top of the search engines).

    Podcast Guest on Show #121
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  • Adam Sullivan
    Real Estate Agent · Minneapolis, MN · Member since 2017 · 13 posts · 6 votes
    4y

    If you have a history or can find a partner (high net worth individual) then you should look into commercial lending. Commercial guys (smaller banks - some medium sized ones too) will do value add deals where you get today's rates and only have to bring 15-20% of the total project cost (purchase + rehab) and they'll fund the rehab through draws. This will usually be an interest only loan for 1 year. Some will also let you capitalize interest as well so you don't have to pay the interest out of pocket. Then after a year you convert it or refinance based on the new value.

    Commercial Lending is way better than private or hard money from a cost standpoint. 

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