NEW to the BRRRR method! Where to start with private money or hard money lenders?

Question

I'm not sure where to start with private money or hard money lending when it comes to covering rehab costs on a rental property that we already own. To add more context, we have owned this particular property free clear for a few years now and want to make this property our first BRRRR, however we've never worked with a private or hard money lender before. The house is already in good living condition with great tenants currently in it. I initially paid out of pocket for most of the interior updates / rehab costs when the family moved in, but now it could use new roof shingles (which we've got estimates on) and some minor updates in the kitchen and garage. We also considered converting the garage into a 3rd bedroom to add value through live-able square footage but aren't sure how far we should go with it before we start looking into a cash out Refinance. We got a great deal on this property, it's positively cashed flowed over the past few years, we would actually profit on a refinance, and it'll carry an INF% return once refinanced according to the BRRRR calculator.

Any info, insight, or personal experiences in regard to hard money lenders and/or rehabbing before refinance would be greatly appreciated. Sorry if I went off on a spiral there. Thank you in advance BP Family!

Any info, insight, or personal experiences in regard to hard money lenders and/or rehabbing before refinance would be greatly appreciated. Sorry if I went off on a spiral there. Thank you in advance BP Family!

River Sava · Answer

Hey Mateo!

This is a common question and it can be conufusing with different REI lingo (private money, hard money, etc). Check out this BP article on BRRRRs and how DSCRs come into play for the refi portion. I hope it will clear up some gray areas!

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

Nathan Gesner · Answer

A hard money lender is typically used for short-term loans. For example, you might borrow $200,000 at 12% interest so you can buy a house for $140,000 and spend $60,000 on renovations. You sell the house, pay off the hard-money loan, and keep the profit. People are willing to pay the high interest rate because they expect to pay off the loan quickly.

If you own the home outright, you would go to a traditional bank to cash out the equity. However, I don't like this idea because it creates Loan A (the equity you borrow against your home) and Loan B (the purchase of the investment). If you borrow $50,000 against your equity and use it as a down payment on a $200,000 investment, you'll have borrowed the entire $200,000. Your payment is around $1,500 and the property is unlikely to cash flow, plus you are 100% leveraged and at risk of default.

Matthew (Mateo) McDaniel · Answer

Awesome article River, thank you for sharing!

Mike Klarman · Answer

Matt, since you own this already for years and it is livable with a tenant, you are better off with a DSCR refi cashout and then use that money to fix what is needed.

I sent you a PM.

Erik Estrada · Answer

You might want to look into a DSCR loan on this. Is the property in C3 condition or better?

Ko Kashiwagi · Answer

Hi Mateo,

The ideal would be to use cash and then do a cash out refinance into a long term mortgage. If you want to leverage, you could use the property as collateral, take a hard money (bridge) loan, rehab, then refinance, which also makes sense.

^this is assuming you want to refinance based on the full fledged value after rehab/value add. If you're okay with less returns but lower risk/work, you can simply cash out refinance now without doing any work since it's rentable.

Anderson S. · Answer

When exploring financing strategies for your first BRRRR project, especially with an owned property, start by researching reputable private or hard money lenders who specialize in rehab financing (like us :)). Evaluate the total cost of needed updates, like new roof shingles, kitchen improvements, and possibly converting the garage into a bedroom, ensuring these will add significant value. Gather all necessary financial documents and apply to multiple lenders to compare terms.

Once the rehab is complete, consider a cash-out refinance to recoup costs and fund future investments, leveraging the increased property value. This approach will enhance your ROI and streamline your BRRRR strategy.

Matthew (Mateo) McDaniel · Answer

Thank you for the suggestion Mike! I see now that I shouldn't need a hard money lender for this particular scenario. I'm still new to some of these real estate investing strategies and am certainly learning a lot. I appreciate the insight!

Matthew (Mateo) McDaniel · Answer

I appreciate the helpful insight Nathan! Thank you for sharing your perspective on this.

NEW to the BRRRR method! Where to start with private money or hard money lenders?

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