Newbie question on BRRRR

[Sang Nguyen]

Hi guys,

I'm brand new to investing in real estate. I've spent a solid month now listening to BP podcasts and other YouTube videos. The BRRRR strategy caught my interest, but I have a question.

Let's say I find a property that I like, and I would like to purchase it with a shorter term loan through hard / private money. Do you typically ask for the loan amount to be the cost of the house plus rehab costs? So let's say I find a property where the purchase price is $400k, and I estimate that rehab costs will be $50k. When talking with hard money lenders, do you request $450k?

[Mark Safrin]

Originally posted by @Sang Nguyen:

Hi guys,

I'm brand new to investing in real estate. I've spent a solid month now listening to BP podcasts and other YouTube videos. The BRRRR strategy caught my interest, but I have a question.

Let's say I find a property that I like, and I would like to purchase it with a shorter term loan through hard / private money. Do you typically ask for the loan amount to be the cost of the house plus rehab costs? So let's say I find a property where the purchase price is $400k, and I estimate that rehab costs will be $50k. When talking with hard money lenders, do you request $450k?

Sang. Welcome to the world of Real Estate Investing.

You can ask whatever you want but most Hard Money Lenders will not give you 100% of what you need to purchase a property. They want you to "have some skin in game".

So we will lend you a portion of the purchase plus (probably) 100% of the rehab costs. Rehab money however is held in escrow and released in draws, in arrears,  as you complete each milestone. 

Therefore, using us as a HML example, we will lend you whichever is lower of: 65% LTV (the current, As-Is worth ofthe property) or 90% of the purchase. Whicheve is lower. As you get more experienced, for future deals we can contemplate 75% LTV.

That's what we can give you up front when we close the loan.  You may also draw the rehab money in arrears as complete each milestone.

So you will need money down, this is the portion of the purchase that we do not finance.

You will also need money (from somewhere) for:

- loan closing costs including points, fees, insurance, title and appraisal.

- rehab costs at least until the first milestone.

- servicing the loan, HMLs are not cheap, at least untill you have stabilized the property which means you have leases in place and rent money coming in to hopefully service the loan.

- cost overruns for when, not if, your rehab is more expensive than you estimated, when it takes you longer to rent out the property than you hoped, or any one of a thousand possible unexpected contingencies. 

In your $400K example, the best you can hope for is $360k for purchase (90%) _presuming_ that the property is worth A LOT more As-Is to make 65% of LTV higher than $360k. Plus of course your $50k rehab will await you in escrow.

Best wishes in your real estate BRRRR career.