Getting a loan for BRRRR Method

[Eric McCarty]

Hello All

I have a pretty good grasp on the BRRRR method and how it works (I think). The only thing I don't fully understand is the financing to purchase and rehab the property. I've called several banks and in general, I've been told the same thing:

you only use an FHA loan with a lower down payment (3.5%) if you are living in the property. I do not plan to live in the property so I asked what my other options were. They told me that the only other option to finance with a conventional loan with 15% down, however you can't roll the rehab into the mortgage. This would mean that I would need to take out a personal loan or come up with the rehab money another way.

The way I've understood the BRRRR method was to purchase the property and roll the rehab up into one loan. Am I correct in this assumption? I know my other options would be to get money from investors or take a home equity loan out but I want to do one loan and then perform a cash out refinance.

Any insight on this would be great. I appreciate it!

Eric M

[Bonnie Low]

There are many ways to do a BRRRR - you're only limited by your creativity and resources. However, most do not involve a conventional loan on the front end and here's why. To BRRRR a property, you have to be able to increase the value of it. Therefore, you're either buying a distressed property and fixing it up or you're doing something special to the property to increase value like adding square footage. In the first scenario, distressed homes rarely qualify for conventional loans (an exception would be a 203k loan). The lenders are just so conservative that they won't lend on homes that are damaged, missing flooring, appliances, etc. In this case, finding a hard money lender is common. They specialize in funding distressed properties and loans are usually set up to be short term and interest only during the loan term. For example, 10% interest only payments with a balloon payment due in 12 months. This gives you time to do the rehab and "season" your property so you can qualify for a conventional loan with your cash-out refi. The other options are to buy the property with cash or find a private lender - like a family member of private investor who will loan you based on whatever terms the two of you agree on. But the bottom line is that for BRRRRs, it's not very common to use a conventional loan on the initial purchase. The numbers usually just don't work and neither do the lending guidelines. Hope that helps.