BRRRR with Conventional Loan?

Question

Hello BP!

I am looking to get started on BRRRRing my first property and I am curious to know if it's possible to do a BRRRR by putting down 20% and going with a conventional loan and if I have the funding to complete the rehab. Once the rehab is complete,the idea will be to go back to the bank to refinance. Most of the BRRRR's I have heard of on BP is by obtaining a hard money lender or private loan.

I have called various hard money lenders and found one that I think will be good to work with (thanks to BP networks!) however, for my first BRRRR, I was thinking of using my own money, rather than others if something tends to go wrong. Does anyone have any advice?

Thanks for the help in advance!

Alex Bekeza · Answer

@Dilbar Chhokar & @Kevin Hunter Conventional loans are typically not viable on BRRRRs on the purchase end because they will not allow for any deferred maintenance on the property. They'll require a property to be considered "rent ready" or "move in ready" and will require simple items like wood rot, moldy carpets, etc etc to be cured prior to closing. The best BRRRR deals tend to come about when a property can be updated under market value because of it's poor condition. Hence, the need to an all cash purchase or a hard money/private loan. To clarify, using hard money is no different than a conventional loan in terms of "using my own money". Hard money lenders are still going to require the investor to have skin the game. 9/10 times that means 10-30% down. In this era, with all the uncertainty in the market, there are very few hard money options that would not require at least 20% down with the exception of very experienced investors. Do 100% financing options exist? Yes, but typically not worth the split you're likely paying them. More importantly, a typical hard money scenario where you're in 10-30% equity the whole time is much safer than being 100% leveraged on a distressed asset especially in the times we find ourselves in. Hard money is not ONLY about closing faster. It's about getting a loan based on the after repair value of a property. It might still take several weeks depending on whether or not the lender wants a full appraisal, BPO, or desktop valuation.

Kevin Hunter · Answer

@Ale x Bekeza, @Dilbar Chhokar, While I will agree that you are not going to get conventional financing on a complete gut rehab, I will staunchly disagree that conventional lending is not typically viable on a BRRRR. I conventionally financed three last year and I am closing on two next month with conventional financing. I BRRRR'd all of them, and got my money back out of every deal. I believe it comes down to what you are looking for. If you are looking for a complete home run down to the studs rehab etc... than it wont work of course. But, if you are buying a property that needs a rehab and can support a value add, it will absolutely work. I think as a forum, we tend to get pigeon held into the home run deal every time. For me, I don't have the time for the home run deal every time because I have a full time job that I love and put more time and effort into and, quite frankly, care more about. However, I invest in real estate to build long term wealth so I can retire from the job I love and not go back to work for someone else. I don't mean to hijack the post, and don't harbor any ill will, I just believe that we need to keep all options on the table for new investors. I want to teach all folks here what I know and have used, and don't want to give the opinion that only one thing works, or one thing never works.......

Kevin Hunter · Answer

@Dilbar Chhokar, if you can use conventional financing than I say do it. The rates will be far lower and expenses are a concern on a deal like this. One thing hard money can offer is the opportunity to close faster, but if you dont need that then why do it. It is a numbers game. Spend less in administrative costs,make more.. Good luck!

Barb Asay · Answer

@Dilbar ChhokarYes. You can. In a way. I dont know if its considered a true BRRR but we did it 12 times last year. We work with a local bank that allows us to. Uy a property subject to improvements. So I present the bank a plan with purchase price, projected rehab costs and projected ARV. As long as the appraiser agrees with my projected ARV the bank will loan me up to 80% of the ARV in a convention commercial loan. We al.ost always go in with no cash down and Often we come out with more cash than we need to Complete the deal. If i happen to need a down payment they allow me to tap into some equity at an existing property. Is it BRRRR? Maybe not, but who cares

Whitney Hutten · Answer

@Dilbar Chhokar I agree, most BRRRRs that are great equity makers wouldn't qualify for a conventional loan because of the deferred maintenance. However, don't rule out using the conventional loan if the property would qualify. I like using probate sources to find these properties as they tend to be extremely dated (yet otherwise well cared for) properties.

Joe Aiola · Answer

@Dilbar Chhokar Great question! @Alex Bekeza and @Kenneth Garrett answered it perfectly. If you want to go conventional and use your money for the rehab, then maybe consider changing the strategy - you could possibly do a live in flip on a property that just needs cosmetic work.

Dilbar Chhokar · Answer

Thank you everyone! This really helps! I’ve talked to a few HMLs and I plan on talking to a few banks first to see what their requirements are too. I’ll keep this thread posted.

Jon Kelly · Answer

@Dilbar Chhokar Yes, you can BRRRR a property with a conventional loan. If the numbers make sense, go for it. Most people don't use a conventional loan for a BRRRR because (1) the property is in poor condition (e.g. not livable) such that a conventional lender will not offer a loan, or (2) it's costly. You will be charged closing costs and fees twice.

Michael Noto · Answer

The issue is getting a property cheap enough that is in good enough condition to be conventionally financed. They are very far and few between assuming you do not have a pipeline of off market deals set up through marketing methods.

Kenneth Garrett · Answer

@Dilbar Chhokar I agree with @Alex Bekeza finding a conventional lender to finance a BRRRR might be difficult since the goal is to force the appreciation through the rehab. The best deals are ones that need a lot of work. I typically use private lending v HML as I feel the cost is less and after the relationship is built with a history of projects I can get 100% financing. Of course this takes a high degree of trust. In addition, no lender fees or closing cost other then typical title fees.Good Luck.