Can you do BRRRR without 100% down?

Question

I found a property on the MLS that I toured with an agent and want to make an offer on. It is a 1500 sqft 2 unit both 2 bed 1 bath. It needs some work mainly a septic system and then mostly other light cosmetic work. It also has a large storage space that is big enough to be made into a studio. I think with the new septic, light cosmetic work, and adding the studio it could be a great investment. My issue is I only have enough to pay for about half the value in cash. The property is eligible for traditional financing if a new septic system is included in the loan.

What would be the best way to finance this if I am planning on pulling money out of it once all the work is complete? If I go with traditional financing could I still refinance it and be able to pull money out (not expecting to get all of the capital back out but some would be nice) when if it appraises for more? Would it be better to find alternative financing through a hard money lender?

Another avenue I was thinking about was to go straight to the owner and inquire about a seller finance deal, That way I could still be able to refinance out of that to a bank loan. I don't want to step around my agent and would still pay them for their work. Is this an option for a property on the MLS and how could I go about doing this?

If you made it this far thank you for reading. An advice is much appreciated.

Whitney Hutten · Answer

@Ben Pasculano Every HML and PML I've worked with just looks at the overall deal portfolio (I'd even include any primary deals you have done, fixed up and sold).

Whitney Hutten · Answer

Depends on who you use.  For a hard money lender, they most likely have a tier structure in place.  So once you clear the hurdle in repositioning two properties, you will transition to the next tier.  If you have an amazing deal, and are going to refi anyways, then the higher rate is a cost of doing business.  What would be worse is to never get your business started so you can have a track record over a couple of 1% points and couple grand in closing costs.  Many of my clients actually find their PML in their family and get FAR better terms than any conventional bank.

I'm not saying to shop around and get the best lending deal, but getting started is FAR more important than the lending terms if the deal can handle it.

Whitney Hutten · Answer

@Ben Pasculano I disagree that BRRRR works best when using all cash.  You just have to learn to use the financing.  Here is a guide to help you use other people's money.  If you use cash, and then refinance conventionally, you will most likely have to let the title season for 6 months or more and hope the market holds for you.  Whereas you can use hard money or private money to fund the purchase and rehab the property and most likely do a rate and term refinance out immediately after closing (or possibly a cashout refi if your numbers are great).  You still have your cash in hand to go do other deals too!

CJ M. · Answer

@Ben Pasculano

I'm not a lender but I'm pretty confident there's a seasoning period for when you could refinance it (assuming you used tradition financing to buy it).  BRRRR usually works best when cash is used to fund the purchase and rehab. That's why it's not called FRRRR (finance, rehab, rent, repeat, refinance) lol

Perhaps try and find someone to loan you the money.

Ben Pasculano · Answer

@Whitney Hutten thank you for your advice that article was very helpful. I have found some OPM to use and have already spoke with a lender about a Fannie Mae/Freddie Mac loan so i am alreday prepared to refinance when the time comes. (Is there a big difference between the two?) For transitioning to the next tier with a hard money lender will I need to have several deals done with the lender or just proof that I have done deals before so they know I know what I am doing?

@CJ M. (tag isnt working) you are correct this is my first deal.@Kerry Baird I talked with a Septic installer and he seemed knowledgable about the area and costs for a septic replacement. If i do conventional financing I can do a hold back, but with a cash offer there is no possibility for a hold back and i would have to factor the costs into the offer. So far the one lender I talked to would not do a hold back in "good weather" (as in summer when the work can be done) and my agent was leaning towards the fact that the seller did not have the money to replace it or else they would be able to list the property higher. The septic company said to allocate 30-35k saying the permitting process in the area and the soil make it difficult. Costing potentially up to 42k if other issues are encountered.Thank you all for your advice.Ben

Kerry Baird · Answer

I do ask for seller financing, especially when conventional financing would be difficult or impossible. My last seller financed deal a year ago was suggested by the seller at 6%, interest only.  That lower payment helps me to get the property stabilized while I do repairs.

I have only had one house with a septic system, and wonder whether you have had quotes for repairing or replacing it?  Our agent suggested that we pay to have the septic tank drained during our inspection period, and then inspected.  If it was OK, we started ownership with a clean tank; if it was a pricey repair, we could back out of the deal.

The replacement price of the tank can range from locality to locality.  You may be looking at a range of $1500 to replace the tank  to $20k for permits and relocating the leach field. Estimates septic

CJ M. · Answer

@Whitney Hutten

From my understanding, the OP is new to this. Will a private/HML loan someone like him (with no track record) money...and at decent terms?

Ben Pasculano · Answer

I have heard about seasoning periods and that is something I plan on bringing up with my lender.  Say I put 50% down, is there a seasoning period if I went to another lender (or the same one) and took out a second loan against 25% (or more if it appraises for more than the original) of the home? Still leaving me with 25% equity.

Can you do BRRRR without 100% down?

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