Financing Options Other Than Investing Capital
Rental Property Investor · South San Francisco, CA · Member since 2019 · 262 posts · 95 votes
I have recently invested in 2 BRRRR deals where I used my personal saved capital on. My question is: How can I keep the ball rolling for more properties in terms of financing for them? I do have reserves saved for the 2 BRRRR deals. I do have enough money in my personal Roth IRA to purchase a property, but do not understand how I could potentially use those funds for another BRRRR (I think I read somewhere that I am able to pull out $10,000 max without penalty so long as the funds are paid within 2 months. Seems like enough for a rehab, but not a property. Could someone verify?).
Should I just wait to the cash out refinance later on and then go for another 2 then while continuing to save from my day job? I do not want to miss out on deals where the numbers work out and want to add them to my portfolio. I know of hard money lending, but am not very familiar with this route followed by refinancing. I look forward to hearing from the community!
@Arron Paulino Here's a financial example of a typical BRRRRR investor when combining with a hard money loan, hopefully it is helpful for you: The investor buys a fixer upper for 100k and obtain a hard money loan for 90% of purchase price and 100% of the 50k rehab. Which means $10K down payment plus closing costs/fees to consummate the loan.
They now have a loan amount of 140k and will be paying interest-only monthly payments during the course of the term. 4 months later the rehab is done and the property now appraises at 220k. At that point, they refinance into a 30 year loan.
They refinance at 70% of the new value and obtain a 30-year loan of 154k before payoff of the 140k hard money loan, which would leave 14K to pull out before closing costs on the refi. In the end the borrower is left with approximately a similar amount of down payment money when they started the process to purchase the fixer upper to repeat the process all over again with a different property.
The investor will be paying mortgage on the $154K loan going forward for 30 years.
The numbers may be simplified here but hopefully this helps you understand how it flows using some values.
Hey @Arron Paulino,
Congrats on knocking down two of these, it's not easy and you did you twice! There are a few options for yourself here, you can go with hard money or you can do a non-conventional loan to get where you want to go. The other option is a line of credit from a bank, but given these COVID times,they may have some different restrictions. I have a few lenders I would be happy to connect you with if that was something you wanted to explore.
Thanks for the reply! I have heard of a HELOC as an option, but I currently do not own my own primary residence. Do you have experience with a personal line of credit?
I vaguely understand hard money. I'm guessing I'll have to come up with monthly payments to issue back to the lender on top of their profit/money back at the end of term. Do you mean private lending when you mention non-conventional?
@Arron Paulino Here's a financial example of a typical BRRRRR investor when combining with a hard money loan, hopefully it is helpful for you: The investor buys a fixer upper for 100k and obtain a hard money loan for 90% of purchase price and 100% of the 50k rehab. Which means $10K down payment plus closing costs/fees to consummate the loan.
They now have a loan amount of 140k and will be paying interest-only monthly payments during the course of the term. 4 months later the rehab is done and the property now appraises at 220k. At that point, they refinance into a 30 year loan.
They refinance at 70% of the new value and obtain a 30-year loan of 154k before payoff of the 140k hard money loan, which would leave 14K to pull out before closing costs on the refi. In the end the borrower is left with approximately a similar amount of down payment money when they started the process to purchase the fixer upper to repeat the process all over again with a different property.
The investor will be paying mortgage on the $154K loan going forward for 30 years.
The numbers may be simplified here but hopefully this helps you understand how it flows using some values.
@Arron Paulino Here's a financial example of a typical BRRRRR investor when combining with a hard money loan, hopefully it is helpful for you: The investor buys a fixer upper for 100k and obtain a hard money loan for 90% of purchase price and 100% of the 50k rehab. Which means $10K down payment plus closing costs/fees to consummate the loan.
They now have a loan amount of 140k and will be paying interest-only monthly payments during the course of the term. 4 months later the rehab is done and the property now appraises at 220k. At that point, they refinance into a 30 year loan.
They refinance at 70% of the new value and obtain a 30-year loan of 154k before payoff of the 140k hard money loan, which would leave 14K to pull out before closing costs on the refi. In the end the borrower is left with approximately a similar amount of down payment money when they started the process to purchase the fixer upper to repeat the process all over again with a different property.
The investor will be paying mortgage on the $154K loan going forward for 30 years.
The numbers may be simplified here but hopefully this helps you understand how it flows using some values.
Thanks for the reply! This example is helpful and breaks in down in my head. Essentially from what I'm reading, you gain 66k in equity for owning the home and 10k for the down payment plus 4k for approximate closing costs to repeat. Is this correct? Also, ideally an investor would plan to have enough in reserves beforehand for interest-only payments during the term of the hard money loan right (in this case, approximately 5k on top of the 14k for purchase ≈ 20k)?
@Arron Paulino Yes you are thinking about this right the right way. You'll definitely need reserves available to you to be able to close the loan. The amount can vary depending upon the lender, most of the programs I work with require six months reserves for the monthly interest payments plus 10% of the rehab costs as an example.
Hey @Arron Paulino,
Congrats on knocking down two of these, it's not easy and you did you twice! There are a few options for yourself here, you can go with hard money or you can do a non-conventional loan to get where you want to go. The other option is a line of credit from a bank, but given these COVID times,they may have some different restrictions. I have a few lenders I would be happy to connect you with if that was something you wanted to explore.
Thanks for the reply! I have heard of a HELOC as an option, but I currently do not own my own primary residence. Do you have experience with a personal line of credit?
I vaguely understand hard money. I'm guessing I'll have to come up with monthly payments to issue back to the lender on top of their profit/money back at the end of term. Do you mean private lending when you mention non-conventional?
A personal line of credit is rough, they require you to be liquid a lot of capital. Hard and private are forms of non-conventional lending, owner financing is also one. Some banks will offer products that they own vs what they issue that is backed by the government.