How do you get less that 20% down on a property?

Question

It seems like a lot of banks like to stick to their 80/20 rule how can you negotiate a better down or creative ways to get a property for cheaper?

Bridget Y. · Answer

If it is 1-4 units, house-hack it. Purchase with a conventional or FHA loan. Down payments as low as 3.5%. Live in the property for a year, then move out.

Andrew Postell · Answer

@Nathan Faselt I might not have followed everything you stated there....but essentially the BRRRR method can be used on your first property.  You don't have to "get back" what you put into it. Just to summarize it for quick reference here:

The first thing to understand is that this is really hard to do. But if I don't have $100,000 then there's no other options for me. Going the "traditional" route would be impossible. So what's better - "hard" or "impossible"? Well, hard is better. When I am using this method I usually have to target "off market" properties. I have not been able to compete as a BRRRR buyer for quite some time on the MLS because of how much competition there is in the open market. That might change here in the next few months, and while there's always an exception somewhere, buying "off market" is the right expectation to have currently.

Next I need to know HOW MUCH I can qualify with my lenders. With the BRRRR method, I have 2 lender steps - the "BUY" step and the "REFINANCE" step.  For example, usually the "BUY" lenders (often hard money lenders) that we want to target will lend to us 75% of the ARV. For the sake of time let's use that placeholder for now. The "REFINANCE" lenders we want to target will use 80% LTV. I'm using these numbers for specific reasons. When you REFINANCE, you will have closing costs. So if I owe 75% of the ARV already...when I "REFINANCE" I want to roll in my closing costs so I don't come out of pocket on that step either.  So make sure your REFINANCE lender can lend slightly higher than your initial "BUY" lender and that will allow you to roll in the closing costs.

Now I need the property to fit the math formula.  So let's take a quick example here:

Property ARV = $200,000

BUY Lender = 75% LTV

REFINANCE Lender = 80% LTV

REHAB = $40,000

Closing Costs = $10,000

So what do I need to make my initial offer at to keep my out of pocket money at $0?  This is it - this is how you make sure you don't come out of pocket anything.  Does the "ask price" of the property matter? Not to me.  It's not my fault if a wholesaler is asking too much.  I have to stick to my numbers here.  So here's how the math would work:

- Purchase Price x "BUY" Lender LTV = $150,000

- REHAB - $150k = $110,000

- Closing Costs - $110,000 = $100,000.....and that's what my offer needs to be. Remember I have to fit BOTH the BUY and the REHAB in that 75% LTV for this to work.

- After the REHAB is completed and I have the property RENTED, now it's time to REFINANCE.  I owe my initial BUY lender that $150,000 referenced above and my REFINANCE lender can lend me 80% of $200k = $160,000, which gives me room to roll in those closing costs we spoke about.

There's holding costs too (utilities, payment to the HML, etc)....so if you want to account for those then make your offer $96,000 or something. The concept is the same. Can I really use the BRRRR method to make my out of pocket costs $0? Yes, and this is how you would do it. You still need some skills to get good at it. My first few BRRRR properties weren't this good. But I got better and better over time. It's pretty cool when you come out of pocket $0 or less.

And just for quick reference here's some of the skills that you need to do this:

BRRRR SKILLS NEEDED

Generally speaking you will need several things to successfully complete a BRRRR:

• ARV - being able to calculate the Value on your own (meaning, without the wholesaler telling you the value) is really important.
• Repairs - You will likely need to know how to budget the repairs as well. Getting a contractor can be extremely frustrating especially if you need to make an offer without even looking at the property. How do you calculate repairs without a contractor? You may need to lean on other local real estate investors in the beginning. Or maybe even just focus on properties with a very light rehab?
• Lenders - You will need a lender on your BUY step and on your REFINANCE step. And I would HIGHLY recommend to read this article I wrote for Bigger Pockets on how to find good lenders that you can find HERE. If they are good, they should be absolutely definitive on rate, terms, costs, etc. Trust me, many lenders will tell you they can do this...but it's very rare to find. When I first started BRRRR'ing my properties lenders would tell me "That's illegal"....it's not, they just didn't know anything about it.
• Finding Properties - and this is the absolute hardest step of anything right now. So network like crazy and find some good resources. It's going to be hard...but if it were easy then anyone could do it.

Hope all of that makes sense.

Mark Durham · Answer

Don't buy from banks.

Learn Creative Financing techniques/strategies & focus on locating and buying from MOTIVATED sellers.

Andrew Postell · Answer

@Nathan Faselt generally speaking we use the BRRRR method to avoid such high down payment requirements.  But just in case, a traditional Fannie/Freddie loan will only require 15% down....but that's still too high for most.  BRRRR is the preferred method to use.

Matt B. · Answer

if you get that 80%LTV or 85%LTV loan, what are some creative ways to make up the other 15-20% needed?I'm familiar with seller financing, but for my current deal, it doesn't work too well.

Chris Webb · Answer

I know that Steven Dao with Velocity Mortgage has a 50/40/10 product where 50% loan, 40% owner carry, and 10% down on investment properties. He does this with the YouTube channel of "One rental at a Time." At least that is where I heard it. Best of luck!

Nathan Faselt · Answer

@Andrew Postell

Yeah miss understanding in the brrrr strategy

The refinancing part is where you just an equity that you can loan on. For the next deal still 20%

If you don’t repeat in theory you have lowered your down payment with paper money.   But how about the 1st house you get.

Aristotle Kumpis · Answer

Like Andrew said, you can put down 15% on a conventional loan. But then you also need to pay mortgage insurance since its less than 20%.

How do you get less that 20% down on a property?

Most Popular Reply