BRRRR Investment - Hard Money Loan Types?

Question

Hi Everyone, wanted to see if anyone can provide me with a little bit of information that isn't clear to me. With Hard-money loans there are a number of different types you can apply for with Hard Money Lenders. I was wondering if what is the best option to go with when you are buying a property that you will rehab, rent and then refinance with an conventional loan. I'm looking for capital to start with and will refinance once the project is done and the property is rented.

I'm looking at the following:- Fix-and-Flip

- Rental

- Bridge

Yes, I am new to this but very eager and hungry for information. Any information is greatly appreciated I know how busy everyone is. Hopefully as I grow in this area of investments I can repay by helping someone else one day.

Huge thanks,

-Matt

Zach Westerfield · Answer

The three you mentioned are probably just products offered from a specific lender. They are no mean a standard or common term across hard money lenders. I would start by looking at the terms and fine print. most all products will have varying combinations of the same factors. Things to consider:

- Amortization

- points up from

- interest rate, type and amount

- payment structure - prepayment penalties, balloon payments

A bridge loan is a term for a short term loan to "bridge" the gap until long term financing is secured. Hard money loans for both BRRRs and fix and flips are types of bridge loans. Typical characteristics of bridge loans include: Higher interest rates that are variable; sometime interest only payments; short term balloon payments in 12-36 months.

For a new investor looking to BRRR with hard money, I would look for something that gives you the lowest payments, as you will eventually finance out. Typically this means getting payments that are interest only. But my advice is consider the above factors and calculate the cost of the financing to complete your deal (give yourself minimum 6 months for your first deal and refinance). Factor these numbers into your up front costs.

Michael Kinsella · Answer

Matt,

I really like @Zach Westerfield's answer above.

I'll add a few supplementary points...

If you are looking to employ the BRRRR strategy, then you will likely be looking at two different types of loans; the first is a bridge loan, which you and Zach mentioned above, and the second is a long-term loan, which you will use to refinance (the penultimate 'R' in BRRRR) the bridge loan.

Above, you mention 3 products;

• Fix and flip
• Rental
• Bridge

The differences between these products are as follows...

The fix and flip product offered by a hard money lender is intended for a rehab and then sale of the subject property. The difference between this product and one that would be acceptable for a BRRRR is the exit from the financing. In a fix and flip, the exit is a sale of the subject property from which the proceeds pay off the existing loan. In the BRRRR strategy, the exit is a refinance of the existing loan.

The rental product offered by a hard money lender is a long-term product. This is for properties that are rented out and stabilized, and these products typically have seasoning requirements. Banks are a very common route for refinancing (they generally offer cheaper rates), but in the event that someone doesn't want to use a bank, hard money lenders have developed a product that can be used to refinance out of a short-term loan.

The bridge product is an umbrella term as Zach mentioned above. The fix and flip product is a type of bridge product, but it is not the only type of bridge product. In your case, you will likely use a bridge product as the first loan in order to acquire and rehab the subject property.

You can speak with this specific lender about your strategy (BRRRR), and they will likely point you towards their bridge product.

Below are a few additional items (beyond what Zach laid out above) to consider when evaluating the bridge loan:

1. Loan amount (particularly what it is subject to in terms of LTC and LTARV)?

2. Is interest charged on the total loan amount or just funded amounts?

3. Loan fees in addition to origination points?

Hope this helps!

Michael