Taking the big leap....BRRRR

[Allison Winston]

We have found properties that we are interested in using the the BRRRR method but we have some issues....

1.) We don't have the 20% down payment (more like 10-15%) or rehab cost without dipping into 401k.

2.) We're afraid of HML as we're just starting out and doubt want to get burned.

3.) Credit score is great just don't have start up cash for the class of property.

Any and all suggestions welcomed.

[Ley Nezifort]

Hello Allison, regarding point #2) I shared the same sentiment towards hard money when I just getting started, but now that I've got some experience, I've realized that was mostly out of fear and not knowing. There is nothing wrong with Hard Money if you do your due diligence and the numbers make sense. Now I mostly only use Hard Money for my BRRR Deals.

Secondly, since you mentioned your credit is great, you can leverage your personal credit to get Business credit cards, lines of credit to fund the down payment. 

[Shawn Thomas]

@Ley Nezifort if you can get a credit line, even better! There’s definitely ways to figure it out. Good luck!

[Allison Winston]

@Shawn Thomas we recently refinanced our home and took some equity in cash. This was before we figured we would get onto the business. Had we made ther decision before, we definitely would have cashed out more. Not sure if we can do a HELOC so soon after a refi.

[Michael Ohara]

I second what @Ley Nezifort said about #2. I felt the same way, but my experience using HML went well. Due diligence is key. Your experience and credit score certainly help in getting better rates. I have access to private money that will fund up to 90% of the purchase price. All the best.

[Allison Winston]

@Michael Ohara so do we get a HML for cost of property AND refinance or conventional for cost of home and HML for rehab??

[Whitney Hutten]

@Allison Winston HML, when used correctly, is a great way to start your business. What makes me take pause on your situation is you say you don't have the cash to get started without tapping your 401k. You want to have cash reserves now to survive the bumps in this economic environment. Do you have partners (family / friends, etc) to help you get started???

[Michael Ohara]

Originally posted by @Allison Winston:

@Michael Ohara so do we get a HML for cost of property AND refinance or conventional for cost of home and HML for rehab??

You can use HML for purchase and rehab and then cash out refi with a bank.

👍 

[Allison Winston]

@Whitney Hutten I may be thinking about this wrong but we're thinking we have to get a conventional loan for the purchase price and find a way to get funds to fix it up. That's where the 401k loan would come in but only as a last resort (most likely not). Trying to talk to friends and family about partnership is a touchy subject. They are not interested in this type of venture.

[Michael Ohara]

Originally posted by @Whitney Hutten:

@Allison Winston HML, when used correctly, is a great way to start your business. What makes me take pause on your situation is you say you don't have the cash to get started without tapping your 401k. You want to have cash reserves now to survive the bumps in this economic environment. Do you have partners (family / friends, etc) to help you get started???

Good point on the cash reserves by Whitney.  

💯 

[Odie Ayaga]

@Allison Winston you would use the HML for the B, buy, and the R, rehab. You don't combine conventional and HML loans as its two liens on the property and neither will do it. Once you complete the rehab you get it rented and then you would typically go conventional for the refinance.

It's a very tough market for HML loans right now so you'll want to temper your expectations. Before I would say expect to need AT LEAST 30K to get into a hard money purchase, now i might double that. Additionally, some lenders aren't even lending to new investors at this time. It could be good experience just to do some research, get some recommendations and get to know more about the lending market and if you're prepared for taking on these projects in this environment. Best of luck!

[Derek Smith]

@Allison Winston

You’re not ready. Financially speaking. Especially, right now during these wild and crazy times.

I would wait, be patient and save more cash.

Find ways to save and cut costs. Get in touch with local banks and start building new relationships, etc.

More deals will come.

[David Acosta]

@Allison Winston - If you're able to source good deals, consider bringing on a partner to help with the funding. I know you mentioned that your immediate circle doesn't have an interest in REI. I would start looking at your network and explore where you can grow in this area with likeminded individuals. A local REIA would be a great start if you haven't jumped in already.

@Whitney Hutten brings up a great point regarding reserves.  With the current economic conditions and likely economic vacancies, you'll want to ensure you have healthy cash reserves going into a deal.  Just some food for thought as you continue to evaluate and source.  Best of luck moving forward!

[Geoffrey Barker]

We are facing an unprecedented situation with the spreading of Covid-19 and nobody knows what is going to be happening with the economy. I know everyone loves the Warren Buffet line about investing when people are scared and pull out when people are scared. He also says that knowing the market you're getting into is key, otherwise, you're just gambling. That's just my long-winded way of saying that now doesn't seem like the time jump into the market

That being said, if you have 10-15 % on your own, consider finding someone who does that have the experience and you trust. Now is a great time for networking and education. Just don't mention your willingness to dip into the 401k as that could create a set of problems that you and you will have to deal with, not a potential investing partner.

[John Libretti]

LOC would be great if you can get !

[Whitney Hutten]

@Allison Winston Unless you have an additional stash of cash not mentioned (which I totally get if you didn't mention it since this is an open forum), I worry that you would be under-capitalized going into a project which is a tenuous place to be right now. Also, I'm not a fan of tying assets together (in this case home / 401K)... using one as leverage to get another is another thing. And if you put a conventional loan on the project and don't refi out that 401K loan, then you need very strong cashflow on the property to get it paid back quickly (hence why I like the BRRRR strategy better).

If it were me, I would be saving like mad for the next 60+ days, studying my markets, building my teams (especially lending), getting solid deal flow going in that area so I could choose my projects. My feeling is deals will start coming in middle of Q3 as people can't/don't want to hang on to their homes anymore. Lending will have started to stabilize by then.  You can still get your 401K loan too if needed.  And you will be in a better position to get much better deals.