Clarifying a BRRRR point - BUY must be done with 100% cash?

Question

Hello! I've been reading up on the BP core books. I read "Investing in real estate with no and low money down" first, and then am reading BRRRR now. I thought I understood the process after reading the first book but after reading BRRRR I feel like I need to clarify my understanding.

I have a primary residence home right now, that I got a HELOC out of. I was going to:
1. Find an investment property to purchase
2. Use the heloc as a down payment (10~20%)
3. Finance the rest from a lender
4. Rehab (using heloc)
5. Rent
6. Refinance after the forced appreciation on the investment property, and use that money for the next purchase & pay off the initial down payment from Step 2

However, the BRRRR book said I needed to make the purchase with cash. Is it essential that I use cash for the initial purchase? Or is it that I need to use the HELOC completely to purchase the property, basically put 100% down with the HELOC & the rehab? As this is my first purchase I'd like to make sure that I put the "first button on the shirt correctly", so to speak. :)

Matthew Crivelli · Answer

@Billy Seol

It is not essential that you buy the property with cash. You can take that HELOC and use it towards the DP on a rehab loan.

This is called leveraging your HELOC.

Just watch out if the profit margins are slim you could end up not being able to pull out the HELOC money when you refi. This could force you to come out of pocket to pay off the HELOC OR what happens to most people, you have to sell the house. Which isn't terrible because you can just 1031 exchange the profits into another BRRR. Avoiding the capital gains and effectively recycling the HELOC.

You don't need to pay cash for things to work out.

Dan H. · Answer

If you purchase with financing 1) Many of the best candidates for BRRRR do not qualify for conventional financing.  2) You likely will not be getting the best purchase price 3) you may have seasoning issues.

However, if you can find a good BRRRR candidate property that can be purchased via conventional financing, there is no better financing for a purchase.  Especially shorter term loans will typically be the cheapest money you can obtain.

To correct something implied earlier, you cannot 1031 a flip.  A failed flip that is converted to a rental and later sold can be 1031 exchanged.  A flip that stays on the market for extended period of time (never taken off market), regardless if tenant has been placed, cannot be 1031 exchanged.  The property must be out of the resale market to 1031 exchange.

Good luck

Andrew Postell · Answer

@Ralph Barone I mean that your BUY and REHAB added together should not exceed 75%-80% of the ARV.  The ENTIRE purchase price and the ENTIRE rehab budget.  Together.  If you are working with the right type of acquisition lender that will lend 75% of the ARV, then BUYING and REHABING at 75% means you would have 0% down payment.  I hope that makes sense how I am describing it.  Ask anything else if you need.  Certainly here to help.

Andrew Postell · Answer

@Billy Seol Yes, in your $20,000 ARV example that is exactly how it would work.  If I can BUY and REHAB at 75%, then I need NO downpayment.  The ARV math has nothing to do with the down payments.

And yes to the 2nd part of your statement as well.  This is the main function of Hard Money Lenders (HMLs).  In many cases they will lend to the 75% ARV number. Keep in mind you'll have closing costs with whatever you do - even if you don't have financing - but you don't need a downpayment in all scenarios.

That's the concept at least.  Some things that do happen here:

1. A BUY lender will say "Sure, we can lend 75% ARV but we still require a downpayment" - I cannot work with that lender.  There are plenty of lenders that DO NOT require a downpayment.  Now, there could be this piece that says "We will need a downpayment because it's your first deal"....ok, that might be fine.  I've seen that in several instances (or some other similar restriction if it's your first time).  But as long as they will offer me 0% with some experience that's the kind of lender I need.

2. Seasoning - Sometimes when you get to your REFINANCE step there will be some lenders that will require you to own the property for 6 months to 1 year.  UNDER NO CIRCUMSTANCES ARE YOU TO WORK WITH THOSE LENDERS.  I MUST have no seasoning at all times.  Otherwise this won't work.  And there are plenty of lenders that don't have seasoning.

3. In 99% of the scenarios using a separate "acquisition" style loan that requires you to REFINANCE later will be the better route to go.  This BRRRR method has been going on for years and years.  There's a reason why a REFINANCE step is needed.  There's always a "one off" here or there but in most situation I do not want to use any type of conventional financing to purchase a property.  If we looked at every scenario I can show you the hard math of why a short term lender will be better....that is, as long as you are using the right short term lenders.

Now, how do you find good lenders that meet these requirements?  Read this post I wrote HERE. I think it will help some.  Ask anything else if you need.  Thanks!

Ralph Barone · Answer

when you say "BUY and rehab @ 75-80%" is this for down payment and closing with rehab, or whole purchase price plus rehab?

Billy Seol · Answer

@Matthew Crivelli

Thanks for the clarification!

@Andrew Postell

I haven't learned of that concept yet, so thanks. Let me see if I understood your message correctly.For example if I buy a 3br property for 10k, and I rehab + do some ADU with 5k, and the market value of a well furnished 3br + ADU is about 20k, then even if I pay 15k with full cash (provided via HELOC) that's still about 75% of ARV so I should be happy? This ARV math has nothing to do with down payments vs financing, right?

I don't fully understand the statement "If you can BUY and REHAB at 75%....then all sorts of loans can help you purchase a property with 0% down." From my example above, does that mean if I can prove to a lender that I can fix this 10k property up to 20k with 5k of work they'll give me 0% down loan? Could you clarify that part?

Andrew Postell · Answer

@Billy Seol you've got some good comments above but I wanted to provide a bit of clarification here - you should NOT be paying 100% of the ARV on a property.  We usually target to BUY and REHAB at 75% or 80% of the ARV.  If you can BUY and REHAB at 75%....then all sorts of loans can help you purchase a property with 0% down.  And that's why we target that number.  I hope this makes sense how I am describing it...and maybe you knew this already...but thought I would mention it just in case.  Thanks!

Matthew Crivelli · Answer

@Billy Seol

You are correct. If you pay for the house in full with the HELOC it is just like cash. You can even refi into a short term loan directly after you close if you needed to pull money back out to fix it up. That would allow you to buy the house initially with out having to wait for an appraisal or loan process yet still have access to rehab money. (if you just exhausted your HELOC with the purchase)

Billy Seol · Answer

@Matthew Crivelli

Thanks for the answer! So if I'm understanding correctly as long as the math works out I can 100% put down with HELOC or mix a HELOC with financing, right? Is there a relative pro/con between putting 100% down with HELOC vs. financing? My hunch is that putting 100% down with HELOC would be treated like a cash offer to the seller.

Clarifying a BRRRR point - BUY must be done with 100% cash?

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