BRRRR - How to finance the initial purchase with no money down?

Question

Hello everyone,

My name is Ron and I am new to real estate investing. I have noticed that some say you can buy properties by using OPM, including hard money lenders. When I did some research, I found that hard money lenders loan up to 80% of purchase price. Doing a quick math, where's the remaining 20% coming from?

Thank you,

Ron

Mike Klarman · Answer

Terms are not really lender specific all that much.

Most, not all, have a 0 bucket - that's no experience

Then the next bucket is usually 1 - 2 experience

Then 3 - 5 experience

Then 5+ but under 10

Then 10+ but less than 30.

Then 30+ - that means 30 completed projects last two years.  If you have this type of experience than most lenders can offer you some kind of a100% program.  Do the books on BRRRR not say this?  Every newbie that reads a books always asks how they can buy a house with zero money down, or very little.  Do the books not say that the lender would have to view them as an expert?

In that 0 bucket, you can expect to put up 20% and pay all the closing costs as well so it is closer to 25%.

I can count on one hand the investors I know that get the 100% program.  It's pretty rare.

Andrew Postell · Answer

@Ron Tehrani I like this question.  And you already have some different opinions above as well.  Concepts and good partners are BOTH important here.

As mentioned above, make sure you can work with someone that can lend on the After Repair Value (ARV) instead of the "purchase price".  Those types of Hard Money Lenders (HMLs) are the ones we want to work with as investors.  Doing it this way you should come out of pocket a VERY small amount (and sometimes $0). Now, there's some nuances to the BRRRR Method...but more on that in a moment.

Also, in my market, working with HMLs that lend 100% of the purchase and rehab, not to exceed 75% of the ARV, are good lenders and have good reputations.  Not all market are the same though.  This is why you should be networking with local real estate investors in your market to see who they are using.  Usually a national lender is not as good as a local lender - there's exceptions to everything I guess but that's USUALLY the case.

And yes, if you have more money to put down USUALLY you are getting better terms.  But I didn't have any extra money to put down when I got started. $30,000 was a lot of money to me (and still is) so I leveraged as much as I could and today I am very fine.  Work with what you have...and this is where the nuances come in for the BRRRR Method:

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. So in order to see what a lender will provide to you...you have to able to do this math.
• 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.

The BRRRR Method is hard to do but if you can do it then it will change your life.  There are lots of other ways to get started in real estate too - using your primary home for example - but even those can present challenges.  Only 4% of Americans own 2 homes; that's how hard it is.

So, keep learning, keep networking, and don't be afraid to execute on a property.  You might not regret it ;)

Hope all of that makes sense.  Thanks!

Robin Simon · Answer

Generally you may still find financing for 100% of cost from hard money lenders, but tread very carefully because anyone offering that is going to be shaky or you will be faced with extreme fees and interest and risk - much much better to have some "skin in the game" and less risk especially when starting out.

The main point of BRRRR is not really to use "other people's money" rather its to save the down payment and then recycle that cash as you repeat - i.e. you can cash-out 100% of your costs on the refinance purchase and then have the same money to do it again, but having a "free" rental property after the BRRRRR process

Randall Alan · Answer

@Ron Tehrani

So, it is possible to do what you are looking for... but it takes special circumstances.  As you have found, most lenders will loan up to 80% on a typical loan.  But if you restate that point a little differently, you will find one of the ways.  What if the statement was: The lender will loan up to 80% of the appraised value of the property.   You may say... "sounds the same to me."  But now take this scenario:  You find a ready to rent property WORTH $200,000... but the seller has agreed to sell it for $160,000.  (Not all sellers know what something is worth.)  So now the bank says they will finance 80% of the $200,000 and that translates to $160,000.

This is actually the exact same principle that works with cash-out refinances after a BRRRR.  The 'secret sauce' is finding the deal that lets the concept work.

We have 37 rental units across 25 properties.  Out of those 25, about 3-5 of them could have worked that way.  Most of those 3-5 were wholesale deals... not MLS listings.  Wholesalers... for better or worse... often find people in desperate situations... facing foreclosure... divorce, death of the last household member (estates), etc.  As the saying goes, "Desperate times call for desperate measures"; and wholesalers are there to 'help out'.  Or perhaps said another way, insert themselves into someone else's desperate situation where they can profit off of it.  But, along the way, the ultimate buyer of the that property also has to find it a great deal too... or else it's just 'move on to the next deal'.  So that is one way you can make a deal work.

We came across one deal that wasn't that though... but it started out with a wholesaler.  We had woman come to rent a little 800sf house of ours for $1,200/month.  While viewing the rental, she said, "Would you all be interested in buying my house?"  We were like, "You already have a house?"  She goes on to explain she was coming out of a bad divorce and she just needed to move on from the property.  So we said, "Maybe... tell us more". She said she wanted $112,000 for it.  Seemed cheap enough at the time, but we knew nothing about it.  She said she had been working with a wholesaler (she didn't use that word).. but that was the price they were offering to her LAST YEAR and so she would be good with that.

So she gives us the address and we pull it up on Zillow.  Zillow says it's worth $190,000! We bought the property with cash, but we immediately turned around and did a cash-out refinance... the house appraised for $225,000.   Our mortgage was for $180,000 and we walked away from the closing table with a check for $60,000.  It is now a long-term rental of ours and makes over $600/month even with the higher mortgage!

We could have skipped the "buy it for cash part" and would have been able to put zero down on this property.  So if you can find undervalued properties, it is possible to buy with no money down.

All the best!

Randy

BRRRR - How to finance the initial purchase with no money down?

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