Financing Options for BRRRR Method?

Question

While reading the BRRRR book, I became confused on the financing aspect of the process. In one part of the book, David Greene mentions that the home must be purchased with cash, but then later he says it is possible to finance the purchase using alternative methods (private money, hard money, etc.). I must be missing or misunderstanding something and would love if anybody was able to help clarify.

Thank you!

River Sava · Answer

Hey Kyle - Nicholas summed it up great. Hard money lenders / purchasing through non-conventional route are reffered to as cash. Term can be misleading especially for someone jumping into BRRRRs. I was also confused about this when I first read the book!

Ko Kashiwagi · Answer

Hi Kyle,

A lot of people use financing for BRRRR purchases interchangeably as "cash". Technically, financing used for BRRRR — such as hard money and private money — is not cash because it still uses financing. But when making an offer, people still say their offer is "cash" because it makes the offer stronger.

So in summary, you can use cash or financing to purchase BRRRR deals. It's a matter of risk tolerance and leverage.

Stacy Raskin · Answer

@Kyle Kline, you can buy a rental property with cash or you can use hard money / fix & flip loans to utilize leverage to get more deals up and running (or just have one deal with less cash invested).

You would start first with a hard money loan-

Hard money lenders vary on their underwriting guidelines but generally they are looking for:

1. Your Credit Score: 680+ or 700+ will get you better terms depending on the lender. 660 is the minimum for many lenders. Pricing generally is impacted by every 20 point increment of your middle mortgage FICO mortgage score so a 740-760 score will get a better rate than a 680-700 score.

2. Type of Market: Is it a declining market, is is suburban or is it rural? If an appraiser marks it rural, the lender may not do it or it will be a lower LTV.

3. Experience: Do you have any? Some care less about this but generally will impact how much they will lend to you. Some lenders will do up to 90% of purchase price and 100% of rehab up to 70-755% of ARV.

4. Do you have an LLC set up? Most lenders require this.

5. Most lenders will want a minimum of $100K for the property acquisition and rehab. Many lenders will charge additional rate increase if loan is under $150K. Lenders will generally not lend more for rehab than for the property itself.

Most lenders will generally lend on 1-4 units and condos. These are generally 12-24 month interest only loans that borrowers will generally pay back by selling or flipping to long term financing like DSCR loans.

More on DSCR loans:

DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Jake Baker · Answer

What programs can you have 0 down?

Kyle Kline · Answer

Thank you all for your replies! This is all great information and helps clear up my confusion. I appreciate you all taking the time to share your knowledge.

Mike Klarman · Answer

The best way to do fix and flips is with cash, because if you do not do it that way the capital needed to complete the project has a "cost" to it.  Origination costs, interest payment costs.  It adds to the costs of the project as a whole which means your return is not maximized however most do not have the liquidity to buy a house in cash and self fund the rehab.  That could take 150k+ for sure.  It makes it extremely difficult to scale, you'd need millions to do it that way to scale.

The absolute best way to start for most are the bridge loans with rehab.  With decent credit you can find 85%/100% programs even for a new investor.  This way you will only need to bring 15k for every 100k of purchase price (plus closing costs - figure 3% of loan amount).  So for a project that had a 100k purchase price and needed 70k in work, you'd only have to bring maybe 20k to the closing total, as compared to the 170k it would take with cash.

These bridge loans do get called "cash" offers at times or are looked at as cash offers at times, but they are financing and they still do take 3 - 4 weeks to close, their are outfits who will close in 5 - 7 days but you will pay extra in origination for it.

Joshua Stanley · Answer

Actually for seasoned investors (10 or more rehabs). There are programs that you can have 0 down.  For even new investors to be able to finance the purchase with only 15-20% down and then 100% of the repair budget is extremely valuable.  Allows for you to stretch your cash farther or take on a property you might have had to pass on due to cash flow.

Kyle Kline · Answer

Thank you so much for your time and help! That definitely clears it up. I appreciate you getting back to me and taking the time to explain.

Nicholas L. · Answer

@Kyle Kline

great question!  he's saying "cash" as opposed to conventional financing from a normal bank.

most people who buy a primary residence go to Bank of America or Chase or whatever.  that's all they know.  that's conventional financing.  umbrella 1.

then there's "cash."  umbrella 2. and under the cash umbrella are the options we talked about - your own cash, your dentist uncle's cash (private money), a local fix and flip lender's cash (hard money.)

i did a BRRRR last year (that i ended up selling because it didn't appraise) and i bought it with my own cash because the purchase price was pretty low.  I financed the rehab with a 0% credit card (i strongly do not recommend that if you're new) and so i had zero finance or interest charges for the entire rehab.  saved me some money but it still didn't matter when it didn't appraise!

with hard money you're going to pay interest on the loan, which can be pretty hefty, especially if the rehab goes longer than planned.  then the entire balance is due in usually 6 or 12 months.

Kyle Kline · Answer

That makes sense, thank you! I guess my only other question then is, if all purchases are technically made with cash, why would he even say that a BRRRR must be purchased with cash? Wouldn’t that be assumed? What other alternatives would there be? I suppose it ultimately doesn’t matter, but I just want to make sure I understand fully before considering that as an investment strategy option.

Financing Options for BRRRR Method?

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