I want to BRRRR, but I'm stuck on step 1. Insights?

Question

I'm just getting started into real estate and I want to BRRRR a multifamily property.  I have a foundational understanding of how it all works, but I have a hang-up on the first step: Buying.

I live in Boston, so being able to pay cash is pretty much out of the question for me.  So how do people get the financing to fund the purchase AND the rehab?  Conventional financing will only lend the purchase price of the home.  How do I go about getting the extra $50K on top of that or whatever it costs to renovate?

I've heard of FHA 203k loans and Fannie Mae Homestyle Renovation Loans.  However, I haven't been able to find any lenders that have those programs.  Does anyone know of any banks that do do these types of financings?  Is that something you recommend?

I've also heard of hard money lending, but I'm fairly unfamiliar with this.  Is that a good tactic for a first time home buyer?  How would one even get started in getting that lending?

Any suggestions would be greatly appreciated.

Thanks guys!

Daniel Kong · Answer

This is where you might need to get creative, if you dont have the cash sitting in your bank account. Some ideas to consider are:

1) PLOCs - Personal lines of credit - go to your local banks and take out unsecured lines of credit in amounts of 15-50K. I went in one day to five banks around me and got over 100k doing this

2) HELOCs - Home Equity lines of credit - if you own a house, you can borrow from the equity you have built in.

3) 401K - You can borrow up to 50% or 50K normally (whatever is less), but now with COVID i think its 100K. There are also ways to pull it out with COVID, or you can also self direct, and fund your deal directly from here. (Same goes for your IRA)

4) Seller Financing - If you can find the right deal, a seller may be willing to finance for a short (or long) period of time. Being creative like this opens up a lot of possibilities

5) Partner - If you bring a good deal, there are lots of investors on here (myself included) who would love to partner and bring the funds and/or experience. Depending on what you are getting though, you can expect to give away some of your equity and/or profit.

Either way, keep learning and networking. Good luck!

Brad Bellstedt · Answer

In my experience, BRRRR properties won't qualify for conventional financing because of the condition of the property. Going to hard money/private money route is typically what you'll see. That's actually why the 3 R exists, because after you have brought the property up to conventional financing standards, you refinance out of your hard money loan and into a conventional loan. With hard money I understand you should be ready to pay 2-3 points, 20-25% down, and the rates are 10-12%. Expensive for sure but if it's a good deal, the HML will finance the other 80% of the purchase price and 100% of the renovations. Just make sure to account for the cost of the hard money in your calculations.

If the hard money lender tells you they won't lend on a specific property with the numbers you have because "you don't have a deal," take that advice. A lower purchase price can solve that problem for you but of course, the seller has to agree to the terms as well.

Hope that helps!

Daniel Kong · Answer

@Carlos Villalobos Hey yes, plocs can get complicated. Here are a few tips for you.

1) When you plan to go get your plocs, then visit all the banks on one day. When you fill out the applications, you can truthfully say you have no other loans/lines of credit at that time. You will get your credit pulled and some banks may ask about previous pulls. At least when I did it pre-covid, it was pretty simple to get them. I dunno if the landscape will have changed.

2) Talk to and find a lender that will only use the plocs you have balances on. Some may take into account the total potential you could have open, while another lender will only count the lines that you have a balance on, and that current balance as of your last reporting. You wanna use that lender.

3) There is the date of your line statement, and the date the bank reports the balance to the credit agencies. These might not be on the same date. When you are doing the refinance, just be aware of that. You basically want to add as little as possible to the "Debt" part of your DTI equation as possible

4) Use as little lines as possible. So if you have 5 lines, 50k, 20k, 25k, 15k, 15k, then try to use the full 50k one first, even if its a higher interest rate. The reason for this is how your minimum payment is calculated. All banks will calculate your min payment differently - Some will say 3.25% of outstanding balance, others will say the interest for the month owed + 2% of outstanding balance, etc. But all min payments will include some principle. So you are paying back principle to your line, which you can just borrow out again the next day. However, the min payment is counted against your "Debt" equation, so if you do some math, the least number of lines you are pulling from will give you the smallest "Debt". So pulling 10k from each line will be a lot higher debt than 50K from one line. And also its less messy for your lender.

Sorry, Im typing this all in a hurry, my wife is telling me we have to go lol. If you need me to clarify anything, let me know.

Matthew Porcaro · Answer

I basically jumpstarted my BRRRR journey using a 203k loan. I found a deeply distressed duplex, used the 203k loan to purchase it for $270k, and put $80k into it in renovations.

Quick side note: to answer your lender question, some lenders have put renovation lending on the back burner due to COVID, but the renovation expert lenders are still doing them! Check out Mortgage Possible.

Anyway, the way I leveraged this loan into the BRRRR method, was that after the rehab was done, my property reappraised for $480k. Now, while I didn't cash out refinance like the BRRRR method suggests, I immediately refinanced into conventional to remove the mortgage insurance premium I was paying each month on my mortgage, then about 6 months after that I took out a HELOC on the equity I had in the house, opening up $60k for me.

That $60k I use as my seed capital for buying more deals.

You can use this seed capital to slowly build up your down payment capital budget, which will eventually lead you down the road to having a good chunk of change to start buying cash, or close to it.

This is all built off that initial $10k down payment (3.5%) I put down on my 203k property.

Hope this helps!

Lien Vuong · Answer

You can do the FHA 203k construction loans - I'm happy to recommend you a local lender if you'd like. Please PM me for the info.

Hard Money Lenders are difficult to get a hold of right now bc many have paused their operations and are only maintaining their current book of business. That is to add to the fact that their rates will be much higher 2-3x what a traditional lender would be at 12-15% with 20% down payment. You will be further leverage and more reasonable terms by using FHA 203k or having cash to do the renovations

Regards to a BRRRRR in this area, it's not really likely because as you see in the samples some of my peers have shown, the prices of properties in Boston are no where near the $200's and esp for a multi family. Even a 2 family in the outskirts of Boston will be $350-450. What would be plausible is a hybrid BRRRR where you can take some money out but not the entire amount to move on to your next project. You have to also consider the condition of these properties and thinking about how much renovations you're willing to handle.

Brendan Murphy · Answer

@Matthew Porcaro This is amazing.  That's exactly what I want to do.  I'll check out Mortgage Possible.  Thanks for the tips.

@Odie Ayaga I'm planning on living in the property most likely.  I think it depends on the property type, but in an ideal situation, I'll be buying a duplex and living in one of the units.  Sounds like FHA is the way to go in that case.  Thanks!

@Daniel Kong These are awesome suggestions.  I never thought about taking out personal lines of credit.  How difficult are these to get?  My debt-to-income ratio is pretty high with student loans, so I'm wondering if they'd be willing to give me unsecured lines of credit, especially if I just took out a mortgage.  Also, I'd assume the rates are pretty high right?

Brendan Murphy · Answer

@Brad Bellstedt Very helpful.  Thanks Brad.

Carlos Villalobos · Answer

@Daniel Kong Thank you for taking the time and sharing a some tips with me. Ill make sure I visit all the banks in one day and find a lenders who only counts PLOCS that have balances on. I appreciate it, very good quick tips. If I have any more questions I’ll reach out. Stay safe and take care.

Carlos Villalobos · Answer

Hi @Daniel Kong, I read some of your ideas about getting creative. One of them is the PLOC. I am working on arranging my finances and I thought about getting PLOC to have funds for a rehab. Any quick tips and was there any challenges when you go and refinance a property, having balances on PLOC?

Thank you in advance,

Carlos Villalobos

Joshua Rice · Answer

@Brendan Murphy

Look into a "self-build loan" I am not to familiar with it but someone suggested it to me when I was looking at a possible Brrrr property. Hope it helps.

I want to BRRRR, but I'm stuck on step 1. Insights?

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