Brrrr Down Payment Question?

[Lucia Lilac]

Hello BP! I am curious to know if anyone has purchased a Brrrr with 20-25% down and take a loan/mortgage out from the bank for the rest. I know most deals are done with cash, hard money lenders, etc... Is it possible to do it this way using a bank and refinance with them after the renovations are done? Just curious. 

[Andrew Postell]

@Lucia Lilac let's look at a likely scenario that you might face out there to determine the best route.  

• Let's work with a value of $200,000  
• The purchase price is $100,000 
• the renovation is $50,000 
• closing costs of $7,000

With a conventional "renovation" loan (yes, there are renovation loans...but not every lender offers them so make sure you are speaking with one that offers it to understand the pros/cons of going this route)

15% Down Payment (yes, 15% down is the minimum) of your Purchase Price + Closing Costs - down payment is $22,500

So total out of pocket here is $29,500 (down payment + closing costs).  You don't have to refinance since you are in a 30 year loan.  You rent the property and are cash flowing.  The end.

Now let's examine the Hard Money Lender route:

Hard Money Lender - Lends you 75% of the ARV - so $150,000

Your down payment is $0...so your out of pocket is $7,500

You do have to refinance though, but we can roll in the closing costs into our refinance.

Total out of pocket this route is $7,500.

So would you rather be out of pocket $7,500 or $29,500?  Or think of it this way, let's say you have $50,000 in the bank.  That's a lot of money for anyone.  How many deals can you do using $29,500?  One?  How many using $7,500?  LOTS!

Now, someone might point out that the standard loan would have a lower loan amount....so you would cash flow more.  And that is true....but what if I have NO CHOICE. I'm not talking about BRRRR'ing properties to millionaires. They have money. I'm talking about BRRRR'ing properties to the regular person...who may not have very much. The BRRRR method evens the paying field for us. That's why we use Hard Money. If you have lots of money, use the traditional loan. If you don't - then use HML. You still have to buy it right...but HML allows us to keep more money in our pocket.

Hope all of that makes sense.