BRRRR and a Business Purpose Rental Loan Lender

Many Real Estate Investors know the benefits of the BRRRR method for building a portfolio quickly. Simply put using the BRRRR strategy an investor can use the same down payment dollars to buy 3 to 4 properties a year or 12 to 16 units per year. But this strategy only works if you have the right lender partner. Let me explain.

B.R.R.R.R.

Buy - Rehab - Rent - Refinance - Repeat

Let me give you an example to illustrate having the right lender partner for you and your BRRRR strategy.

Let's assume an investor has $50,000 to invest and their target is 4-unit properties that costs $150,000 to purchase and $60,000 to rehab for a total acquisition cost of $210,000 with an after rehab value of $300,000. This is the 70% rule (The total acquisition plus rehab cost should not exceed 70% of the after rehab value).

Buy - at this point you would go to a hard money lender that will require a down payment. Based on your experience that down payment can be as high as 20%. There are even 100% programs available. But most borrowers will put down 10% to 20% of the purchase price. Using the worst-case scenario as a new investor your down payment is $30,000 (20% of the purchase price). Plus closing costs at %10,000 (I use a high number to present

Rehab - Let's assume renovation takes 90 days.

Rent - if you are seeking a conventional refinance the property must be rented. This is the first point of deviation with a business purpose rental loan. A Real Estate Investor would qualify based off the market rent as determined by an appraisal, therefore the property does not necessarily need to be rented to qualify for funding.

Refinance - As mentioned above for conventional financing the property must be rented and the conventional lender will require tax returns and base the rental income from your tax returns. This can pose 2 issues. First many Investors have substantial write-offs that may negatively impact rental income. Secondly, if you have not owned the property long enough for rental income to show then you may not qualify for funding. Of course, if your personal income is enough to offset the potential negative rental income then this may not be an issue on a conventional loan. Most people cannot qualify to carry 2 mortgages (including their primary home - mortgage or rent) without the rental income from the new property. With a business purpose rental loan, the lender does not require tax returns or the property to be rented. 

 Refinance - Ownership seasoning will be an issue for conventional financing as most programs require 12 months ownership. A business purpose rental loan will have a shorter seasoning period some as little as 1 month. This means the refinance will be based off the after repair value, allowing for cash out and return of assets. In our scenario the borrower will get their $30,000 down payment and $10,000 in closing costs back after the refinance in 90 days.

Repeat - Now the investor has the same cash or more to repeat the process 2 to 3 more times in a year. This would yield 12 to 16 units owned and an extraordinarily strong cash flow plus a return of all their cash or more.  If you are looking to do a conventional loan with 12 months ownership seasoning will only own one property at the end of the year.

To be fully transparent, convention financing typically have a lower interest rate. Conventional rates are about 1% to 1.5% lower. 

So the ultimate question you must ask yourself, which is more important, having a slightly lower interest rate or owning three to four times more properties with a total portfolio value 3 to 4 times greater and with potentially 3 to 4 times more cash flow better for your real estate investment goals.

The simple answer is to choose the right financing partner who understands the BRRRR investment strategy and the best financing for you.