All Forum Posts by: Aaron Freeman

Do you mean to ask if a lender may require 20% D.P. on the entire Loan amount (purchase + rehab) instead of just the purchase? If that is your question, no. I have never seen a lender require a D.P. percentage based on the total loan amount. Almost always the lender is looking at the value of the property or the purchase amount, whichever is more, and requiring the D.P. percentage off that amount, not the full loan amount.

Yes, that's what I meant. In your example the 20% is calculated from the property price, not the entire initial loan. That was a surprise to me.

Regarding this comment: "This means the borrower's money must first be in the project before gaining access to the construction funding." ...
You can't be saying that the borrower needs to fund the construction entirely (spend $60k) in order to get access to the $60k. If that was the case there would be no purpose to borrow $60k. :)
So I am missing something. I am guessing the $60k for construction is paid out in traunches or based on phases/milestones of the project or something? So the borrower needs to front, say, $10k and then will get reimbursed (hence "arrears"), and that continues until the project is complete?
Are these arrear loan payments based on milestones?

1 Vote

Quote from @Edwin Epperson:

Happy to share, I also created a video that goes into detail why this is the case, but I cannot post video links here. 50,000 ft view for the purchase + reno side, the most that you will be able to get access to is 75% of ARV, though in today's environment the norm seems to be 70% Max LTARV.
...
So this means you will always have 25% - 30% equity in your deal, and you will always have 5 - 10% of tappable equity untapped.

Dumb question time!

In your video you show that a property purchased for $100k that requires $60k in renovations would only require a $20k down payment (20% of the purchase price). So that means typically we do not have to make a down payment on the rehab portion of an initial loan?

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Quote from @Mike Klarman:

I oversee lots of bridge loans for investors. I can tell you, what works right now in the DSCR environment are duplexes, triplexes, and quads. One of my clients is about to close on a Triplex for 130k. He's putting 100k in and the ARV came back 345k. Market rents bring in 4700 for the 3 units, and even at max cash out leverage his loan payment will only be 3k. That's a 1.6 DSCR which is great.

I'd sell all the SFH inventory right now and look to hold those 2 - 4 units buildings when they pop up until rates fall to a sensible level where there's still a few hundred to be made again per door on the SFH inventory.

Very helpful insight.

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Quote from @Edwin Epperson:

If you would like to see the video (about 20 min) where I break down the numbers to help it make sense, shoot me a PM, and I'll share the link to the video.

Found it by searching your name and brrrr. It's very interesting, and I think I get it. Going to watch the final example once more to be sure. :)

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Quote from @Robin Simon:

Hi - check out this article published on BP on this exact topic! It goes into all the options and pros/cons of each

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

Ah, nice, I will definitely read this!

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Quote from @Edwin Epperson:

Also be aware that conducsting the BRRRR strategy will always leave untapped equity from your refinance. Happy to discuss my solution for this if youd like

Interesting! Yes, please share on how a BRRRR leaves untapped equity and your solution. I'll definitely learn something and maybe others watching this thread will too.

1 Vote

Quote from @Matthew Crivelli:

Quote from @Aaron Freeman:

Quote from @Matthew Crivelli:

@Aaron Freeman

You don't need prior experience for hard money, you just need skin in the game, maybe 20%-30% down payment. Also with hard money you are using an LLC so its easy to bring on a partner onto the deal. If they have experience, you can piggy back off of them and get better terms.

Interesting, I have a Subchapter S established, but not an LLC. Can you give some details on why I would need an LLC for a hard money loan?

Hi Aaron,

You can use an S CORP if you wanted to. Hard Money loans typically require the borrower to be an entity. One of the main reasons is that commercial bussiness loans have very few regulations.

Ahhh, so it's common for a BRRRR investor to create an LLC for each investment?

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Quote from @Andrew Postell:

@Aaron Freeman I absolutely want to use lenders that give me the purchase price + rehab. There are enough lenders out there that will do that. In nearly every case, I have used hard money to do so. Now, not all Hard Money Lenders (HML) are the same. I want HML that will lend me 75% of the ARV. That's usually the most flexible and the maximum amount that we can receive. None of this "we lend 100% of purchase price + 80% of rehab" stuff. That's not as good as borrowing 75% of the ARV.

Please understand that I'm not answering anything about how you calculate the ARV or how you calculate the rehab or how to negotiate the price or any other skill that is needed to execute on a BRRRR. I'm only answering your lender question.

Hope all of this makes sense.

Definitely makes sense, and it definitely helps me to set an expectation with what can be found. Thank you!

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Quote from @Steven Goldman:

Good Morning! Very few lenders will lend you rehab funds, after you have acquired the property. Rehab. lenders want to lend you the purchase price and the rehab funds based on a formula which takes into account the ARV and then calculates a loan to cost approach.

...

Also be aware some lenders charge you interest on the entire holdback amount others, only on what has been advanced.

...

Many borrowers look for private funds for rehabs. A private lender will usually charge you a higher rate and also will charge you for the entire rehab amount form one month on. Some private lenders will not hold back the construction funds, allowing you more flexibility and the ability to access the construction funds immediately after settlement.

Very helpful. From a pre-screening standpoint, I feel comfortable guestimating an expected ARV for my own purposes based on comps and what I am seeing in the market, but how do lenders ultimately establish an ARV for a purchase and rehab loan?

Also is there industry jargon for a loan where a lender is charging interest on the entire holdback vs amount advanced?

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Quote from @Matthew Crivelli:

@Aaron Freeman

Interesting, I have a Subchapter S established, but not an LLC. Can you give some details on why I would need an LLC for a hard money loan?

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All Forum Posts by: Aaron Freeman

Aaron Freeman has started 2 posts and replied 21 times.

Post: Buy + Rehab Financing

Post: Buy + Rehab Financing

Post: Buy + Rehab Financing

Post: Buy + Rehab Financing

Post: Buy + Rehab Financing

Post: Buy + Rehab Financing

Post: Buy + Rehab Financing

Post: Buy + Rehab Financing

Post: Buy + Rehab Financing

Post: Buy + Rehab Financing