Want to know how you can BRRRR your way to financial freedom (and real estate wealth)… WITHOUT any of your own money?
That’s what we’re going to show you how to do in this article. 🙂
But first, free gift below!
The Challenge of The BRRRR Method – You Need Money to Make Money!
It’s a familiar adage in the real estate realm: “You need money to make money.” But in my years in real estate, I’ve seen many investors get hung up on this, believing they’re barred from strategies like the BRRRR method if they don’t have a hefty bankroll.
Let’s get something straight: capital is essential in any investment venture. There’s no sugarcoating that. But it’s not the be-all-end-all. The BRRRR method, while inherently cash-intensive due to its cycle of buying, rehabbing, renting, refinancing, and repeating, doesn’t necessarily require you to have a mountain of cash at the outset.
I’ve witnessed savvy investors with more ambition than cash navigate this process. How? By leveraging the right tools, understanding the market intricacies, and, above all, not being afraid to think outside the box when it comes to financing.
In the sections to follow, we’ll dissect these strategies, drawing from real-world experiences. Because while having capital is an advantage, the real game-changer is knowledge, strategy, and the grit to make things happen.
Strategy #1: Bank Loans
This is as simple as it is unsexy.
A lot of investors like to talk about private money (which I love) or creative financing (which I also love)… but there’s no denying that bank loans can be a GREAT WAY to get started with the BRRRR method.
1. Research & Identify Suitable Banks: Not all banks are created equal when it comes to real estate investment loans. Some might have programs specifically tailored for investors. Begin with your own bank, since having an existing relationship can sometimes help, but also shop around. Local community banks and credit unions often have more flexibility and understanding of the local market than larger national banks.
Before you choose, double check…
- LTV Limits on Cash-Out: Some banks might let you refinance up to 70-80% of the property’s value, while others might have stricter limits.
- Seasoning Period: This refers to how long you need to wait after the initial purchase before you can refinance. Some banks might require six months to a year, while others might be more flexible.
- Terms and Rates: Check the terms and interest rates for cash-out refinances. They can sometimes differ from standard refinance rates.
2. Prepare Your Financial Portfolio: Before you approach a bank, have all your financial documents in order. This includes recent pay stubs, tax returns, a list of assets and liabilities, and a statement of your net worth. Banks will want to assess your creditworthiness and your ability to repay the loan.
3. Understand Loan-to-Value (LTV) Ratios: Banks typically lend based on the LTV ratio, which is the loan amount divided by the appraised value of the property. For BRRRR deals, banks might lend up to 70-80% of the after-repair value (ARV), meaning you’d need to come up with the remaining 20-30% (either through personal funds or other financing methods).
4. Familiarize Yourself with Interest Rates & Terms: Know the difference between fixed and variable rates, and understand how the term length (15-year, 30-year, etc.) impacts your monthly payment and total interest paid. For BRRRR, you might initially want a shorter-term loan for the rehab phase and then refinance to a longer-term once the property is rented.
5. Get Pre-Approved: Before you start property hunting, get a pre-approval letter. This will give you a clear idea of what you can afford and show sellers and agents that you’re a serious buyer.
6. Factor in Closing Costs & Fees: Securing a bank loan isn’t just about the down payment and interest rate. Remember to account for origination fees, appraisal fees, title insurance, and other closing costs. These can typically add 2-5% to the cost of your loan.
7. Build a Relationship: Once you’ve secured your first loan and successfully completed a BRRRR deal, nurture your relationship with the bank. Over time, as you prove your reliability and expertise, the process may become smoother, and the bank might even offer more favorable terms for subsequent deals.
Strategy #2: Private Money
While traditional banking channels can be useful, the world of real estate investment offers other financing avenues that might prove more agile and flexible, especially for the BRRRR method. One such avenue is private money. Unlike bank loans, private money comes from individual investors or private groups who are willing to lend their personal funds for real estate ventures.
The main benefits of private money as I see it…
- Less Red Tape: Unlike banks, private lenders aren’t bogged down by bureaucracy or stringent regulatory guidelines. This often translates to faster loan approvals and more negotiable terms.
- Relationship-Based: Private lending is heavily relationship-driven. It’s about building trust between the investor and the lender.
- Scalability: The only limit is how many investors you can find and how much they’re willing to give you.
Here’s the gist of how you want to present to investors…
- Present a Clear Plan: When approaching private lenders, have a clear breakdown of the BRRRR strategy—your purchase plan, estimated rehab costs, projected rental income, and exit strategy (refinancing). You’ll usually need to show them the exact property their money will be invested in. You can offer anywhere from 8% to 12% return on their investment over, say, 12 months.
- Showcase Past Successes: If you’ve completed prior projects, whether BRRRR or other real estate investments, highlight them. It builds credibility.
A few things to keep in mind, though…
- Cash-Out Refinance Nuances: With private lenders, the terms of a cash-out refinance will often be negotiable. While some private lenders might allow for a direct cash-out refinance, others might structure it differently, potentially asking for their principal back while allowing you to keep the surplus from increased property value.
- Negotiating Interest Rates: Unlike banks with standardized rates, with private lenders, everything is up for discussion. The rate will often reflect the perceived risk of the project and the relationship between you and the lender.
- Understanding the Exit: With private money, the “refinance” step in BRRRR might sometimes involve paying off the private loan in full—either through bank refinancing, another private loan, or proceeds from another project.
Get yourself a lawyer experienced in real estate to help draft up the contracts for you and your investors — find a good one and they’ll be worth their weight in gold.
Strategy #3: Hard Money
Not my favorite. But hard money is another tool in a real estate investor’s arsenal. Hard money loans are short-term, asset-based loans provided by private investors or companies. While they tend to have higher interest rates than traditional bank loans, their flexibility, speed, and focus on the asset value rather than the borrower’s creditworthiness can be useful.
Some of the benefits…
- Asset-Centric: Hard money lenders focus primarily on the value of the property being purchased and its after-repair value (ARV), rather than the borrower’s credit score.
- Shorter Durations: These loans are typically for shorter terms, ranging from a few months to a couple of years, making them ideal for the Buy and Rehab stages of BRRRR.
- Initial Purchase: With their quick approval times, hard money loans can be ideal for acquiring properties swiftly, especially in competitive markets.
- Rehabilitation: Some hard money lenders will also factor in the rehab costs, lending you not just the purchase price but also a portion of the renovation expenses based on the projected ARV.
Here are some important things to remember for refinancing when you’re using hard money…
- Transitioning from Hard to Traditional: After rehabbing the property and stabilizing the rental income, your goal would be to refinance with a traditional bank. This allows you to pay off the high-interest hard money loan and transition to a more sustainable, long-term financing solution.
- Preparation is Key: Ensure the property’s value is appraised high enough post-rehab to cover the hard money loan when refinancing. It’s essential to have a clear understanding of refinancing requirements from traditional lenders to make this transition smooth.
A few more considerations…
- Higher Interest Rates: Hard money loans often come with higher interest rates, sometimes double or even triple those of traditional bank loans.
Points and Fees: Lenders might charge upfront fees, known as “points,” which are a percentage of the total loan amount.
- Loan-to-Value (LTV) & After-Repair Value (ARV) Ratios: Hard money lenders typically have specific LTV or ARV ratios they’re willing to lend up to. It’s essential to clarify these ratios and understand how much you’ll need to bring to the table.
And don’t forget…
- Reputation Matters: Just as with private money, building a successful track record and establishing strong relationships with hard money lenders can lead to more favorable terms in future deals.
- Shop Around: Different hard money lenders have varying terms, rates, and fees. It’s beneficial to get quotes from multiple lenders to find the best fit for your project.
Strategy #4: Seller Financing
You might not have thought of it, but seller financing is a possibility for funding your BRRRR deals (if the numbers make sense).
Here’s what one investor said about seller financing with BRRRR on BiggerPockets…
But, of course, there’s a lot of nuance. Here’s what you should keep in mind…
- Direct Dealings: In seller financing, the buyer agrees to a promissory note detailing the interest rate, repayment schedule, and consequences of default, all directly with the seller.
- Title Transfer: Despite the unconventional loan structure, the buyer (you) receives the title, gaining ownership of the property. The title may revert to the seller if the buyer defaults, based on the terms of the agreement.
- Initial Purchase: Sellers open to financing might be more flexible on price, or they may have properties that are harder to sell (and ripe for rehab). This can allow you to acquire a property at below-market value.
- Rehabilitation: Without a traditional lender involved, you often have more flexibility and fewer restrictions on the rehab process. However, terms should be clearly outlined to ensure both parties are on the same page regarding renovations and their impact on property value.
Here are some details on refinancing…
- Leverage Increased Property Value: Once you’ve improved the property and increased its value, traditional lenders may be more willing to refinance the property, allowing you to pay off the seller-held note.
- Clear Communication: Ensure that the seller is aware of your intention to refinance once the rehab is complete. This transparency ensures no surprises when you transition from seller financing to traditional bank financing.
Some more considerations…
- Interest Rates: Often, seller financing might come with higher interest rates than bank loans. However, these rates are negotiable, and the overall terms might still be more favorable than other financing methods.
- Shorter Loan Terms: Seller-financed loans typically have shorter durations, often with a balloon payment expected at the end. This setup aligns well with the BRRRR strategy, where refinancing is an integral step.
- Due Diligence: Just as with any other property purchase, ensure you conduct thorough property inspections and title checks.
And some tips for finding seller financing deals…
- Networking: Real estate investment groups and clubs can be a gold mine for leads on potential seller-financed deals.
- Direct Outreach: Contacting property owners directly, especially those with older listings, can unearth seller financing opportunities.
- Real Estate Agents: Some agents specialize or are well-acquainted with seller-financed deals. Building relationships with these professionals can provide a steady stream of potential opportunities.
The realm of real estate, especially the BRRRR method, presents a diverse landscape of financing options.
From traditional bank loans to more flexible routes like private money, hard money, and seller financing, there’s no one-size-fits-all approach.
Your success lies in understanding, adapting, and leveraging each strategy to suit your specific situation. As you embark on this investment journey, arm yourself with knowledge, maintain flexibility, and remember that persistence and adaptability are your allies. In the world of real estate, every challenge overcome is a step closer to your goal. Stay the course, and the potential rewards can be immense.