How to Initially Finance a BRRRR
Updated: Feb 12, 2022
Funding the initial costs of a BRRRR can be one of the most intimidating parts of your first project!
There are many ways you can fund a BRRRR project, the methods here are some of my favorites.
We use a combination of many financing types for initial purchases in our business.
What does 'initial financing' mean?
For a typical BRRRR project (unless you purchase the property in cash) you will be obtaining financing twice. Once when you purchase the property in it's distressed state, and a second time after you have renovated, and rented the property. While this initial funding could be a bank loan, some of the best BRRRR projects will be too distressed to qualify for traditional bank financing. Luckily there are many other options available.
"Cash is King" right? Well, maybe in some cases, but there are definite drawbacks to this method of purchasing property as well. Purchasing in cash can streamline the process, and cut out some of the red tape that comes with financing a property. However, unless you're sitting on piles of money (call me) you're going to run out of funding quickly. And even if you were sitting on piles of cash waiting to be deployed, purchasing with 100% of your own money is going to significantly lower your ROI in most cases.
No Mortgage Payment
Loss of Liquidity
HARD / PRIVATE MONEY
What is hard money?
A hard money loan is a loan secured by real property, given by a person or company who is in the business of lending (but is not necessarily a bank). These loans can be amortized or interest only, and are often short term and have a balloon payment due after 12-36 months. They typically come with high interest rates and sometimes have origination points as well. Hard money lenders typically make lending decisions based on the viability of the investment property. While the creditworthiness of the borrower may still be part of the decision to lend on a project for the hard money lender, it is less important. A hard money lender will typically have standard terms they will be able to offer you because they often have a standard of lending that their investor base has agreed to.
What is private money?
Private money is a loan given by someone looking to make a return on their own money. This person's main business is typically not lending money. These loans take many different forms and all of the terms are negotiable. This could be someone looking to make a better return on their retirement savings, or a private investor looking to diversify their investment portfolio by making a passive return on an investment secured by real property.
Hard and private money are incredibly flexible options for purchasing distressed property, but they do come with risks. The terms can be very short, often 12 months. This would mean that you need to be confident you can renovate, rent, and refinance the project well within a 12 month time frame. These loans also tend to come at a high cost, which can be very tough on the initial cash flow of a BRRRR project. Use caution with hard and private money until you are very comfortable with the BRRRR process.
Cannot Live & Flip
What is a HELOC?
A HELOC is a Home Equity Line of Credit. This can be a great option if you have a property with equity that you would like to release and put to work by buying another property. You can also potentially find private money investors who have equity in a property that they can release to invest with you. For example if someone can take a HELOC on their property with a 4% interest rate and lend it to you at a 10% interest rate, you now have a lender who is netting 6% on their money that was otherwise sitting stuck in their residence.
No Deal Specific Underwriting
Peer to Peer Lending
Peer to peer lenders such as Kiavi pool funds from individuals and lend them out for various purposes. Their loans typically fall somewhere in the middle of the road on terms, interest, and underwriting requirements.
Lower Interest Than Hard Money
Typically Fixed Rate
Some Properties May Not Qualify
Higher Interest Than Traditional Lending