Do you have to buy BRRRR with hard money? Or can you use a traditional loan?
In the BRRRR method, you need two loans – one to buy, and one to refinance. One short-term, and one long-term. One investor-friendly loan, and one conventional.
This two-loan strategy allows you to unlock the equity hidden in a BRRRR-style under-market property.
But why do you need the first loan? Why can’t you just buy with a conventional loan rather than something like hard money?
Let’s look at an example of what happens if you purchase investment properties using traditional versus investor-friendly BRRRR loans.
Traditional Loans vs BRRRR Hard Money Loans
Here are the specs on our example property:
- After-repair value (ARV): $400,000
The appraised value of this house should be $400k once we’re at the refinance stage.
- Purchase price: $300,000
We’re going to buy this property for $300k.
In most actual BRRRR situations, we’d need to consider rehab costs in the equation. For the sake of our example, though, let’s say this house is rent-ready at $300k.
The spirit of BRRRR is to buy houses under-market – for less than they’re actually worth. This example house costs $300,000, but it’s worth $100k more, at $400,000.
Using Traditional BRRRR Loans for Purchase
With a traditional loan, like a 30-year fixed mortgage, Fannie or Freddie, or other conventional, the lender has to abide by underwriting rules. When it comes to using appraised value or purchase price for the LTV, the rules say the lender has to use the lower of the two numbers.
So if you purchase for $300k, even if the home is worth $400k, they can only loan you for the purchase. In addition to that, they’ll also require 20% commitment.
What does this chalk up to for your wallet?
- The lender will give you a loan-to-value of 80% of $300,000. So the actual loan you get is $240,000.
- You’ll need to bring in $60,000 for the purchase of the property.
Buying a BRRRR with a traditional loan means a smaller loan and a big down payment.
And that’s just not what BRRRR is meant for. The BRRRR strategy should be a zero-down, high-leverage real estate method.
So how do you get there?
Using BRRRR Hard Money Loans
Let’s check out our example house if we used an investor-friendly loan for the purchase.
Using an investor real estate loan, like hard money, allows you to profit using two BRRRR loans. This first loan is to buy at the lower listed price, the other is to refinance with the full appraised value of the home.
Remember that the traditional loan went wrong when the underwriting guidelines forced us into a lower loan amount. But when you buy with a hard money loan… that underwriting suddenly opens up.
During a purchase, investor-friendly loans look at the value of the home, the ARV. They base the loan amount on this number, which does two things:
- Gives you more money to work with on a rehab.
- Requires less (or often no) money down.
Investor-friendly loans often offer 75% or higher LTV for the ARV.
In our example, this means your investor-friendly loan will cover $300,000 (which is 75% of the $400k). This gives you enough to purchase the property with no money down required.
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