The BRRRR Method: When to Use DSCR and Bridge Loans
Categories: Blog Posts
How can you use the BRRRR method to get you in and out of a property with little-to-no money down?
Let’s start with a real scenario we encountered a few weeks ago. A client from Michigan called. He’s done flips before and even kept a few rentals, but he’s new to the BRRRR method.
In the past, he’s always used partners or cash to fund his investing. However, this property needs more money.
He’s buying it for $200,000, putting approximately $22,000 of rehab into it, and we’ll estimate closing costs around $7,000. That’s a total of $229,000 for a pretty basic investment property.
Where can this client find the money, and how can he leverage it to his advantage?
What is the BRRRR Method?
BiggerPockets launched the BRRRR acronym a few years ago. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. This acronym outlines a helpful strategy for successful real estate investing.
It centers around buying properties with built-in equity. After renovations, the investor can refinance therefore creating a sustainable cycle of investments.
Can You Use a DSCR Loan to Begin the BRRRR Method?
The short answer is technically yes. However, since you don’t currently own the property, you can’t claim the equity in it just yet which makes it a not-so-great deal.
For our example client above, a DSCR loan will only cover up to 80% of the purchasing costs. This leaves 20% leftover — a large amount of cash that our client and a lot of newer investors simply don’t have.
Additionally, a DSCR loan won’t cover renovations or closing costs.
If you’re trying to exclusively use a DSCR for a BRRRR, you’re going to see the payments begin to add up really quickly.
A Better Plan
Instead of throwing a DSCR at the whole thing from the start, we suggest a different strategy of kickstarting your BRRRR cycle.
1. Start with a bridge loan.
The BRRRR method is all about sustainable investing. How can you use other people’s money to keep cash flowing in and out of your projects?
This means beginning with a loan that’s going to cover those starting costs so you can get ownership and claim that equity!
A bridge loan is more flexible than a DSCR so you can cover the purchase, rehab, even the closing costs.
2. Add the DSCR.
Once you’re actually starting to rent out the property, that’s the time for the DSCR. DSCRs have more restrictions anyways, so they’re most effective when used for renting.
The DSCR can pay off the bridge loan and you can refinance the property for an even better outcome.
The Beauty of the BRRRR Method
By using this loan strategy with the BRRRR method, our client was able to come up with a plan that should easily generate over $1,000/month of positive cash flow for himself.
And it all started with strategically using other people’s money to enter the BRRRR cycle.
This is the beauty of real estate investing. It’s accessible and profitable, even for beginners.
We’re Here For You
If you have any questions or want to discuss a project, reach out to us at Info@TheCashFlowCompany.com.
Please also check out the free tools on our website for downloads that can help set you up for success. Additionally, if you’re interested in the BRRRR method, make sure to explore our BRRRR roadmap.
