15. BRRRR Strategy and your Funding Options
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.
You have a property under contract and your exit strategy is to keep it as a rental. Let’s discuss three possible funding scenarios.
FIRST SCENARIO
You are purchasing the property from a reputable turnkey provider (TKP). The property is completely turnkey meaning it is fully renovated, tenant occupied and under property management. It will cash flow from the day you close on it. It’s not a BRRRR property but you decided it’s a property too good to pass on.
How do you plan on financing it? It all depends on whether you are buying it under your name or through a corporate entity such as an LLC.
Purchasing under your own name has its advantages. Most all traditional lenders will finance with 20% down at an interest rate in the 4.5% range. There are some significant drawbacks if you want this low interest rate. First, the documentation required is more labor intensive as they may ask for multiple tax returns. That means a higher level of scrutiny. Second, the mortgage will appear on your credit reports ultimately impacting your FICO scores. Third, you will have greater liability exposing your personal assets to any insurance claims made against the property exceeding your policy limits.
If you decide to purchase in your LLC, then a traditional mortgage is not possible, and you would need a loan through a commercial lender. These lenders work specifically with investors. Most all will finance you with 80% down and an interest rate in the 5% range, depending on credit and experience. Even though the interest rate may be slightly higher, the advantages are numerous. First, these lenders require a lot less documentation than the traditional lenders thus offering you greater flexibility in obtaining the loan. Second, the property does not appear on your personal credit history since it is purchased under the company name. Third, you have greater liability protections buying under your LLC keeping you and your personal assets from any legal exposure. Fourth, you have greater tax benefits with corporate write-offs, depreciation, and cost segregation.
SECOND SCENARIO:
You are purchasing a vacant property that requires significant repairs. Your plan is to do all the heavy lifting of renovating and placing a tenant into the property. You are truly employing the BRRRR strategy. First, traditional lenders are not an option. It’s too risky for them. Commercial lenders will certainly finance it with a short-term bridge loan (AKA fix & flip loan). There are many loan programs including the ones we offer with up to 90% of the purchase price and 100% costs of renovations depending on experience level. You will need a short-term bridge loan during stabilization (renovations and tenant occupancy). Once completed, you will refi into a long-term fixed loan. Lenders will require 3-6 months seasoning but most this time will be absorbed during the stabilization process.
THIRD SCENARIO:
Let’s assume your funds are limited or your credit is too low to obtain a bridge loan. What’s your option? Find private money. This could be family, friend, or a fellow investor. They may offer a higher interest rate of 10% – 12% with the same terms as a bridge loan but with one significant advantage. They have the flexibility to give you 100% of the purchase, renovation and holding costs. This is the OPM strategy (Other People’s Money). You have zero risk of investing any of your own capital.
The challenge is finding private money. Outside of family and friends, these relationships take time to build and cultivate. There are plentiful other resources that focus on finding private money and I suggest you explore this option as part of your overall BRRRR strategy.
I have personally used private money for years obtaining 100% financing. It has offered us the greatest flexibility to acquire multiple properties without financial constraints.
My best advice to you is to make sure you have your funding strategy in place before you make offers on properties.
Looking for funding? REI Trader, LLC has purchase, refi and fix and flip loan programs for your SFR, rental and multifamily portfolios. For rates and terms, please email jonathan@reitrader.com
Category : Blog