How are hard money loans used if I want to “BRRRR” (Buy, Rehab, Rent, Refinance, Repeat)?

Reading time: 6 minutes

Question: How are hard money loans used if I want to “BRRRR” (Buy, Rehab, Rent, Refinance, Repeat)?

Overview

1. What is the “BRRRR” strategy?
2. What makes the “BRRRR” strategy attractive to real estate investors?
3. How are hard money loans used in the “BRRRR” strategy?
4. What is an example of a hard money loan being used in the “BRRRR” strategy?

What is the “BRRRR” strategy?

“BRRRR” stands for “Buy, Rehab, Rent, Refinance, Repeat” and is one of the most attractive real estate investment strategies for both beginners and seasoned professionals alike.

As the name implies, the BRRRR strategy is comprised of 5 components;

1. Buy – purchasing the investment property
2. Rehab – fixing up and adding value to the investment property
3. Rent – renting out the investment property to a tenant or tenants
4. Refinance – using a cash-out refinance to replace the initial loan and receive additional proceeds
5. Repeat – perform steps 1-4 on a new investment property

There are a couple of key moves in the BRRRR strategy that, when executed well, make it a particularly appealing real estate investment strategy, namely the value-add and the cash-out refinance.

The value-add component works when you improve the property’s value by more than what you spend to rehab the property.

A simple example of this would be, you spend 50k to rehab the property, and in doing so, you improve the value of the property by 100k.

The cash-out refinance works when you replace the initial loan (often a private or hard money loan) with another loan (often from a bank or DSCR lender), and receive proceeds beyond what replaces the loan.

A simple example of this would be, you have an investment property worth 300k after it has been rented out, and you have a hard money loan of 150k on the property.

You get a bank to refinance the hard money loan, and they provide you with a cash-out refinance of 210k (70% LTV). The first 150k goes towards paying off the hard money loan, and the remaining 60k is yours to keep.

The above key moves, when executed well, mean that you get paid and also maintain ownership of the investment property.

What makes the “BRRRR” strategy attractive to real estate investors?

The “BRRRR” strategy is powerful because it allows investors to acquire new investment properties, and eventually, own these properties while receiving all of their money back (and then some) that they put into purchasing and rehabbing them

Other real estate strategies, such as the fix & flip, can provide significant profits for real estate investors, but by nature of the exit (sale of the property) they don’t allow the real estate investor to still own the property after they fix it up.

The “BRRRR” strategy, while not providing the immediate profitability of a fix & flip strategy, does allow the investor to retain, and eventually grow, equity in his or her investment portfolio.

How are hard money loans used in the “BRRRR” strategy?

Hard money loans are often used for the first portion of the BRRRR strategy. More specifically, hard money loans are used to purchase and rehab the investment property. 

A hard money loan will help on the first two letters of the BRRRR acronym, “Buy” and “Rehab”.

A hard money lender will often finance a portion of the purchase of the investment property, and then 100% of the rehab of the property on a draw reimbursement basis. This means that you will be responsible for a portion of the purchase price of the property, and you will also typically be responsible for floating the first construction draw.

To use an example, let’s say that your rehab budget on an investment property is $60,000, and you’ve broken that budget down into 4 separate stages of work, divided evenly.

You would be responsible for the $15k outlay, and then after an inspection by the lender, assuming that work has been completed, you would be reimbursed for that $15k.

As you can see, by the end of the rehab process, you will have been reimbursed $60k. However, you are still responsible for the initial capital outlay.

Your exit from the hard money loan is going to be a “refinance”. For some lenders, this may change how they underwrite your file. Hard money lenders are always quite concerned with how they will be paid off, and if your exit is a refinance as opposed to a sale (as would be the case with a fix & flip), then the variables that the hard money lender pays most attention to will often change.

For example, your creditworthiness and likelihood of receiving long-term financing are much bigger factors for your ability to refinance than the average time on market for a specific location.

What is an example of a hard money loan being used in the “BRRRR” strategy?

Let’s run through a concrete example of how a hard money loan might be used to employ the “BRRRR” strategy.

Let’s use the following numbers for an example investment property,

In this simplified case, you are responsible for $41,250 of the project cost (typically the purchase price + rehab amount). The hard money lender gives you the remaining $233,750 of the project cost through the hard money loan.

To be clear, this $41,250 will typically be due at closing, and you will need to float the first construction draw.

In any case, through the above example you were able to add a significant amount of value to the investment property. The property went from being worth $220,000 at the outset of the project, to now being worth $375,000 after only $75,000 worth of work.

As was mentioned above, the hard money loan is going to be used for the first part of the BRRRR, or the purchase and rehab of the investment property.

After the work is complete, you then rent the property out, and also typically allow the property to “season” until it qualifies for traditional financing or a DSCR loan. At that point, you can go ahead and cash-out refinance, replacing the more expensive hard money loan with a bank loan or DSCR loan from a private lender, and keep the additional proceeds that are not used to refinance the existing loan.

The key points to remember regarding the use of a hard money loan in the BRRRR strategy are;

1. Hard money loans are often used for the initial purchase and renovation of the investment property. Oftentimes, hard money lenders will refer to this type of loan as a “bridge” loan. The idea behind a “bridge” loan is that it bridges the gap between the property in its current state and long-term financing (when the property is stabilized/rented out).
2. You will almost always be responsible for bringing a portion of the purchase price and rehab amount to the closing table; this amount can change based on a number of underwriting criteria, but most of the time you will be responsible for bringing 10-25% of the total project cost (typically the purchase price + rehab amount) to the closing table.

Conclusion:

The BRRRR strategy can be a fantastic way for real estate investors to build up their investment portfolios, and hard money loans are used quite often by BRRRR investors; the funds can be obtained quickly and allow you to leverage your available capital.

These loans are often called “bridge” loans, and are typically used for a portion of the purchase price and 100% of the rehab amount (on a reimbursement basis).

Do you have any upcoming BRRRR projects you need financing for?

If so, you can fill out our preliminary application at this link to get started today.