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What I’ve noticed is that a lot of investors will focus solely on fix & flip as their strategy for making money. They rarely save houses for themselves as a source of long-term investing, which in my experience, is the wrong way to go about it. There are so many benefits to having rental properties, and thanks to things like BRRR, it’s much easier to create a profitable rental property strategy without much of a down payment. But how much money do you need to get a BRRR, and what can you do with it?
The answer is: it depends on the deal. Start with as little money as you can, but be sure that you still have something left in your reserves. It’s better for your business interests for you to come to the table with as little capital as possible. However, mitigating factors (like credit scores) may require you to add more money down. Consider $5,000 – $10,000 to be a safe range to be in with your down payment.
Many investors will say they can’t buy a rental property because they can’t qualify for the loan due to income requirements. BRRR changes all of that and opens the door for many more investors to rehab properties.
But let’s talk about what a BRRR loan is, how you can get one, and what to do if you don’t qualify.
What Does BRRR Stand For?
First, let me clear up what we’re talking about here. BRRR (pronounced “burr”) stands for:
Buying a property
Renovating the property
Renting the property
Refinancing the loan
A BRRR loan is a specific loan you get from a hard money or private lender that goes towards rehabbing a property to create a stream of income by renting it out.
What’s excellent about BRRR lenders is that they rarely care about your debt to income ratio. This makes it much easier to get than a traditional mortgage.
That said, BRRR loans should be used as short-term loans. The lenders giving it to you will be offering much higher interest rates and shorter payment deadlines than a traditional lender would. Consider them a stopgap between what capital you have available and what you’ll need to finance through a mortgage.
How to Get a BRRR Loan
To get a BRRR, you’ll need to go to a hard money lender for the loan. The challenge is finding a lender who will allow you to include rehab costs in the loan, as many will only put up the purchase cost for the property. Try to make sure your loan consists of the purchase cost and as much for repairs as you can get so that you’re coming to the table with as little capital as possible.
One thing that is critical to getting approved for a BRRR is that you’ll need to be pre-qualified for refinancing from a traditional lender. Hard money lenders want in and out of your loan as quickly as possible, and few will be comfortable lending you money without knowing they’re guaranteed to get paid back ASAP.
Call around to businesses like mortgage brokers or credit unions and ask if they refinance hard money or private loans and any seasoning requirements.
What is Seasoning?
“Seasoning” means: Does the lender require you to own the property for a certain amount of time before they will approve a refinance? There’s no set rule for this, so it’s crucial you know ahead of time so you can budget accordingly. Some lenders may want a year, some only a few months.
How Much Money Do You Need to BRRR?
We’ll discuss what to do if you can’t get prequalified further down the article, but for now, let’s just assume you’re good to go. You’ve found a property that has the potential for generating rental income, but it needs a little work. You’ve gotten pre-qualified from a traditional lender and are approved for a BRRR from a hard money lender. What next?
Purchase the Property
Not much else to say here. Get everything transferred over to your name and use your BRRR loan to close the deal. You may need to put up closing costs, and it depends on what your hard money lender allowed for your loan to cover.
Renovate the Property
Remember that the goal here is to renovate the property so that you can rent it out. This isn’t for fix & flips or wholesaling, so don’t treat your new investment as you would those. You’ll ultimately be responsible for the maintenance and repairs your property needs while renters live there. Make sure that your renovations save you money and effort for the long haul.
Get it Rented
Now that the property is through renovations, it’s time to get your first renter. Try to get this done as quickly as you can to move onto the next step. Be sure to get your lease agreement in writing that shows how much rent is to be paid and when (you’ll need this later).
Get Your BRRR Refinanced
Now is the time to take your long-term financing company up on the pre-qualification offer you were approved for. Take your rental agreements that show what your new source of income will be so that you can avoid the income gap that may have stopped you from getting qualified for a mortgage in the first place.
The lender will do what is called a “rate and term refinance.” What this means is that they’ll refinance the BRRR loan on the property so that you’re no longer on the hook for a six-month loan with a 12% interest rate. Now you’ll be the owner of a 30-year market-rate interest mortgage.
Pay Off Your BRRR
The sooner you can get this done, the better established your relationship with the hard money lender will be. This can come in handy when you need more money for new properties, even if they aren’t rental properties.
What You’ll Need to Qualify for a BRRR
Unfortunately, BRRR doesn’t work for everyone. While hard money lenders are much more lenient on the debt-to-income ratio for BRRRs, that doesn’t mean that everyone will be approved.
In addition to being pre-qualified for refinancing, you’ll also need to have excellent credit. You’ll need to show your lender that you’re responsible with debt and that you can reliably pay back their loan.
What If I Don’t Qualify for a BRRR Loan?
If your credit score isn’t up to par, that doesn’t mean that you’re entirely out of the real estate investment game. If having rental properties was part of your original plan, that can still happen, but it just may take longer than expected.
If you can’t qualify, there are several ways you can build your real estate portfolio while working on improving your credit score. A few different options you can look into are:
- Fix & Flipping
- Joint Ventures/Partnerships
By exploring one of these options, you can still get in the real estate game while also working your way up to becoming qualified for the refinancing step in a BRRR loan.
You can also avoid jumping through the hoops to qualify altogether if you have enough capital to purchase the property yourself. But if you don’t have that capital, I’d recommend you start with wholesaling or fix & flips first.
Hopefully, this helped clear up what a BRRR is and what you’ll need to bring to the table to secure a BRRR loan for your business. If you’ve got any tips for how to navigate getting a BRRR loan, leave a comment and let us know.