3 Types of Loans to Maximize the BRRRR Method
The road to a lucrative and rewarding real estate investment empire is typically paved with alternative sources of financing.
From the initial investment in a distressed property to all the costs involved, from renovation to the sale, finding the best type of investment property loan can make or break the deal.
Many investors use the BRRRR method to capitalize on rental income and equity to invest in future properties. If that is best for your investment plans, several loan options that work best with the BRRRR method are available.
How the BRRRR Method Works: A Primer
Like a standard fix and flip transaction, the BRRRR method starts with a distressed property with rehab and resale potential. First, it must understand how the multi-step BRRRR method works before considering available loan options.
- Buy: The first step in the BRRRR method is buying a distressed property with rehab potential.
- Rehab: Renovate and rehab the property to bring it up to code and make it attractive to prospective renters. Depending on the property's condition, this can mean anything from investing in new appliances and cosmetic improvements to putting in a new kitchen and bathroom.
- Rent: Find suitable and reliable tenants to rent the property.
- Refinance: Use the equity to buy another property.
- Repeat: Start the process all over again with the new property!
3 Types of Loans and Financing Options for BRRRR Investments
The old adage “it takes money to make money” has never been more accurate than in the case of real estate in general and the BRRRR method in particular. Yet, securing the necessary cash flow on tight and often uncompromising timelines is often the biggest challenge for real estate investors. Choosing the right loan type to mitigate risks in BRRRR is also very important.
Investing in distressed properties can be incredibly lucrative. Still, the higher level of risk can also make it more challenging to secure traditional financing for purchasing and rehabbing properties.
That’s why many investors turn to loans that are specifically designed for real estate investors and how they do business. Here are a few of these alternative real estate loans that work best with a BRRRR property investment.
Flip and Fix/Bridge Loan
Although the BRRRR method doesn’t involve actually flipping the property once it’s renovated, a fix and flip, or bridge loan, is a reliable source of capital to help meet the costs of renovating and bringing the property up to code to command the best rent price possible.
Also known as gap loans, fix and flip and bridge loans are designed to offer a short-term source of cash flow for real estate investors to pay for property purchases and renovations. The terms for a bridge loan typically range from 12 to 24 months.
Bridge loans are perfect for investors who need quick access to cash to purchase an investment property or complete rehab to get the property back on the market as quickly as possible. The closing period can be as short as a few days, and investors don’t have to leverage their own capital to purchase and renovate.
Hard money loan
Securing capital from traditional lenders can be difficult and/or next to impossible for real estate investments, particularly when distressed properties are involved. From strict loan terms to drawn-out approval processes, the BRRRR method's success often hinges on quick cash access.
Hard money loans are asset-based loans, where the funds are secured against the property instead of the borrower’s personal assets and finances.
Like bridge loans, hard money loans are short-term loans that provide investors timely access to capital with smoother and much faster closing than traditional lenders. Hard money loans are an alternative to traditional mortgages for investors who can’t afford to wait for the traditional mortgage process and don’t want to leverage personal assets and finances to secure investment capital.
Cash-out refinance
A cash-out refinance allows you to use the equity on your property to access the cash to buy the next property in your BRRRR pipeline. Unlike a home equity line or traditional line of credit, a cash-out refinance is not a second mortgage. It replaces the original mortgage with a new loan that includes the remaining balance plus the equity borrowed.
If interest rates are lower during a cash-out refinance, you may also benefit from a lower interest rate than the original loan.
The amount of a cash-out refinance equals the difference between the balance on the original fix and flip or bridge loan and the new long-term rental loan.
Final thoughts
Real estate investment strategies like the BRRRR method are often time-sensitive. Success can come down to securing the right property and getting it on the rental market as quickly as possible.
Alternative financing options like bridge loans, hard money loans, and cash-out refinancing can provide investors with the edge they need to beat out the competition.