3 Types of Loans to Maximize the BRRRR Method
The BRRRR method—Buy, Rehab, Rent, Refinance, Repeat—is a popular real estate investment strategy designed to maximize returns by continually recycling capital. To make the most out of this strategy, choosing the right type of loan for each stage is crucial. Here are three types of loans that can help you maximize the BRRRR method:
1. Hard Money Loans
Hard money loans are short-term loans provided by private lenders. They are typically used for purchasing and rehabbing properties.
Advantages:
- Fast Approval: Hard money loans can be approved and funded quickly, often within a week. This speed is crucial for investors looking to move quickly on a good deal.
- Flexible Terms: These loans are based more on the property's value than the borrower's creditworthiness, allowing investors with less-than-perfect credit to secure financing.
- High Loan-to-Value (LTV) Ratio: Many hard money lenders offer up to 70-75% of the after-repair value (ARV) of the property, providing ample funds for both purchase and renovation.
Best Use: Utilize hard money loans to acquire and rehab properties quickly, allowing you to move through the first two steps of the BRRRR method efficiently.
2. Rehabilitation Loans
Rehabilitation loans, such as the FHA 203(k) or Fannie Mae’s HomeStyle Renovation loan, are designed specifically for homebuyers and investors who want to purchase and renovate a property with a single mortgage.
Advantages:
- Single Loan for Purchase and Rehab: These loans combine the purchase price and renovation costs into one mortgage, simplifying the financing process.
- Lower Interest Rates: Rehabilitation loans typically offer lower interest rates compared to hard money loans.
- Longer Repayment Terms: These loans come with longer repayment periods, making monthly payments more manageable.
Best Use: Opt for rehabilitation loans if you prefer lower interest rates and a single, simplified financing option for both purchasing and renovating a property.
3. Cash-Out Refinance Loans
A cash-out refinance loan allows you to refinance your property for more than the existing mortgage balance, taking the difference in cash. This loan is critical for the “Refinance” step of the BRRRR method.
Advantages:
- Access to Equity: Cash-out refinancing lets you tap into the increased equity of your rehabbed property, providing funds for your next investment.
- Lower Interest Rates: Refinancing usually offers lower interest rates compared to hard money or bridge loans.
- Improved Loan Terms: Refinancing can improve your loan terms, such as extending the repayment period or switching from an adjustable to a fixed-rate mortgage.
Best Use: Use cash-out refinance loans to pull out equity from your rehabbed, rented property, providing the capital needed to repeat the BRRRR process with a new investment.
Conclusion
Maximizing the BRRRR method requires strategic use of various loan types at different stages of the process. Hard money loans offer fast, flexible financing for purchasing and rehabbing properties. Rehabilitation loans provide a streamlined option for buying and renovating with one mortgage. Cash-out refinance loans enable you to unlock the equity in your property to fund further investments. By leveraging these loans effectively, you can enhance your returns and grow your real estate portfolio more rapidly.
Ready to maximize your BRRRR strategy? Contact Temple View today to explore the best financing options tailored to your investment needs.