How to BRRR with Hard Money Loans

Are you looking to acquire more rental properties? If you answered ‘Yes’, then this guide is for you. While traditional loans are available for real estate investors, those loans look at your credit score and W-2 to determine if you qualify. Over time as your portfolio grows, you’ll find it harder and harder to get a traditional loan.

This is where hard money loans come in. Hard money loans are based on the income your property produces. Most people think that hard money loans are short-term interest only terms due in 12 months. But we already have a long-term rental loan program in place. This benefits investors who need loans with 15-20 year terms.

There are downsides to our long-term rental loan program though. First, if you’re looking to close on a property quickly, then this loan isn’t for you. Our loans take some time to close, so you’re better off finding a different product.

Second, your property needs to be rent ready by day one to get approved for the loan. If you need to do rehab work, then what we can actually do is to buy that property using a short-term bridge loan. This allows you to buy a property for a very low price.

Then after doing the rehab work and holding on to it for a little bit, you can later do a cash-out refinance to get back most of your money. This is what we call the BRRR method – Buy, Renovate, Refinance, and Repeat.

Here’s a case study of a property deal to help you compute whether you’d be able to use a hard money loan to do the BRRR on this property. Just take note that numbers here are something you’d find in Fresno and the East Coast, but not in the Bay Area.

Let’s say that you’re buying a single-family home with these details:

Purchase Price:	$200,000
After-Repair Value (ARV):	$300,000
Rehab Costs:	$30,000

Now, after applying for a hard money bridge loan, this is what you got:

Loan-to-Value (LTV): 80%	80%
Interest Rate:	10%
Origination Fee:	1% of loan amount
Processing Fee:	$1,500

Luckily, my channel viewers get a discount on the processing fee, which will be $999 instead.

So given all of that, how much do you need to fund this deal?

Loan Amount:	$160,000
Down Payment:	$40,000
Rehab Costs:	$30,000
Origination Fee:	$1,600
Interest for 6 months:	$8,000
Total Cash in the Deal:	$79,600

You’re going to be putting out almost $80,000 to get this property and make it rental ready. After that, you’d want to do a cash out refinance to get your money back.

Let’s say you want to do a cash out refinance of 75%. The next thing we need to do is compute what would be your debt service coverage ratio (DSCR) as this will determine whether you’d qualify and what interest rate you’d get. Since you’re aiming for 75% LTV, your DSCR needs to hit 1.15 points to qualify based on our rate sheet. Check out my video to get a glimpse of the rate sheet we use.

The lowest credit score we accept for this program is 660. The higher your credit score, the better rates you’ll get.

But let’s assume your credit score here is 760. With 75% LTV, the base rate you’d get is 5.625% for a 30-year fixed loan.

Since you’re doing a cash out refinance, 0.5% is added to your rate. Next is to determine which prepayment penalty you’re willing to accept. Our prepayment penalties work on a step-down method.

If your loan has a 5 year PPP, this would mean that if you sell the property on year one, you have to pay 5% of the loan amount. If you sell in year two, you’ll pay 4% and so forth.

Depending on the prepayment penalty, your base rate could decrease or increase. For people who don’t like prepayment penalties, the lowest we have is a 1 year PPP where you’ll pay 1% of the loan amount if you sell on year one. The downside is that it increases your yearly rate by 0.5%.

If you want to take the 5 year PPP with a cash out refinance for a 30-year fixed loan with 75% LTV, here is what your rate would be:

Base Rate:	5.625
Cash Out:	0.5
5 Year PPP:	-0.25
Net Rate:	5.875

For most of you used to getting traditional loans, you might think this rate is very high, especially considering the historically low interest rates we have now. But remember that this program is for those who can’t qualify to get a traditional loan. Had they gone to a private lender, they would end up getting charged 10-12% in interest rates.

Going back to our case study. Let’s move now to computing for your monthly mortgage:

Loan Amount:	$225,000 or 75% of $300,000 ARV
Rent:	$3000
No. of Payment Periods:	12 months per year x 30 years
Net Rate:	5.875

To compute your mortgage, just head over to Excel and follow this formula:

=-pmt(net rate/100/12, the no. of periods, loan amount)

You should come up with this:

Mortgage (Principal & Interest): $1,330.96

Next, we have to add our other expenses to compute your PITIA or Principal, Interest, Taxes, Insurance, Association Dues.

Insurance:	$700 annually or $58.33 monthly
Tax:	$4,800 annually or $400 monthly
Association Dues:	$0
Total PITIA:	$1,789. 29

To compute your DSCR, just divide your rent by your PITIA.

DSCR: $1.68

Great, your DSCR is way above the 1.15 needed based on our rate sheet. This gives you a DSCR bonus deducting 0.125 from your net rate.

New Net Rate:	5.75
New Mortgage:	$1,313.04

Your mortgage now drops by almost $20. Overall this is a good deal, but what if your rent was lower?

If rent was instead $2,000, your DSCR would go down to 1.12, this is below the 1.15 needed to qualify.

In this case, you’d need to increase rent by a little bit, let’s say rent is $2,100. Your DSCR becomes 1.17, enough to qualify for this loan.

This case study is a great example for you to check if a deal makes sense before you execute. Looking at it, your total money invested in this property amounts to $239,600.

Loan Amount:	$160,000
Total Cash Out:	$79,600
Sum:	$239,600

With 75% LTV for your cash out refinance, you’ll only be getting back $225,000. But look at it this way, you’ll only have $14,600 stuck in the deal versus the $79,600 you initially put in.

Doing the BRRR method with hard money loans is a great strategy to grow a huge portfolio of rental properties and accumulate your wealth. Let me know if you have questions about hard money loans and I’ll be sure to help.