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BRRR Loans: Bridge Loan to DSCR Rental Loan Growth Strategy

It takes money to make money, but it doesn't need to be your money...

BRRR Is All About Optimizing Cash On Cash Returns

The BRRR method of real estate investing is a powerful strategy for wealth creation. BRRR stands for Buy, Rehab, Rent, Refinance.

Here's how traditional BRRR works:

  1. Find a property below market value with a large spread between AS IS value and ARV
  2. Buy the property in cash
  3. Renovate the property cost effectively and maximize ARV
  4. Rent the property
  5. Refinance the property to pull out as much of your cash as possible

It's not uncommon for experienced BRRR investors to pull out more money than they invested into the project. Here's an example of a BRR investor and OfferMarket Capital client:

  • Purchase price: $285,000
  • Rehab: $83,000
  • Total invested capital: $368,000
  • ARV: $570,000
  • Rental loan (75% LTV): $377,000
  • Cash remaining in deal: $0 (+$9,000 cash gain)
  • Monthly rental income: $3,700
  • Monthly rental FCF: $1,200

Now this sounds great, but there's one major problem...

What if you don't have enough cash to buy a house and rehab it? Or what if you want to do multiple deals at a time? It takes money to make money and very few people have the luxury of endless cash to fund real estate deals.

Take the example above: $368,000 is a lot of money to tie up for 6+ months. While this turned out to be a great investment, there were certainly opportunity costs -- missed opportunities for additional BRRR projects or other investments with similar returns.

Bridge Loans

That's where bridge loans come into play. A bridge loan is a short term loan available to experienced real estate investors that funds up to 90% of your purchase price and 100% of your rehab budget. Bridge loans are backed by the real estate you are purchasing/rehabbing and don't require W2 salaried employment or tax returns. Using bridge loans, you can conduct one or more BRRR projects without tying up unnecessarily large amounts of your personal capital. Bridge loans are available from private lenders, commonly referred to as hard money lenders.

Bridge loan terms you can expect:

  • Interest rate: see Fix & Flip Bridge Loan Index below
  • Loan term: 6 - 18 month
  • Loan-to-ARV: 75%
  • Origination fee: 1 to 4 points (1%-4% of the loan amount)

DSCR Rental Loans

DSCR stands for debt service coverage ratio. This metric takes your net operating income and divides it by your mortgage costs. Lenders will provide cash out refi loans to real estate investors based on DSCR.

Rental loan terms you can expect:

  • Interest rate: see [DSCR Loan Index] below
  • Loan type: 30 year fixed rate
  • LTV: 75%
  • Minimum DSCR: 1.2
  • Origination fee: 1 to 3 points (1%-3% of the loan amount)

Low Cost of Capital

The name of the game is having the lowest possible cost of capital. Financing BRRR projects with bridge loans will add fees that you wouldn't need to account for if you're using your own cash (aside from the opportunity cost).

It continues to amaze us how uncompetitive most private lenders are. Across our marketplace and professional network, we see lenders offering upwards of 12% and 3 points for bridge loans, and 2 or 3 points on rental loans. High interest rates and origination fees will dramatically impact your profits. It's important to shop for the best rates and make lenders compete for your business.

How many more units will you add to your portfolio simply by using the BRRR Loan Strategy?

Disclosure: OfferMarket operates as a low-cost private lender through our OfferMarket Capital division.

Private Lender Guide

Interested in learning more about private lenders? Read The Ultimate Guide To Private Lenders.

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