Part 8 of 15: The Beginner’s Guide to the BRRRR Method Funding the Buy Phase: Leveraging Hard Money, Private Money, and HELOCs

Part 8 of 15: The Beginner’s Guide to the BRRRR MethodMastering the "Buy" Phase: Your Guide to Short-Term BRRRR Financing

Welcome to Part 8 of The Beginner's Guide to the BRRRR Method series! This installment is crucial, focusing on Funding the Buy Phase: Leveraging Hard Money, Private Money, and HELOCs. Since the entire strategy relies on acquiring distressed properties at a deep discount, investors must become masters of short-term financing to bridge the gap until permanent capital is secured in the Refinance phase.

If you plan to use the BRRRR method, you cannot rely on conventional, long-term financing for the purchase and rehab of these distressed assets.

The Catch-22: Why Conventional Banks Say No

Traditional lenders offering 30-year mortgages will refuse to fund the purchase of distressed properties for three core reasons:

Property Condition Requirements: Conventional lenders require properties to be in "livable condition," meaning they must have a solid roof, functioning plumbing and electrical systems, and working HVAC and appliances. Distressed BRRRR properties, by definition, often have major issues like damaged roofs needing replacement, outdated or broken plumbing, electrical systems not up to code, or structural issues, making them non-habitable in their current state. The result is a catch-22: lenders won't lend until the property is fixed up, but you need money to fix it up.
Appraisal Value: Conventional lenders base the loan amount on the current appraised value. Since a distressed property appraises low (e.g., $120,000), a conventional lender might only offer 80% of that value ($96,000). If the purchase price is $100,000, the loan amount doesn't work for the transaction.
Risk Profile: Banks want stable, predictable loans. They view a distressed property during renovation as a high-risk proposition, unlike a long-term owner-occupant or stabilized rental.

The Solution is short-term financing that will lend on distressed properties, base the loan amount on the After Repair Value (ARV), close quickly (2-3 weeks, not 45 days), understands the renovation timeline, and expects payoff in 6–12 months.

1. Hard Money Loans (HMLs): The Accessible Start

Hard Money Loans (HMLs) are short-term loans from specialized lenders who focus on the property's potential value (ARV), not the borrower's personal income. HMLs are typically the most common option for an investor's first 1-3 BRRRR deals because they are the easiest to access and close quickly, often within 2–3 weeks from application.

How They Work and What They Cost

HMLs generally lend up to 70–75% of the After Repair Value (ARV). They may offer structures covering 90-100% of the purchase price, plus potentially 75-100% of rehab costs.

While accessible, HMLs are expensive:

Interest Rate: Typically 10–15% annually, usually paid as interest-only monthly payments.
Points: An upfront origination fee ranging from 2–5 points (1 point = 1% of the loan amount).
Other Fees: Common additional fees include processing ($500-$1,000), underwriting ($300-$500), appraisal ($400-$600), and closing/title fees ($800-$1,500).
Total Cost: Due to the combination of high interest, points, and other fees, the effective annual rate for an HML can reach ~24%.

Lenders can be found through local Real Estate Investment Associations (REIAs), Google searches, the BiggerPockets Lender Directory, or national players like Lima One Capital and Kiavi.

2. Private Money Loans: The Cheapest Option

Private money is capital borrowed from individuals (not institutions)—including friends, family, colleagues, or other investors. For experienced investors, private money becomes the cheapest and preferred source of short-term capital.

Key Advantages and Legal Requirements

Private money offers significant savings compared to hard money:

Cost: Private money typically costs 6–10% interest annually with usually zero points. For example, a $100,000 loan over 6 months might cost $4,000 in interest with private money versus $9,000 or more with hard money.
Flexibility: Terms (typically 12–24 months) are relationship-based and often more flexible, including payment structures (interest-only monthly or accrued interest/lump sum at payoff).
Sourcing: Start with your inner circle (close family, extended family, close friends), then expand to your professional network and the real estate investment community. Target those with retirement accounts or savings accounts earning low returns (1-3%).

Legal Documentation is Critical: Even when borrowing from close family, investors must secure the loan legally to protect both parties. This requires having an attorney draft:

Promissory Note: The legal promise to repay the principal amount, interest rate, payment terms, and maturity date.
Mortgage or Deed of Trust: This secures the loan with the property as collateral and must be recorded with the county recorder's office, granting the lender foreclosure rights if you default.

3. HELOCs: The Strategic Tool for Homeowners

If an investor owns a primary residence with significant equity (20% or more) and has good credit (680+), a Home Equity Line of Credit (HELOC) can be a low-cost and fast source of capital for BRRRR deals.

How HELOCs Operate

A HELOC works like a revolving line of credit secured by your primary home. You only pay interest on the amount drawn, and the funds can be accessed quickly if the HELOC is already established.

Cost: HELOCs typically have a low variable interest rate, currently around 7–9%, and usually zero points or origination fees, offering substantial savings compared to hard money.
Risk: It is critical to understand that a HELOC is secured by the investor's primary residence. If the investor fails to repay the BRRRR loan, the lender can foreclose on the home. Furthermore, HELOC rates are variable, meaning the monthly interest payment can increase if the Prime Rate increases.
Qualification: Requires sufficient home equity, good credit (720+ is ideal), verifiable income, and a manageable Debt-to-Income (DTI) ratio (usually below 43-50%).

4. Other Creative Financing Strategies

For investors with specialized needs or advanced experience, several other strategies exist:

Financing Strategy

Description

Cost/Risk

Cash

Using liquid savings to fund 100% of the deal.

Zero financing cost, but ties up all capital and limits ability to scale.

Equity Partnerships

A partner provides all the capital, and the investor provides the work/expertise, splitting ownership (e.g., 50/50).

No personal capital needed, but you give up ownership percentage and future profits forever (unless a buyout is arranged).

Seller Financing

The motivated seller acts as the bank, holding the mortgage, with the investor making payments directly to them.

Flexible terms, but rare and usually requires a balloon payment after a short term (3-5 years).

Cash-Out Refinance

Pulling equity out of existing, stabilized rental properties to fund the next deal.

Lower-cost long-term fixed rate, ideal for scaling after the first few deals.

Combining Multiple Sources

Using Hard Money, HELOC, and/or Private Money to finance a complex deal (e.g., HML for the purchase, HELOC for the rehab).

Recommended for experienced investors due to increased complexity and coordination required for multiple payoffs.

Self-Directed IRA/401(k)

Using retirement funds to purchase real estate.

Tax-advantaged growth, but complex IRS rules apply, and the investor cannot personally work on the property.

The Financing Strategy and Payback

Your financing strategy should evolve with your experience. Investors should start with the most accessible options (Hard Money or HELOC) and progress to cheaper, relationship-based options (Private Money) as they build a solid track record.

The Refinance Payback Process

The short-term financing must be paid off by the proceeds of the new, long-term mortgage secured during the Refinance phase.

Timeline: After the renovation (Months 1-4) and tenant placement (Month 5), you must wait for the lender's required seasoning period (often 6 months) to complete (Months 5-11).
Closing: When the refinance closes (Month 12), the new long-term loan proceeds ($135,000 on a $180,000 ARV) are sent to the title company.
Distribution: The title company immediately distributes funds to pay off the short-term lenders (e.g., paying off the Hard Money principal of $100,000 plus $6,000 in interest). Any remaining funds are returned to the investor as recovered capital.

Crucial Warning: If the property appraises low and the refinance proceeds are insufficient to cover the short-term debts, the investor must bring cash to closing, negotiate an extension with the short-term lenders (which involves an expensive extension fee of 1-2% of the loan amount), or sell the property as a last resort.

Remember, Hard Money is temporary, but mandatory for the purchase of distressed assets. Your financing needs and sophistication should grow with your experience. Financing is merely a tool that enables wealth building; choose the tool that minimizes cost and risk while maximizing speed.