Getting started in the real estate industry isn’t always the easiest task to undertake – even with all the right ideas and adequate research, sometimes a successful strategy implementation comes down to resources. If you’ve begun to dig into fix and flip strategies, chances are good that you’ve at least heard of the BRRRR method; that’s Buy, Rehab, Rent, Refinance, Repeat. A great strategy for real estate investors both experienced and new to the market. While elegant in its simplicity, the BRRRR method cannot function without the right resources. The most critical of these resources is hard money. Let’s take a look at how hard money works within the BRRRR model:
OK, What is Hard Money?
Before exploring its use within the BRRRR model, let’s answer the question “What is hard money?”. Hard money or a hard money loan is a short-term loan which an investor takes out against the value of a physical property. This type of loan is also referred to as an asset based loan – in the instance of real estate investing, that asset is typically the property to which the loan will be applied. In most cases, hard money is loaned out by a private lender and not a traditional loan institution like a bank.
Hard Money and BRRRR
So where does hard money fit into the BRRRR model? Hard money fits at the initiation of the BRRRR process, which is “Buy”, and may be used for the second step of “Rehab”. When examining the steps of the BRRRR model, new investors are often faced with the questions “How do I start?”. Most people do not have the resources to buy out of the in their pockets –and that is where hard money comes in.
In order to buy, you need an asset based loan, based on the value of the property in question. Without cash to purchase out of pocket, no BRRRR project can get started. Securing a loan provider to help you purchase your property is a critical pre-implementation step to any successful BRRRR project.
After securing your hard money loan and completing your buying process, you will begin your rehab or fixing stage. The funds which you secured via your asset based loan should provide you enough capital to help fund your rehab efforts.
The basic function of asset based loans in real estate is to provide you the capital necessary to keep your project soluble through the renting step. In the BRRRR method, the renting step is the first step designed to begin your repayment process to the hard money lender with which you’re working. Rehabbing your property to the point that it is ready to be occupied can cause significant financial strain, and renting is designed to generate largely passive income in order to relieve that strain.
Your asset based loan exits the BRRRR strategy when you refinance. Much like refinancing other loans, refinancing a hard money loan requires working with a traditional lender in order to restructure your debt into a long-term program. As you progress through the BRRRR model of real estate investing, it is important to remember that the repeat step is likely to carry with it the need for another asset based loan in order to secure your next property.
Looking for the right lender to begin your BRRRR journey? Talk to the professionals at EMCAP Lending today! Our asset based loan programs and experienced loan officers provide a curated approach to every project. To learn more about EMCAP Lending and how we can help you contact us today.