I want to use the BRRRR strategy, but I might not qualify for a mortgage. What's going on,
YouTube? Thank you for watching Mentorship Monday. My name is Matt. My company is called
The DeRosa Group, and this is our Mentorship Monday program. People email questions to
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email to HelpMe@DeRosaGroup.com with a good real estate question and it'll get answered
right here on this YouTube channel for everybody to learn from and will keep the conversation
going. So today's question comes in from Maurice, Maurice from Columbus, Ohio. Hi, Maurice from
Columbus, Ohio. Thank you for your Mentorship Monday question.
So Maurice says, "Hi, Matt. I've recently purchased my first rental property and I have
a goal of accumulating 10 buy and holds." Awesome, Maurice. You're going to get there,
buddy. I love the goal. Oh, the other thing is, you don't say buy when. Every time you
guys give a goal, you should always say, "I want to get here in this time." Not just to
me, but to the world. Say, "I have this goal and I'm going to get here in this amount of
time." A little sidebar, but that's okay, Maurice, I'll forgive you. "My question is,
after the 2008 market crash, banks tightened up on how they award financing." True. They
stopped doing no doc loans and they stopped doing stuff like 100% financing and stuff
like that. But you can still get financing on properties. But let's keep reading Maurice's
question.
"How do I then pull the 75% to 80% ARV to continue the BRRRR strategy when I'm concerned
that I might qualify for a mortgage the first time? What happened if the second time I attempt
to scale this thing and I'm not able to pursue my goal?" Okay, so here we go, A couple things.
Number one, and all you guys, not just you Maurice, but run your personal credit. Check
your credit score to see if you guys have the financial backing and the financial house
in order on your side to get a mortgage. So make sure you've got a credit score that's
above 680. Make sure you don't have any foreclosures or bankruptcies or anything major on your
personal credit that's going to prevent the bank from giving you a loan. You are going
to have to have earned income, a W2 income. When you're first getting started, you're
going to have to have a W2 somewhere on your side for the bank to be willing to agree to
give you a mortgage on the property.
Or you can do what's called an asset based loan. There are asset based lenders on BiggerPockets
that are higher interest rates that are, say, 6%, 7%, 8%, maybe 8%, 9% that you might be
able to reach out to you. One that I know of, and I'm not endorsing them, I just know
that they do it, is Lima One Capital. You could reach out to them, and there's a bunch
of others, including you could LendingTree, try Better Mortgage. Look on BiggerPockets
again under the vendors section. There's a lot of vendors out there that I know will
give you guys an asset based loan. The best mortgage you're going to get at a best interest
rate is going to be from a small community bank. They're going to ask for a reasonable
credit score, earned income, some cash in the bank, and they're going to want you to
keep the deposits from the property with them.
They are going to give you interest rates in the 4% to 5% range where are the other
companies that I mentioned might be literally double those numbers. And so you've got to
decide what you're qualified for, Maurice, but there are options. I would try and go
to a small community bank first. Not an enormous bank that has branches all over the country
or a stadium with their name. If the bank has a stadium with their name on it, they're
too big. You want to go for a local bank that has maybe three to five branches around the
property that you're looking to buy. That's the bank that's going to give you the best
deal and is likely going to give you a fairly easy approval, but they're also going to require
credit. If you can't get credit, if you don't have reasonable credit, then go to one of
those asset based lenders.
Second thing, Maurice, you're saying that, what if you qualify for the first loan on
the BRRRR strategy, but not the second? Likely, you're going to use private money that you
might have attained through the principles that I talk about in my book, Raising Private
Capital. I'll put my hand on top of it. There it is right there. You could use that strategy
by using private lenders, you could use hard money. But likely a small community bank or
any other kind of bank is not going to finance the acquisition and construction side of your
BRRRR deal. The point of the BRRRR strategy, just so you guys know, is to buy a property
that's dilapidated, that needs some work, then to do that work. Bring out the value
of the property through renovations, through construction, through bringing the property
up to the market. That's the first R.
The second R is rent out. So you start, you monetize the work that you did by putting
a tenant in the property to enjoy the new kitchens, the new bathrooms, and the replaced
roof and the new windows and the work that you've done to the property to bring out that
value. You pull the value out through a rental. Then you refinance, you harvest the value
created by a refinance. Now, if you're using a small community bank on the first leg of
that, you're likely not going to be able to pull out much cash during the refinance if
you use the same bank when you refinance it. You're likely going to want to use a first
lender, a private lender, a hard money lender on the purchase of the property and the construction
of the property, and then when you refinance, you use a stable longterm interest rate bank
that's over here. So these two different lenders.
So you don't have to worry about qualifying for one and then not qualifying for the second,
because the first lender, a hard money lender or a private money lender, is likely not going
to have the same qualification processes that a bank will. So next thing, Maurice, you talk
about continuing the process on and on. This is why you want to buy these properties in
an LLC, because the debt, the loan once you refinance, it will show up on the LLC's books,
not your books. So you don't want to buy the property in your personal name. I don't recommend
buying any real estate in your personal name. We've got a ton of videos out there on LLCs.
So you want to hold the property in an LLC from day one when you buy it. Buy it in the
LLC, renovate it, refinance it in the name of the LLC, and it won't show up on your personal
credit score as a mortgage that you have personally in your name. They are going to make you personally
guarantee it, but that's different than having the loan in your name on your credit report.
A lot we covered today, Maurice, I hope this was a value to you, and I hope all you guys
enjoyed it too. Don't forget, like I said, email your questions to HelpMe@DeRosaGroup.com,
and to subscribe to this channel. We'd love to get you guys on as subscribers so you can
notifications of all the cool stuff that we do, like property tours in the field and interviews
with interesting real estate folks that have something that they want to say to you guys.
So cool. Thank you for watching. Thank you again, Maurice, for your question. Have a
great and profitable week, guys.