Step 4-The Art of funding your project
"First Punch-Bridge Loan/Second Punch-Rental Loan"
- IIn boxing and martial arts, beginners are first taught the most basic techniques. One of the first they learn is the one-two punch—and for good reason. This combination is far more effective than swinging wildly at an opponent. The idea of having a plan, rather than relying on chance, has been valued for thousands of years. The same principle applies to real estate investments.
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- "Master teach us the Bridge Loan"
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- The initial funding, or "first punch," is necessary to cover the purchase price of the property and the cost of renovations. Lenders are familiar with the math behind the BRRRR method, though they may use a different term for it. Most lenders will limit loans to a maximum of 70% of the improved property value. This is where having a trusted team member, specifically a mortgage broker, becomes essential. A mortgage broker is responsible for finding the right type of lender whose guidelines align with your qualifications.
- A mortgage broker works independently, meaning they are not tied to a single institution or individual for loan options. They can explore lenders on your behalf, typically falling into one of three categories. The first category is "hard money lenders," who are usually private individuals or small companies specializing in lending directly to real estate investors. These lenders can often fund a loan in just a few days. The second category is "private lenders," which are institutions that provide loans to real estate investors. While they resemble banks and credit unions, private lenders are usually not federally chartered. They typically fund loans within 30 days or less. The third category includes federally chartered banks and credit unions. These lenders generally have the strictest qualification requirements and the longest loan processing times, ranging from 30 to 45 days. Your mortgage broker will assess your qualifications, present loan options from these different types of lenders, and help you choose the best one for your needs.
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- "Master Teach us the Rental Loan"
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- The Rental Loan is the final step after the renovation is completed and the new tenants sign the leases. Once again your lenders understand the BRRRR Method math and will offer you a loan based on a percentage of the new "ARV" or improved property value. Your teammate the "Mortgage Broker" will secure lender offers based on a percentage of the new "ARV". The new loan will pay off the "Bridge Loan" and usually a surplus (many times matching your origional funds invested) at closing that will allow you to purchase your second project.
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- You may realize there is much more to learn about real estate financing. At this stage, the master can only award you your first stripe on your white belt. However, you’ve gained valuable knowledge here and can achieve the expertise of a black belt by collaborating with your teammate, the "Mortgage Broker."
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