How to BRRRR With Seller Financing

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Everybody loves the BRRRR Strategy—Buy, Renovate, Rent, Refinance, Repeat—because it allows investors to recycle their cash and repeat the process over and over again without needing additional capital. But can you do the BRRRR strategy with Seller financing? Yes you can! In today’s episode, Jeff shares two simple frameworks for using Seller financing to BRRRR properties and build your rental portfolio. Plus, Jeff also shares one advanced bonus framework using the principles of Supercharged Seller Financing.

Episode Transcript

It’s one of the most popular acronyms in real estate investing today the good old BRRRR: buy, renovate, rent, refinance and repeat. And so sometimes people wonder, gosh, is there a role for seller financing in a BRRRR? And good news for you, there is; there’s a couple straightforward ways and one more sophisticated way and I’m going to share them with you in today’s episode. So let’s cue that theme song, I will start explaining.

Welcome to Racking Up Rentals, a show about how regular people, those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans, nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented deal makers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media, this show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.

Thank you for joining me for another episode of Racking Up Rentals. Show Notes for this episode are at thoughtfulre.com/e105. E105. Please do us a big favor by hitting that subscribe button in your podcast app; might look like a plus sign these days. But please go ahead and follow and subscribe to this show. It really helps you make sure you don’t miss out on any awesome episodes, but also helps other fellow thoughtful real estate entrepreneurs to find the show. Onward with today’s episode.

And I’m excited to chat with you about the bur and how to BRRRR with seller financing. So let’s just back up for just a quick second. And let’s make sure everybody’s on the same page about what BRRRR stands for. So BRRRR stands for B R R R R: buy, renovate, rent, refinance, and repeat. And what this is, is an overall process and kind of a framework a strategy for being able to cycle your investment dollars through multiple deals. So really what happens here, if I can paraphrase BRRRR in sort of more plain English, it’s sort of like this: buy something, make it better, and thus worth more than you paid for it. And then extract the equity that you just created. So you get your cash back, and you could go and do it again, somewhere else. So it’s sort of a sustainable, repeatable, real estate investing process that helps you add to your portfolio over and over and over again. And it was sort of a popularized expression a few years ago.

Although the idea itself has been around for a long time, it was popularized in this very catchy and easy to remember acronym of BRRRR in the last few years. And so a lot of people are really sort of attached to this idea and want to do it because it allows them to cycle their cash investment, get it back and reuse it and do it again. So how does it normally work? Well, to put it simply from the financing perspective, while there’s lots of different ways that it could work, generally speaking, people will buy their property using a hard money loan, the hard money loan will also be used to help fund any renovations. And then upon the need to refinance after it’s all renovated and rented up and everything, then the second loan is a bank loan. So there’s usually often two loans involved: hard money at the beginning, and then a bank loan for the long term sustainable type of financing. And some people might buy initially with cash and then refinance with the bank. But that’s generally how it tends to work.

So it begs the question, can seller financing work in a BRRRR strategy, can it BRRRR scenario? And the answer is yes, it absolutely can. So then the next question, of course, is, well, if it can, how does that work? And I’m going to share with you today two frameworks, and then I’m going to give you just a little teaser of a third one, as well.

But let’s step back for just a quick second. And let’s just ask, Where does financing and the need for financing show up in the BRRRR strategy? It really shows up in three spots. You have to buy the property, sometimes there’s financing involved with that, there often is you need to renovate the property. Oftentimes there’s financing involved with that. And then thirdly, there is the long term after renovation refinance that puts affordable money on the properties So that you have a cash flowing asset moving forward. So there’s really those three spots, you got to buy the property, renovate it, and then refinance it at the end.

Now, as with all things seller financing, at least the way we do it here at the Thoughtful Real Estate Entrepreneur, seller financing is not necessarily about making sure that you never have to get $1 out of your wallet in order to buy a property. And so we’re not about fancy zero down strategies, necessarily, some deals might end up being zero down. But that’s not our objective. Our objective is to get amazing loans directly from the seller with great ease so that we’re not out shopping for a loan separately and being subjected to the lending requirements and the underwriting guidelines and the limitations and things like that we’ve got one stop shopping, we’re getting a loan at the same place, we’re getting our property. That’s our objective.

So we know in our strategy for doing seller financing, we of course have to have some cash available. So as I share with you my thoughts about different frameworks you can use for using seller financing in the BRRRR method, please know that this isn’t about preventing you from needing to have any cash, I absolutely recommend that you have some cash available to you. And or you also have ways to get access to cash and other ways, whether that’s other personal lines of credit, or even credit cards where you can get cash out or whatever it might be. Just keep in mind, you will just like most any project need to have some of your own money to involve with these. So I’m going to give you two core frameworks. And then we’ll talk about a third teaser one.

So the first of the two core frameworks for using seller financing and the BRRRR strategy is with what I would just simply call short term seller financing, right? So you go out and you find a property that you want to buy and you would like to hold on to it over the long term as a rental property and you want to run the BRRRR method, right you see this property’s got some opportunity to have value added to it, it could be better, it could be worth more with some improvements in renovations and improvements in your management, you rent it at market rents, and you want to hold on to it after that. So you go and you find a property that you really like for this model, and you negotiate a reasonably low down payment, short term seller financing loan. Now, I’m always personally shooting for the longest possible seller financing loan I can get my hands on but if you can only in this case, because it is what works best for the seller, negotiate a short term seller financing loan, you go ahead and use to secure that short term seller financing loan.

Now how is this better than using hard money loans? Well, first of all, you’re almost certainly not going to be paying any points or other types of loan fees on a seller financing loan like you would on a hard money loan, the interest rate is likely to be quite a bit better as well, you like all seller financing loans have some say in the terms that you are negotiating and agreeing to whereas with hard money, you sort of have to take it or leave it there’s really not a whole lot of back and forth discussion on those types of loans, generally speaking, so you’re already winning here, because you are getting a loan that is probably cheaper than your hard money loan and you’re not needing to qualify separately with a hard money lender, you’re just getting it from the seller themselves. So you take this and you put some of your cash down and hopefully a relatively low down payment scenario. And then you renovate the property with the cash that you have available to yourself so more of your down payment, or perhaps some of those other lines of credit that we’ve talked about. And you go ahead and renovate the property that way.

So perhaps you have made a lower down payment on this property purchase than you would have had to otherwise, which preserves maybe more of your cash available for more of the renovations. But you’re also not afraid to turn to your other credit lines as necessary. And once you get the property renovated, then you rent it back up, and you go to your bank just like you’re going to refinance the property, but instead of paying off a hard money lender, with that bank loan refinance, you are now paying off the seller. And your overall win from doing this is what I already mentioned, really the savings and that come from not using the hard money loan; you’re not paying the points, you’re probably paying a better interest rate, you might have some flexibility in some of the other terms as well. Chances are if you need an extension of your loan, it might not be quite as onerous or as expensive to negotiate that with the seller as it would be with the hard money lender.

So framework number one is really about using short term seller financing in place of and to replace and avoid the need for hard money loans at the very beginning. You could also see this as a way to avoid needing to use all your cash for a cash purchase, if that’s what you were going to do by default anyway. But at any rate, it’s basically like saying the front end of your project’s financing is now easier because you have a short term seller financing loan; the back end, the refinance with the bank, is the same as you would do anyway. However, the front end is now easier and more advantageous. So that’s the first framework is to use short term seller financing for the acquisition of your property. But let’s talk about the second one.

Now, the second one is where you have long term seller financing that you have negotiated and you’re using long term seller financing for your BRRRR. Now, this is something I personally do a lot, like I mentioned a moment ago, I’m always trying to negotiate long term seller financing, and I won’t even really sign up for anything that’s less than, say six years, I really want it to be quite a bit longer than that. But that’s kind of my bare minimum personally. So here’s the framework that I’m using the most myself, similarly to our first framework, and I’m trying to negotiate a low down payment loan with the seller, but with longer term seller financing, also, similarly to our first framework, I am then also taking some of the cash that I have available to me, which I might have more available since I’ve made a smaller down payment, presumably, and or my other credit lines and access to liquid funds to do my renovation. But what’s the difference between the first framework and a second framework? Well, with the second framework, I don’t need to refinance my property. Because I don’t need to replace my purchase financing. My purchase financing was my long term financing, there’s no expensive loan, there’s no super short term loan with a short fuse that I need to pay off before the fuse burns out, the whole thing blows up none of that I already have a good long term loan on this property.

But what else do we need to accomplish with our refinance? Well, with a refinance, normally, it’s kind of serves two purposes, it pays off the less than ideal purchase loan that we use hard money to buy it in the first place. And it also gets us some of our cash or ideally, all of our cash back so that we can recapitalize ourselves and be able to go and repeat the process over and over again, right. So we need some way to extract the equity that we have just built through the improvement in the value of this property. So if we don’t go and replace our long term seller financing loan with a bigger bank loan, how do we get our cash out? So what we do here, then, is instead of replacing the first position long term loan with a new first position long term loan, we instead go and get a second loan secured by the property right.

So some might call this a home equity loan. Sometimes in commercial situations, where it’s a rental property might be called just an equity loan, or a real estate equity loan or something like that. But you can go and get secondary debt to place in second position on the property. So now, you might ask yourself, Well, where do I find that? You know, sometimes you can go to a community bank or perhaps a credit union, and they might offer Home Equity products for non-owner occupied properties. But that is going to be far less common than it would be if it’s a house that you live in, right, you can walk into a credit union pretty much anywhere in the country, and say, Hey, I would like to get a home equity line of credit or home equity loan on my primary residence. And that’s a very possible type of thing to do. It’s definitely more difficult in the case of an investment property, like a rental property.

So that means we are best served, if we also know how to get secondary loans from private individuals, maybe they’re even secondary loans from other sellers, maybe you got this loan from a different seller and you’ve moved it into second position on this property, that’s certainly a possibility to or maybe you have some lenders that you’ve cultivated relationships with that are just private individuals who have self-directed retirement account funds, and they would be very happy to make a loan to you secured by the equity and the cash flow in your real estate.

So framework number two delivers you a win in a very different way from even framework number one; whereas framework number one, short term seller financing, was basically about saving money and energy and hassle by cutting out the hard money lender at the front end of the deal, framework number two delivers you a win by giving you cheap financing from the start. Good quality, cheap seller financing from the start, without any bank approvals required. So that’s framework number two, and is different, but also very valuable.

Just like framework number one is now, I promised you a little teaser on a third framework that is a more advanced and more sophisticated. And this starts to tap into the ideas that you may have heard me refer to before as Supercharged Seller Financing. Now, like I said, this is a little bit more of an advanced strategy and explaining it in great depth here is beyond the scope of this particular podcast, and really kind of requires a little bit more in depth conversation. But one of the key ideas I actually mentioned a moment ago, when I was talking about placing secondary debt, on your long term seller financing property, instead of doing a cash out refinance, you place additional second position debt on the property to get some of your capital back. So bonus concept number three, for the BRRRR strategy says that you buy your BRRRR property, however, you need to buy your BRRRR property, whether you buy it with a hard money loan, or you buy it with cash, or you do it however you want to, you then go and you renovate your property, however you want to using whatever funds you need to. And when the time comes to refinance this property to both replace your acquisition financing. And to extract the equity that you have just created through your improvements in the property. You get a refinance replacement loan, not from a bank, not from pitching a private individual for a loan, but by buying another property with seller financing.

So to state it differently, let’s say your BRRRR property is property A, you have purchased property A using whatever means you had available to you, you’ve renovated it, you’ve rented it, and now you’re ready to refinance it, and you need a new loan to go on property A. So what you do is you go out and you buy property B also with seller financing, but not just regular seller financing, you buy property B with Supercharged Seller Financing, and you now have bought property B and you bought the financing for property B at this point, then you take the financing from property B, move it to property A and sell property B. Now, that might not make sense to you. Or you might have to listen to this a few times. And that’s totally fine. This is not a mainstream concept. And it’s meant to be a teaser, because this is something that I hope you might at some point choose to study deeply like I have, but when you really start to learn these ideas, and figure out how to use them and really embrace them as a core part of your overall investment strategy, it can be an absolute game changer.

So to summarize, before we wrap up today’s episode, you can absolutely use seller financing in the BRRRR method. All you need to do is negotiate the best possible seller financing you can, hopefully with as little down payment as you possibly can, so that you preserve your cash to use for renovations. And if you have negotiated only a short term seller financing loan, well okay then once you’re done with your renovation project, you’re going to go seek new financing probably from a bank but if you’re able to negotiate long term seller financing, then even better, you don’t have to go replace your purchase financing after the renovation you just need to place some additional debt on the property to get some of your cash back. And if you really want to take it to the more advanced level, you can focus on buying the next property with seller financing and utilizing the next property seller financing to refinance your current property.

That is it for today’s episode of Racking Up Rentals. So again, show notes here can be found at thoughtfulre.com/e105. Please do us a big favor by hitting the subscribe button in your podcast app and take just a second to rate and review the show. I so appreciate that. Did you know that we have a Facebook group for Thoughtful Real Estate Entrepreneurs as well? i It’s called Rental Portfolio Wealth Builders and we would love to have you join us over there. Just go to group.thoughtfulre.com and the magic of the internet will redirect you write to that page within Facebook. If you liked this episode and you’re listening on your phone, just take a screenshot of that please and post that to Instagram that’d be fantastic, and tag us in your posts. We are @thoughtfulrealestate. I will see you in the next episode. Until then, this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.

Thanks for listening to Racking Up Rentals where we build long term wealth by being win-win dealmakers. Remember: solve the person to unlock the deal and solve the financing to unlock the profits.

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