BRRRR Method Funding Hard Money, Private Money, and HELOCs

Stop Scrambling for Cash: The BRRRR Investor's Guide to Funding the Risky "Buy" Phase

The BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) is one of the most powerful wealth-building strategies in real estate, but it faces a crucial challenge right at the starting line: Funding the Buy Phase. Since the entire strategy relies on acquiring distressed properties at a deep discount, BRRRR investors cannot rely on conventional financing and must become masters of short-term capital sourcing.

If you’re ready to transform an ugly house into a cash-flowing asset, you need to understand the financing landscape that makes the initial purchase possible.

The BRRRR Catch-22: Why Banks Won't Lend

Before we explore solutions, we must understand the core problem: Traditional banks offering 30-year fixed mortgages will refuse to lend on distressed properties.

Conventional lenders have strict requirements that distressed BRRRR properties almost always fail to meet:

1. Property Condition: Lenders require the property to be in "livable condition"—this means functioning plumbing, a solid roof, a working HVAC system, and no major structural issues. A typical BRRRR acquisition often has damaged roofs, outdated electrical systems, or is simply not habitable. The conventional lender's response? "We can't lend on this property until it's fixed up".
2. Appraisal Value: Conventional loans are based on the current appraised value. If you buy a distressed property for $100,000 that only appraises for $120,000 now, the bank will only lend about $96,000 (80% LTV). This structure simply doesn't work for deep-discount transactions.

The solution, therefore, requires short-term financing that closes quickly (2-3 weeks), lends on distressed properties, and bases the loan on the After Repair Value (ARV).

The Three Power Tools for Buying Distressed Real Estate

The most common financing options for the Buy phase are Hard Money Loans (HMLs), Home Equity Lines of Credit (HELOCs), and Private Money Loans (PMLs).

1. Hard Money Loans (HMLs): The Quick Fix

Hard Money Loans are short-term loans provided by specialized lenders who focus primarily on the property's value (ARV), not the borrower's personal income.

Feature	Details
Best For	First BRRRR deals or when you need to close extremely quickly.
Speed	2–3 weeks (Fastest institutional option).
Typical Cost	10–15% interest plus 2–5 points (origination fees charged upfront).
Reality Check	The high interest and points mean the effective annual rate can be around 24%. For a $100,000 loan over six months, the total cost could easily reach $12,000.
How It Works	HMLs typically lend up to 70–75% of the ARV. Many common structures involve the lender covering most of the purchase price and potentially 75–100% of the rehab costs.

Finding HMLs: Look for hard money lenders who sponsor and present at local Real Estate Investment Associations (REIAs) or use specialized directories like BiggerPockets.

2. Private Money Loans (PMLs): The Relationship Advantage

Private money is capital borrowed from individuals—family, friends, colleagues, or other investors—rather than institutions.

Feature	Details
Best For	Experienced investors, or those who have built relationships with capital providers.
Cost Advantage	Significantly cheaper than hard money. Typical interest ranges from 6–10% and usually involves 0 points.
Savings	On a $100,000 loan over six months, Private Money ($4,000 cost) saves approximately $5,000 compared to Hard Money ($9,000 cost).
The Pitch	You approach your inner circle (family, friends, professional contacts) who have savings earning low returns (e.g., 1–3%). You offer them a secured loan at an attractive rate (e.g., 8%), explaining that the loan is secured by a mortgage on the property.

CRITICAL Warning: You must have all legal documents—including a Promissory Note (your promise to repay) and a Mortgage or Deed of Trust (securing the loan with the property as collateral)—prepared by a real estate attorney. Never use a verbal agreement, even with family.

3. Home Equity Lines of Credit (HELOCs): The Cheapest Capital Source

If you own a home with significant equity (20% or more), a HELOC is often the cheapest and fastest source of capital for your BRRRR deals.

Feature	Details
How It Works	A revolving line of credit secured by your primary residence. You draw funds as needed for down payment or rehab and only pay interest on the amount drawn.
Typical Cost	7–9% variable interest rate (Prime rate + margin) and usually 0 points.
Risk	The interest rate is variable and can rise if the Fed raises rates. Most importantly, the HELOC is secured by your primary residence—failure to pay puts your home at risk.
Strategic Use	Use the HELOC to fund the Buy and Rehab phases. Once you complete the Refinance phase on the investment property, you use the cash-out proceeds to pay down the HELOC balance, recycling your capital for the next deal.

Making the Right Choice: Cost vs. Accessibility

Your choice of financing depends entirely on your current situation:

Your Situation	Best Financing Option	Why
First BRRRR, No Connections, No Home Equity	Hard Money	Most accessible option; focuses on the deal, not your personal history.
Own Home with $50k+ Equity, Good Credit	HELOC	Cheapest and fastest access to funds.
Have Wealthy Contacts Willing to Invest	Private Money	Lower cost and more flexible terms than hard money.
Need to Close in 3–5 Days	Cash	The only option for an ultra-fast closing.

The data is clear: on a typical $100,000 project, Hard Money is approximately double the cost of Private Money or a HELOC. While HMLs are essential for building your initial track record, scaling successfully means transitioning to cheaper, relationship-based financing (Private Money) or leveraging your existing equity (HELOC).

Financing is a tool, not a goal. Choose the financing that enables your deal structure without absorbing all your potential profit. Once the deal is funded, your focus shifts to the Renovation and Refinance phases—where you pay back that critical short-term capital from the new long-term bank loan.

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(Part 8 of 15: The Beginner’s Guide to the BRRRR Method. Next up in Part 9, we dive into the critical Seasoning Period and strategies for accelerating your BRRRR cycle.)