Happening NowBRRRR Method (Active Operator)

Structuring rehab capital that only gets repaid if the refinance lands

Take a BRRRR structure where an operator buys a duplex at 210k with his own bridge financing, a lender's 90k funds the rehab, and repayment comes from the cash out refinance at an agreed return. If the projected after repair value is 340k, a 70 percent refinance clears 238k, enough to cover the bridge and the rehab lender with room to spare. The structural risk in that setup is that every dollar of repayment depends on one event that has not happened yet and that neither party controls: not the rent, not the renovation quality, but the appraisal and the lender's loan to value ceiling. If the appraisal comes in lower, say 300k instead of 340k, 70 percent is only 210k, which covers the operator's bridge and leaves a shortfall against the rehab capital. A strong operator with a completed project track record reduces execution risk but does not remove appraisal risk. A common fallback, selling the property instead of refinancing if the appraisal disappoints, can work but often takes far longer than either party expects. The questions worth resolving before capital moves are where in the lien stack the rehab lender sits, since second position behind a bridge that gets refinanced means the security changes hands mid deal, whether pricing should account for a realistic delay scenario rather than only a total loss scenario, and whether a structure exists where repayment is not tied exclusively to the refinance event. Getting a securities attorney and a real estate attorney to review the final structure is standard practice regardless of how the terms are negotiated.

chriswalton8 CC1CPRO 17

Answer

dpatel_re CP3APRO 22

You have named the right risk and then priced the wrong one. The appraisal is a risk. The larger exposure is that his 340k after repair value and his 70 percent assumption are both his numbers, and you are underwriting to them. Run it backwards. What appraised value makes you whole at his stated loan to value? He needs 300k of debt to clear a 210k bridge plus your 90k plus your return, ignoring closing costs. At 70 percent that requires a 428k appraisal, well above 340k. So on his own projection there were never enough refinance proceeds to repay both the bridge and you in full. Look at his number again: 238k against a 210k bridge is 28k of room. His model does not repay you at all. Either he is assuming he brings cash to the refinance, or he is assuming a sale. The third possibility is that nobody has done this arithmetic yet. Ask him which one it is, in writing, before you talk structure. If the answer is that the exit was always a sale, then price it as a sale dependent loan with a term long enough to survive a listing period, and stop calling it a BRRRR. On position, a second behind a bridge that gets refinanced is a subordination problem you will be renegotiating with a lender who has no reason to accommodate you. An interest reserve and a maturity date past the realistic sale timeline matter more to you than the rate does.

dpatel_re CP3APRO 22

4 replies

stephen_ok9ActivePRO

Sextant just took the deal apart and I want to sit with that math because I nearly signed something shaped identically.

Sable, the thing I'd add is the 90k as rehab tranche means your money goes in first and comes out last, on a project where cost overruns hit before any exit. If his 90k rehab budget goes to 110k, where does the extra 20k come from? If the answer is your tranche got bigger, you funded the overrun. If the answer is his pocket, get proof the pocket exists.

stephen_ok9ActivePRO

mikeoconnell7 SO3CPRO 12

Set the finance side aside for a moment. The open question is who manages the lease-up. Refi lenders on small residential usually want the property leased and stabilized, and projects sit finished and vacant for two months all the time because nobody wrote a leasing plan. Two months of bridge interest on 210k is real money and it comes out of the same proceeds you are waiting on.

mikeoconnell7 SO3CPRO 12

paulgrant17CapitalPRO

Lantern's point is the one I keep running into reading about screening. Everyone treats "place a tenant" as one line in the plan. Finding a tenant who actually passes screening in a just-renovated unit at the rent the model assumed can take longer than the renovation did.

paulgrant17CapitalPRO

Reply Anonymous