Does bridge financing at 10 percent plus two points eat the whole BRRRR recycle

Question

Working through a typical bridge-to-DSCR term sheet is a good way to check the arithmetic against how long-hold investors actually think about carry cost. Say the deal is purchase 145k, rehab 40k, 185k of hard cost. Bridge is interest only at 10 percent, 2 points in, 1 percent exit fee, six month term, funding 85 percent of purchase and 100 percent of rehab in draws. ARV opinion is 250k, refi assumed at 75 percent, so 187,500 gross. Averaging maybe 150k drawn over six months works out to about 7,500 of interest, plus roughly 3,700 of points on the way in and 1,875 on the way out, plus title and legal twice. The round trip financing cost lands near 15k. Against 187,500 of refi proceeds, that means carrying 185k of hard cost plus 15k of friction, and the recycle is already short before holding costs during lease-up even enter the picture. How a long-hold investor should treat that 15k: it does not simply disappear once the property is stabilized, it belongs in the return calculation on the rental rather than being written off as a one-time acquisition cost. And it is worth noting plainly that the lender in a structure like this is often clearing something like 14 to 15 percent annualized with first position and no tenant risk, a better seat, arithmetically, than the equity holder's.

Rena Expert · Accepted Answer

Your 15k is roughly right in shape, and it lands in your basis rather than disappearing. The part of the math that usually breaks first isn't the 75 percent, though. It's coverage.

Run it. A 187,500 loan at 7.5 percent on thirty years is about 1,310 a month of principal and interest. Add taxes and insurance of, say, 400 and you're at 1,710 of debt service. A DSCR lender pricing that deal at 1.20 coverage needs about 2,050 in rent. If the house rents for 1,850 you're at 1.08, and the lender doesn't decline you, it shrinks the loan until coverage works. That can knock 20k or more off proceeds, which is a bigger hole than your entire financing friction. So the number to solve for before you sign the bridge is the rent, not the ARV. The 250k opinion also has to survive an appraiser who isn't the one your bridge lender used.

On the carry itself: it goes into what you have invested, so it shows up as a permanently lower cash-on-cash on the rental for as long as you hold. Whether any of it capitalizes for tax purposes is a question for your CPA, and treatment varies.

The risk you haven't priced is time. Six month bridges get extended, extensions carry a fee and sometimes a rate bump, and most DSCR lenders want an executed lease in hand at closing. A four week gap between certificate of occupancy and a signed tenant is another month of 10 percent money plus an extension. Get the extension terms and the coverage ratio in writing from both lenders before you commit, because those two numbers decide the deal.

karen_whitfield · Answer

I stopped underwriting to a full recycle a while back. If I'm holding a house for fifteen years, leaving 20k in it at the refi is annoying for the next purchase and almost irrelevant to the outcome. What I won't do is leave the 20k in AND take a loan sized so tight that a water heater and a vacant month put me negative. The equity can sit. The coverage can't.

angela_burke · Answer

Six months is where pushback on that term sheet belongs. Permit inspections slip constantly on active jobs, and a two week delay on a rough-in sign-off is not unusual. On 150k drawn, every extra month runs about 1,250 out the door plus whatever the extension costs. If the bridge lender won't quote the extension fee now, assume it's a point. On the lender-seat question, orchard is right that the appreciation and the rent growth land on the borrower's side of that trade, not the lender's.

kevin_lombard · Answer

The exit fee sent me back to the term sheet, since I thought points only got charged when the loan started. So you pay to leave too. That changes how I read every one of these spreadsheets.

Does bridge financing at 10 percent plus two points eat the whole BRRRR recycle

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