There’s multiple different ways to build wealth. Actually, we recently discussed doing it when starting from nothing. But one of my favorite ways is by using real estate. I discussed a strategy I personally use and teach on a regular basis by investing in real estate syndication deals. Another popular one is the BRRRR strategy which acts as a hybrid between active and passive income.
It stands for Buy, Rehab, Rent, Refinance, and Repeat and can be a great way to get started investing in real estate and not use up all your money.
Read on to learn more about it…
What Is The BRRRR Strategy?
One of the nurses I work with has started her path to financial freedom by using rentals in her area. The way she has done this is by saving up and paying cash for single family homes. She’s essentially using the model that Dave Ramsey teaches, pay for rental property with 100% down.
One day she was talking to another local real estate investor and he told her that even though she was using a great long term strategy, unfortunately it would take years and years of doing this to have enough equity in the property to see decent cash flow.
For example, it may take her 6-7 years to save up to purchase a home. At this rate, she’d be lucky to acquire 5 more rentals by the time she’s ready to retire.
He recommended using debt (smartly) to acquire more homes and the BRRRR method is one of the ways to accomplish this without eating up all your cash. It’s also a great way to buy multiple properties when you’re just starting out in real estate investing.
In a nutshell, you buy a property that can be acquired below market value and rehab it. Next, it’s then rented out to generate cash to pay the expenses and begin building up equity.
After the equity has increased, you then refinance the property to acquire more cash to buy another rental. If done correctly, you can get back most of the original capital to use on the next deal.
Essentially, the BRRRR strategy allows the real estate investor to acquire and build a passive income portfolio of rental properties without having to continually save for a down payment for each property.
There’s a large number of doctors and other high-income professionals that are searching for information regarding acquiring rental real estate. Many young ones aren’t sure if starting this process when additional capital is hard to come by is a smart move.
The BRRRR strategy could be an option so let’s breakdown this strategy to learn more.
5 Steps Of The BRRRR Strategy
1) Buy Rentals
“The best investment on earth is earth.” – Louis Glickman
I’ve got a patient that I see a couple of times a year. He has over 65 four-plex units and is constantly on the look out for more bargains. Once he found out that I was interested in learning about real estate, he turned into one of the best teachers that I could ever find…especially free of charge!
The last time he was in, he brought a list he’d made of the recent properties that had sold along with each of their purchase prices. He pointed to two of them and started laughing at the amount that was paid stating, “they’ll never be able to make their money back.” A few other choice words were said that I’ll leave out.
The bottom line is that when purchasing real estate to invest, the most important part is what you buy it for. My patient has always stressed that you “make money when you buy.“
If you don’t have much experience, I encourage you to find someone to mentor you. You’ll be amazed at how willing they’ll be to teach you what you need to know.
The letter “B” in the BRRRR strategy stands for “buy.” Again, this first step in the process may very well serve as the critical point that determines the outcome of an investment.
The key is to purchase an undervalued property that has some upside potential (must do your due diligence). It’s important to know how to analyze properties and work with real estate numbers.
- calculating rehab costs
- estimating monthly expenses
- ensuring the rental income will provide a sufficient profit margin
Many investors rely on the 70% rule, which estimates for the cost of repairs and after repair value (ARV). This helps determine the maximum offer to make and ensures that a profit margin will remain after the renovations are completed.
If you plan on financing the property, most banks typically want 20-25% as a down payment for investment property. You’re going to want to make sure you at least have that amount in cash as well as some extra to cover closing costs and reserves for this first property.
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2) Renovate the Property
After buying a property, it’s time to turn to “rehab” mode. Unless you have a lot of time on your hands and you’re a DIY type of person, you’re probably better off finding someone to to do the repair work (contractor, handyman).
Our time is better spent seeing patients. Remember, time is money!
It’s important to focus on updates that will add the most value to your property which can justify future increased rental rates.
On the other hand, be careful not to make any excessive upgrades that will end up costing more than what can be produced through rental income.
Some renovations will increase the value of the home more than others.
According to Bankrate.com, these are the top six improvements to make:
1. Garage door replacement
- Average cost: $3,611
- Average resale value: $3,520
- Cost recouped: 97.5 percent
2. Manufactured stone veneer
- Average cost: $8,907
- Average resale value: $8,449
- Cost recouped: 94.9 percent
3. Minor kitchen remodel
- Average cost: $22,507
- Average resale value: $18,123
- Cost recouped: 80.5 percent
4. Deck addition (wood)
- Average cost: $13,333
- Average resale value: $10,083
- Cost recouped: 75.6 percent
5. Siding replacement
- Average cost: $16,036
- Average resale value: $12,119
- Cost recouped: 75.6 percent
6. Entry door replacement (steel)
- Average cost: $1,826
- Average resale value: $1,368
- Cost recouped: 74.9 percent
Don’t go overboard with the renovations. If you got a great deal and paid $60,000 for a home that is worth $85,000, don’t spend $30,000 renovating the place.
3) Rent out the Property
Once the property has been renovated, it’s now time to rent it out. The next step with the BRRRR strategy is to refinance and the banks are going to first want to see that the property is producing income.
Getting it rented is going to take some work such as:
- screening and selecting tenants
- managing turnover
- responding to maintenance and repair requests
If you don’t think you have what it takes to be a landlord then consider hiring a property manager. Again, as a busy professional, you’re time is valuable and getting help keeping your property filled and maintained is worth its weight in gold.
On average, you could spend up to 10 hours a month managing a property.
Do you have an extra 10 hours a month? Most of us don’t. So consider finding help with your rentals.Join the Passive Investors Circle
The next step in the BRRRR strategy is refinancing the property.
As stated earlier, the goal is to get your money back, thus speeding up the process of adding passive income properties to your portfolio without burning through all your cash.
Some say that this step is the most crucial in the process.
Here’s a handful of things to consider before refinancing with a bank:
Most banks will require a 6 to 12 month seasoning period to complete a cash-out refinance. A seasoning period indicates how long you must own a property before the lender will consider refinancing against the appraised value of the property.
This means the property has been stable, fixed, and rented for that period of time. Basically, they need evidence of stability in order to justify the higher price.
Lenders will typically loan up to 75% of the appraised value of the property.
The final step in the BRRRR strategy is to repeat the process after receiving cash from the refinancing. More than likely, your first purchase will be the hardest due to lack of knowledge and experience.
But once you get one under your belt, you’ll have what it takes to begin to grow and build a portfolio of rental properties without having to continually save up a large amount of capital.
As you can see, the BRRRR strategy is a solid way to build wealth from rental properties. But of course, you have to be smart and plan correctly just like with any other real estate investment strategy.
Let’s take a look at an example using this strategy…
A BRRRR Strategy Example
Here’s a very simplified example of a deal using the BRRRR strategy.
Let’s consider a property that you can buy for $200,000 in this scenario:
- BUY a property for $200,000
- Down Payment of $50,000
- Obtain a low interest rate bank loan for $150,000
- REHAB property with $40,000
So the total Investment of this project = $90,000 (Down payment + Rehab Costs)
- RENT out the property for $1800/month.
- REFINANCE the property for an appraised value of $260,000 a year later.
- The bank allows you to take out a loan for 75% of the appraised value ($260,000 x .75 = $195,000).
- Now you can use the $195,000 to pay off the original loan for $150,000 which leaves you with $45,000 in cash to go out and REPEAT the process.
- While searching for a new rental, you’ve got one cash-flowing property.
The BRRRR strategy is a great way to grow a portfolio with cash-flowing properties. If you’re looking to speed up the process, this strategy will allow you to avoid having to spend time saving for a down payment as well as cash for a rehab with each property.
There’s more than one way to skin a cat and with real estate, there are many different ways to play smart using leverage with a good strategy.