It’s impossible to buy enough rental property to retire with, right? It simply takes too long to save up, buy property, and a little rent over years
You just need too much money for down payments to keep buying.
It’s true that buying rental property is a very capital intensive process and it’s true that you generally need 20-25% down for your purchases (except your first few which can go FHA or VA).
It’s also true that most people don’t have unlimited funds and can’t keep putting 20-25% down.
But here’s the thing – you don’t have to keep putting money down.
There’s this really simply strategy that allows you to avoid doing all that. You guessed it, it’s called the BRRR strategy and I’m going to go into that in a lot of detail. But first…
A quick story about how I retired using the BRRR real estate method.
BRRR Strategy During the Great Recession
A long time ago I started using the BRRR strategy before anyone ever called it the BRRR strategy.
In a nutshell, it’s a way to buy property that allows you to preserve capital in order to buy more and more properties over time.
I’m going to get into detail on it in a minute, but I want to take you back to 2009 through 2013 during the deepest part of the great recession.
No one had jobs. No one could afford to pay rent. Housing prices dropped like a rock and flat lined like a hospital patient. There was no bounce.
It was just despair everywhere.
They call it the great recession, but in historical terms, it was clearly a depression.
…and I decided to get into real estate.
Everyone said I was crazy, and I was a little crazy. A lot of people had just lost everything, tenants weren’t paying, evictions were happening all over. It was rough.
But, deals could be found everywhere. The other benefit was since no one had work contractors were easy to find and would work for 1/3 what they charge now.
The hard part was finding money to invest and finding banks to lend.
I bought my first 3 family in 2009, then bought a 4 family a few years later in early 2012. This is a picture of the 4 family, sexy isn’t it?
By 2015 I had over 20 units. By 2017 I had around 35, and now in 2018 I’ve moved up to apartment complexes and have over 470.
This is the strategy I used to keep buying more property while continuously putting more money in my pocket.
Here’s how brrr investing works in real estate.
Using the BRRR Strategy to Build a Rental Property Portfolio
The overall Gist of the BRRR method is to add enough value to a property that when you refinance it you will get most, if not all of your capital back. This allows you to take your money and use it over and over again to buy deals.
Just in case you aren’t yet aware, BRRR stands for Buy, Rehab, Rent, Refinance. Alternatively, some people call it the BRRRR method which stands for the exact same thing, except the last R stands for “repeat.”
So, BRRRR method is Buy, Rehab, Rent, Refinance, Repeat.
Step 1 – Buying
There are 3 basic parts to buying any property – finding, analyzing, and closing the deal.
Finding a Deal
The most important part of the BRRR real estate strategy is to find great deals. Without an amazing deal, it simply doesn’t work (but that’s kind of true about making money in real estate anyhow).
In general, people refer to deals as either “off-market” and “on-market.” An off-market deal is essentially every sale that is not listed with a real estate salesperson on a listing service such as the MLS, LoopNet, or CoStar.
There are a ton of ways to find great off-market deals. These includes:
- Starting an Investor Website
- Direct Mail
- Knocking on Doors
- Bandit Signs
…and a couple dozen more methods. The only thing limiting you is your imagination!
Analyzing Rental Property
It’s important to have a couple different calculators to get this job done. The most important is your “back of the napkin” calculator.
The reason why a calculator like this is so important is because you will literally look at hundreds of deals. It’s impossible to use an advanced calculator and cull through dozens of deals a week.
Instead, it’s best to use a very simple calculator, toss in the basic numbers, and just see if it’s even remotely close.
Once you do that, you can take the deal and do a deeper analysis. If it’s not any good, just toss it aside and you’ve saved hours of your time.
I put together a free BRRR calculator for you to use to screen deals.
The most important part of closing a deal is….financing it.
We’ll talk a bit more about financing at the end when we talk about the third R – Refinance, but it’s important to know that your financing up front will be different than how you refinance the deal.
Up front, you are generally using cash or some kind of private or hard money. Banks don’t like risk, and deals that need work are considered risky.
By using cash or private money, you’ll be able to purchase something with a bit of risk so you can add value.
The other reason is because distressed properties often need to close quickly. Banks are anything but quick.
So the key here is to use private money to purchase, then refinance into something longer term such as a good conventional or long-term commercial loan.
Step 2 – Rehab
You don’t want to rehab a BRRR rental property the same way you would fix a flip.
When you analyze a project for a flip, you look at the cost of the work vs the increase in value. If a kitchen costs 10k and increases the value by 15k, then it has a 50% return (15k – 10k = 5k return. A 5k return divided by 10k invested = 50% return).
That same kitchen may add value to your rental, but since you aren’t selling it, it’s the wrong way to measure value.
That $10k might add $15k in value, but add barely anything in extra rent. Since we are looking for cash-flow, I’d rather focus on renovations that add to the amount of rent I can charge.
BRRR Step 3 – Renting The Unit
Finding great tenants that will pay market (or higher) rents is key to your strategy. The 3 key steps are to find, screen, and retain.
Step 4 – Refinancing
The goal is to get your money back so you can repeat the process, which makes this step the most crucial.
because the rules for commercial lending are slighting different than personal lending, let’s take a quick step back and go over the rules/requirements for commercial lending:
- You will need around 2 years of “experience.” This can be rehab experience, landlord experience, or even experience as a realtor if you can convince the bank that it’s directly applicable.
- Most banks require 6+ months of “seasoning” before they will finance it at the market price rather than the purchase price. This means the property has been stable, fixed, and rented for around that period of time. Basically, they need you to justify the higher price with some evidence of stability and improved rents.
- Banks lend 75-80% of appraised value on this sort of deal.
It’s not hard to see the “trick” once all the criteria are laid out.
- Banks will lend around 75% of the appraised value after 6 months of seasoning.
- House flippers are looking to be “all in” for around 75-80% of the property value.
So, buy a rental property like you’re going to flip it, then just refinance it – you’ll get all your cash back plus long-term rental income.
But, in order for this system to work well, you need to be able to be “all in” for around 75-80% of value.
Step 5 – Repeat and BRRR More (aka brrrr)
Once you have most or all of your money back, it’s time to find another real estate deal to BRRRR! The extra R stands for Repeat.
You’ll have your cash back and a new stream of income. Could life get any better?
Have you ever used the BRRR Strategy? Tell me how it went in the comments below.
This article originally appeared on IdealREI. Follow them on Facebook, Instagram and Twitter.