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Real Estate Investing

How To Put That Extra Space In Your Property To Good Use

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A lot of investment properties have something we call bonus space.

It’s space that isn’t quite a bedroom, maybe not really living space, but doesn’t have any one specific use.

So, how do you use this space to create value for your investment property?

Well, that depends…

Can It Become A Bedroom?

A bedroom is almost always going to be the highest value use of any bonus area, so let’s try that first. So, it’s time to look up your local health/building codes to determine the requirements for a bedroom.

The International Residential Code, which most states follow, has several requirements to be considered a bedroom. States and municipalities are free to add on top of this, and some areas don’t use the IRC as their code.

Most places have a square footage requirement and also require a window and a closet. But, different states/municipalities may have different requirements so look them up.

Note About Egresses

Basements and Attics are notoriously bad places to be during a fire. There may be requirements for additional egresses for any living space that is in these two areas. Make sure you know all of the requirements before trying to make a bedroom.

Once you know the requirements, you can determine if a simple project can convert this random bonus space can be used as a bedroom.

For example, if it just needs a larger window, simply hire someone to install it. If you need a closet, get one put in.

It becomes more challenging if you need another egress added to a basement though.

It Can’t Be A Bedroom, Now What?

Most bonus space can’t be used as a bedroom, so don’t feel bad about that. The next thing is to figure out exactly what you can do with the space.

Determine What Kind Of Space You Have

The first step is to figure out exactly what you’re working with and what it can look like when you’re finished.

Regardless if it’s in an attic, basement, porch area, or whatever, it’ll need to be finished with drywall, paint, floors, lights, and heat/ac. Your bonus space probably has some of these already, but often not all.

Keep in Mind The Location

Basements are usually cool and damp, so you may need extra heat during the winter and a dehumidifier in the summer.

Attics are really hot, so you’ll need to add extra air conditioner. Also, you need to make sure your roof is ventilated properly before completely finishing an attic so take that into consideration before adding drywall to the rafters.

Every area will have it’s own unique considerations before starting the project.

Figure Out Its Highest and Best Use

This is really open to interpretation, but you need to figure out it’s best use for other people.

The best thing to do is to look at comparable sales in your market area. Look at what most other people are putting into their properties, then just copy them.

Here are a few common ways people use their bonus space

Den Or Media Room

The most common way people use their extra space is by using it as a second living room, den, or media room. These are all different words for similar things.

Basically, one living room will be a bit more formal for having guests over. The den or media room will be for watching TV or movies mostly.

If you are outfitting a room for this use, it might be beneficial to install speaker wires around the room (this is very cheap), and make sure there is cable and internet hookups.

Game Room

If your investment property already has an area dedicated as a den, you might want to consider outfitting it as a game room.

A Game Room is a room in the house for relaxing or socializing. It is typically furnished with a Pool TablePing Pong TableDart Area, or other recreational amenities.

Storage

A lot of people just need extra space for storage. Having a clean and dry area to toss junk is the lowest value use, but still important. Having this finished space will most likely make it more valuable anyhow.

Advertising Bonus Space

The next step is to advertise your bonus space. You’re either listing this property for sale, or listing it for rent (it’s an investment property, right?).

It’s important to bring attention to the bonus space, especially if it’s not listed in the square footage or other information about the property. This is really common for basements and attics.

In this situation, bring attention to it and make people image what they could use it for, but don’t specifically say it can be used for things that it shouldn’t be used as (such as a bedroom). People will often use the space however they want, including as a bedroom, but you should not encourage this if it’s not a legal bedroom.

So, you’d could potentially say something like:

There is an extra 400 square feet of finished bonus space in the attic that could be a game room for you and your friends, media room for late night movies, or whatever else you can imagine! It is heated, cooled, and has everything you need to enjoy it day and night all year long.

But you’d never want to say something like

There is an extra 300 square feet of finish bonus space in the basement that could be used as a media room, den, game room, or even an extra bedroom when friends come visit.

…assuming the bedroom is not legally a bedroom in your jurisdiction.

Charging For The Space

It’s hard to say what bonus space is worth, but it’s worth something.

The only way to figure it out is to try to sell it or rent it out, and see what the market will give you.

This article originally appeared on IdealREI.  Follow them on FacebookInstagram and Twitter.

Real Estate Investing

The No. 1 Strategy To Build A Rental Property Empire

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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.

Wrong.

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
  • MLS
  • Bird-Dogs

…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.

Closing 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 findscreen, 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 FacebookInstagram and Twitter.

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Real Estate Investing

5 Strategies To Close Your First Real Estate Deal

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