Investment Strategy – BRRRR
When I started our investment journey, the one and only strategy I knew about was the traditional ‘buy and hold’ with a conventional loan. This meant putting 20-25% down on an investment property, which I did not have…in any state. It wasn’t until speaking with my cousin where I discovered the BRRRR strategy. From that moment, I became obsessed and began finding Podcasts, reading books and asking others how they successfully (and unsuccessfully) used the BRRRR method to jumpstart their investing career. I’ll write up some of the lessons I’ve learned during my young investing career, but below is a high level summary of the BRRRR method.
B – Buy. You make your money when you buy, not when you sell. This is the key ingredient and in order for everything to fall into place, you need to buy the property at the right price. I look for properties where I can add value and I aim to be all-in (including the rehab price) at 70-75% of the ARV (After Repair Value). Properties that are already at below retail and that need to be fixed up are the properties that I target. Think of the properties you see on Fixer Upper or those homes that are boarded up with tons of weeds/high grass surrounding the home.
R – Rehab. This is the fun part—transforming a distressed property into a clean, beautiful rental. The rehab costs should be factored into your all-in price mentioned above. Rehab according to your neighborhood which means if you are in a C-class area, putting in top of the line finishes is unnecessary.
R – Rent. Now that your property has been fixed up, your next task is to find someone to live in your property. Usually when I run my numbers, a quick and dirty calculation is to make sure that rents are at least 1%-1.2% of the all-in price. If it meets this criteria, I will start to dig deeper into the deal….if not, I’m moving on.
R – Refinance. Ok, so now the property is tenanted your next goal is to find a bank (local banks have the best rates) to refinance out the money you invested into your property. Since we bought the property right and all our criteria’s were met, the bank will order an appraisal and you will be able to cash-out refi up to 75% of the appraised value. For instance, you bought the property at $50k and spent $25k on the rehab. The appraiser appraises your property at $100k. This means that the bank will be able to get you into a 30 year mortgage of up to $75k (excluding closing costs and such). And doesn’t that work out beautifully—you put in $75k and the bank lends you $75k, which essentially means you put $0 down into a cash flowing property. Now imagine if the appraiser appraised the property at $110k, the bank would be paying you for this property…isn’t that wild? On the other side of the coin, what if the appraisal comes in at $90k? Your all-in now would be $8k (75% of $90k is $67,500)? Think about it, you just spent $8k, for a property that is worth $90k. Doesn’t that sound awesome, even if your property didn’t appraise as you wanted? Again, you MUST buy the property right—that is where the money is made!
R – Repeat. Let your deal finders know you were ready to repeat the process. The velocity of money is a beautiful thing.
Obviously, there are so many moving parts to this method but it could help jumpstart your journey towards financial independence. I love this method as it has helped us scale our portfolio and over achieve our goals in 2020. Understanding the basics of this model is essential, but there are only so many podcasts and books and with anything in life, the best way is to learn through experience.