Why the BRRRR Strategy Is So Cool!

The goal behind a BRRRR strategy is to pull all of the money you put into a property out when you refinance it so that you effectively bought a property for nothing…

Welcome back Gentrifanatics!

If you’re like me I’m sure that you are interested in all wealth building strategies!

Learning never stops!

Real estate is probably the best way for people like you and me to build wealth.

Trust me, I’m no Zuckerberg. I know myself well enough to know my strengths and work in them.

When I was younger I had so many strategies go “get rich”. Most of them dealt with strategies I saw other people using.

At one point I set a goal of making $20 per hour at a job. I thought that once I hit that goal I would just coast for 40 or 50 years until I could retire.

These days I realize that being an employee for someone else will never allow me to realize my goals or my full potential!

Now if you think you can reach your full potential in wealth, contributions to the world, or whatever, by working your 9-5 then you don’t need to read any further.

Chances are that since you’re already here that you want more.

In this edition of Gentrifanatic you’ll learn about the BRRRR strategy of real estate investing.

What Is BRRRR?

Buy, Rehab, Rent, Refinance, Repeat.

Anyone who has spent any time on BiggerPockets.com has heard of this strategy.

BRRRR is one of the best wealth building methods because it involves using assets that you already have to buy more assets.

Buy

All of your money in real estate is made when you buy, not when you sell!

When I tell people that they usually give me a blank stare.

In previous editions of Gentrifanatic we broke down why buying right is so important and how you can do it!

3 Must Read Tips for Buying Your First Home

Make sure you buy right. Buying right means having multiple exit strategies or ways that you can offload the property if you need to.

This means that you can sell or rent the property relatively easily for profit.

When buying your home make sure that if you finance you get good financing terms.

In the BRRRR strategy the goal is to rent the property so using the 1% rule is a good place to start.

A 1% rule means that the home will rent for at least 1% of the purchase price (a 100k home will rent for 1k per month).

Using BRRRR requires money for rehabbing the home too so dont forget to add those costs to your purchase price for the 1% rule!

Rehab

Rehabilitation when it comes to property means work that you have done to the property to get in living condition for someone who is going to live there.

Estimating rehab costs can be tricky if you dont know what you’re doing. Some simple rules are anywhere from $25-$50 per square foot.

A total rehab for a 1,000 square foot property could be 25k or less, or 50k or more!

It depends on what needs to be done!

Get with someone who is a professional and has done rehabs before!

You can lose a lot of money if this step is done wrong!

Rent

Once you get the property in a livable condition for a good resident you need to find that resident!

Tenant screening is a crucial step in the BRRRR strategy. Having a bad tenant can kill your cash flow and even dip into your reserve funds…or worse.

Don’t be cheap when looking for tenants.

Spend money to do background, credit, reference, and former landlord checks!

Make sure your screening methods are fair and even across the board. This is not just because you can get in hot water if you don’t.

Discrimination in any form is just wrong.

That being said there are fair housing protected classes:

race
color
religion
national origin
disability
familial status
sex

You’ll notice that smokers and pet owners are not on this list. If you dont want them in your property you dont have to rent to them.

Again, make sure screening is fair across the board.

Details

Use the 1% rule in setting your rental price.

Make sure your leases end in the spring, never in the winter. Your house may be sitting vacant for a while if you lose a tenant during the winter months.

Screen your tenants well and dont discriminate.

Now you’re ready to get money out!

Refinance

If you bought right refinancing will give you money to purchase more assets.

Here’s a quick win scenario:

You buy a home for 50k, your rehab costs 9k and your tenant screening etc…costs 1k.

This means you’re all in the property for 60k. Lets say for this scenario your mortgage payments (which include the rehab costs) are $400 per month.

Using the 1% rule you would get the property rented for $600 but you know the after repair value (ARV) is at least 120k so you get a tenant paying $1200 per month.

Now the property has a tenant signed lease and the tenant has been paying you.

An appraisal is done on the property and it appraised for 160k (big win).

Next you go to a bank or credit union, they see that loan you have for 60k and the house is now worth 160k.

Keeping with the 1% rule you refinance with the bank for a 120k loan. This means the bank gives you the 60k to pay off your initial loan and then another 60k to make 120k which matches your $1200 per month rent.

Remember the home is still worth 160k so you have 60k tax free (because it’s technically a loan) to invest in another property. Also there is 40k of equity in the property (160k minus 120k).

Your new mortgage payment may be around $800 per month and you’re getting $1200 per month from your tenant. That’s $400 per month to put in reserves for that home.

This may seem technical, and it is. There’s a lot of room for error and this scenario is an example of a killer deal that isn’t typical.

A good tip is to analyze properties and see which ones are deals. Do all the math. The more analysis you do the better you will be at spotting deals.

One great app for this is called Deal Check.

Repeat

Finally after you do all of these steps correctly, do them again. And again. And again.

Keep building! Master P…no limits!

Final Thoughts

In closing remember that BRRRR stands for buy, rehab, rent, refinance, repeat.

Buy right, rehab intelligently, rent fairly, refinance, and then do it all over again!

There’s obviously a lot more that goes into this strategy. This is just an intro!

If you’re thinking of using this strategy I’d be more than happy to walk through a potential deal with you.

Just HMU, I’ll be around!