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 BRRRR strategy before anyone ever called it the BRRR method.
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.
This is great if you're goal is to achieve financial independence. Since you can use the same capital over and over, you don't need to earn a ton of money outside of real estate.
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!
While MLS is always a source to find BRRR deals, it's tough. It works fine when the market is on its way down, but in a hot market it is VERY competitive. So, my current favorites are building an Investor Websites and doing Direct Mail.
Building an Investor Website
This is actually a lot easier than most people think. I actually did an experiment with it, spent only 45 minutes building a site and was able to rank it to #1 in Google for some competitive terms in an average market.
Read about my real estate investor website here.
I've since started a new experiment in the amazingly competitive DFW market, which you can also start reading about at that link as well.
I use onCarrot (also known as Investor Carrot) to help me build my investor websites. It's super quick and easy and you'll have your website up in about 10 minutes.
You can check out my super detailed review of Investor Carrot and setup guide.
Direct Mail Marketing
The key to doing a good direct mail campaign is two fold:
1) Have a great list
2) Have a great letter (or series of letters)
I've found that having honest, straight forward letters work best. The salesy, flashy letters might generate calls, but the trust factor isn't there.
Instead, focus on writing professionally, including a picture, and showing that you are actually part of the community. This helps conversions.
As for creating a good list, it really depends on exactly what you're going after.
I outline in amazing detail how to find hidden gems on MLS, doing direct mail, and building and growing your investor website in my very inexpensive eCourse called Deal Flow Mastery. So, please check it out!
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.
BRRR Calculator Free
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.
Quick BRRR Method Example for Rehabbing
Let's say you can put in a new kitchen for $10,000 or you can just touch up the existing one for $5,000.
Let's say the $10k kitchen will raise the rent $150/month ($1,800/year which is a 18% return on the investment). Not a bad return overall.
The other option is to do some slight upgrades for $5k. Let's say this kitchen would increase the rent by $100/month ($1,200/year or a 24% return).
Unless you are doing rentals in the luxury market, less expensive upgrades often have a higher return on investment than expensive upgrades.
Also, your tenants will put a lot of wear and tear on the unit and upgrades so, you'll find yourself spending a lot more on maintenance for higher end upgrades.
The key is to get you to think slightly different about calculating returns. It's important to consider cost vs rent rather than cost vs price.
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.
Finding great tenants.
The key is to get your listing in front of as many eyeballs as possible. The more applicants there are, the more selective you can be. There are a lot of ways to go about this, but using a great property management software like Avail.co is a great way to find and manage your tenants.
Avail will syndicate your listing on every good apartment listing site on the web including Craigslist.
Make sure you include pictures of the bedrooms, bathroom, kitchen, and exterior. It’s important that it is extremely clean and you don’t have tools or paint laying around in the photo! Also, never take a photo where someone can see you in the reflection of a mirror.
The idea is to get people into the apartment to look. They can decide against renting once they see it, but if they don’t come to see it, they have no chance to say yes.
Screening the applicants
Tenant screening is extremely important. Having bad tenants can put you out of business.
At a minimum, you need to do the following:
- Get Social Security Numbers
- Check The Tenant's Background
- Contact Information For Previous 2 Or 3 Landlords
- Verify The Tenant's Job And Income
- Ask If The Applicant Has You Ever Been Brought To Court By A Previous Landlord For A Debt Or Eviction
- Have A Written Lease Or Tenancy Agreement
For more information about tenant screening, check out the guide to avoiding bad tenants.
You can also check out the full review of Avail which is an online property management software that will help you screen and manage your tenants.
Keeping good tenants
Turnover is very costly; you want to retain good tenants if you can. Unfortunately, most landlords don't realize that there is a relationship between the landlord and tenant which needs to be maintained and balanced.
Understanding this relationship is the key to keeping happy tenants. Here are a few ideas to help you improve your style as a landlord:
- Maintain the property in great condition
- Have a good lease and tenant screening process
- Stay in touch with the tenants in be prompt with maintenance
- Offer a reward to stay at the end of the lease
- Send Christmas cards or small gifts
- Incentivize the tenants to save money for you
- Make it easy to pay rent
- Provide a move in packet
- Send a welcome letter or postcard
There is obviously a lot more to this, that's why I put together this guide to keeping great tenants.
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.
Let’s consider a property that you can buy for $100,000, put $50,000 worth of work into it, and now its market value is $200,000.
You're "all in" for $150k and since 75% of $200k is also $150,000, you'd be able to cash out and get all your money back. Technically, any yearly return cannot be calculated because you have $0 invested in the deal.
Your return is now infinite.
As great as that sounds, it isn’t always possible to get back all of your money, and that's OK.
The goal is to minimize your cash in the deal once you refinance.
So in the same example, if you were all in for $155,000 and the ARV was the same at $200k. After you refinance the property and cash out, you'd have $5,000 total left invested ($155,000 - $150,000 = $5,000).
If this property generates a paltry $100/month, that is still nearly a 24% ROI. Try beating that in the stock market!
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.
Real Life BRRR Strategy Example
Here is a real BRRR strategy example.
There is a distressed duplex that I was chasing. I offered $60,000 and the bank took another offer.
I was disappointed but moved on. A few weeks later I found the property was back on the market.
So, I offered $60k again for the property. The bank once again took another offer.
I kept offering the same amount because that's the number it worked at.
I knew the property would be worth about $150k when it was done, and it needed roughly $40k worth of work. With closing costs and interest, the total cost would be about $50k.
I planned to use the BRRR strategy, so I just did the math backwards.
I could get a 75% Loan to value loan, so $150k * .75 = $112k. Just round it to $110k.
Then take off $50k
$110k - $50k = $60k
So, that was my offer.
Once again, the property came back on the market. I made the same offer again and the bank finally took it.
After I closed on the property, the overall costs came in about $45k which was great, but...
The appraisal came in lower than I wanted. It came in around $140k which would let me get a loan of only $105k. There were also some additional closing costs I didn't anticipate, so my loan proceeds would only be around $102k.
So, I was in the brrr project for about $105,000 and would cash out $102,000. Overall I left only $3,000 in the deal and earned 2 units of cash flow along with about $35k in equity.
Not bad, right? That's the power of the brrr strategy!
If you haven't yet, it's time for you to get your brrrr calculator.
It's important to have a good deal calculator so you don't miss any important expenses, income items, operational costs, etc.
You should also project your cashflow out beyond year 1 so you know what you're looking at in 2, 3 or even 5 years.