It’s impossible to buy a bunch of rental property, right?
You just need too much money for down payments to keep buying.
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.
A long time ago I started using the BRRR strategy before anyone ever called it the BRRR strategy.
You can use it to preserve capital in order to buy more and more properties over time. This is the strategy I used to keep buying more property while continuously putting more money in my pocket.
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.”
Step 1 – Buying
There are 3 basic parts to buying any property – finding, analyzing, and closing the deal.
Finding a deal
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:
- Knocking on Doors
- Yellow Letters
- Bandit Signs
…and a couple dozen more.
We won’t go into a lot of detail on it here, but you can read the guide on finding off-market deals.
A lot of people say that on-market deals are never any good. This is simply not true if you know how and where to look.
Fortunately, I’ve also created the simple guide to finding great deals on the MLS.
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. Here’s one I use (you can play with the cells as it’s fully interactive):
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.
The most important part of closing a deal is….financing it.
We’ll talk a bit more about financing in a couple sections, 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 financing that allows you to purchase something with a bit of risk. These are often hard-money or private-money loans.
The reason is because standard loans don’t allow you to buy seriously distressed properties and buy them quickly.
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 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.
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 $5k in value, but add $0 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 example: a 10k kitchen might raise the rent $150/month (18%/year return) while a 5k kitchen might raise the rent $100/month (24% return).
With rentals, cheaper upgrades often have a higher return on investment than expensive upgrades. It’s obviously a bit more complicated than this, but the idea is to get you to think slightly different about the problem and solutions.
Make sure you consider all options when rehabbing a rental property, not just the most expensive ones.
Step 3 – Renting
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 Buildium is a great way to find and manage your tenants.
Buildium 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.
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
…Check out the guide to keeping great tenants for more details.
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.
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 the process
The purpose of this is to allow you to get most/all of your cash back and leave you with a long-term stream of income. When you get the cash back, you can now go purchase another property with the money.
As you earn more cash flow, you can do more deals.
Eventually, this can snowball and you’ll be able to do some amazing things with this strategy!