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A Proven Path to Financial Freedom – BRRRRing It On!

BRRRR

Summary: There’s something sexy about a good BRRRR. It’s the type of thing that gets real estate investors all excited. Once you’ve done one, you just want to do it over and over again as fast as possible. But what are the keys to doing your first or even your tenth BRRRR successfully? In this post, we share tips that can save you from doing the walk of shame when you BRRRR a property.

 

Right about now, some of you are asking, “What the heck is a BRRRR?”

The rest of you are probably feeling excited. Because you know how awesome (dare I say sexy!) the BRRRR strategy can be when it’s done well.

While we’ve previously shared an example of an investor who BRRRR’ed 50 single-family homes in 6 months, and we’ve covered how we house hacked and then “slow” BRRRR’ed a duplex in Seattle, we’ve never covered BRRRRs in-depth or shared the insights we have on how to successfully BRRRR.

Lucky for you, that’s the purpose of this post! So, let’s get to it!

 

What is a BRRRR?

BRRRR is an acronym that stands for “Buy, Rehab, Rent, Refinance, Repeat.” 

BRRRRing is a niche strategy that has been used by investors across the country to increase both their cashflow and net worth. It increases both because it involves buying properties, getting the initial cash out and holding on to a property as a rental for the long term. 

The buy step consists of buying a property that needs a little love. Because the purchased property needs work, it’s harder to finance so investors usually purchase BRRRRs using cash or hard money (i.e, short-term loan).

The rehab step involves an investor putting in his/her own funds or using a hard money loan to fix up the property. Sometimes properties need a significant amount of rehab and sometimes they don’t. Either way, the goal is to rehab the property as quickly as possible in the most cost-efficient way to get to the next step and start making money.

The rent step involves renting out the property to a long-term renter. This needs to happen before the property can be refinanced so the bank can appraise the property’s fair market value (which should be considerably higher now that you have a renter paying fair market rent). 

After a property is rented, the owner can approach a traditional lender (usually a local bank) to refinance the property using a residential loan and pay themselves back or pay off the much higher-cost hard money lender, depending on who put up the initial funds for the property. 

The last step, repeat, consists of the investor taking out the original funds put into the first property and proceeding to re-use them for another property again and again. 

In this way, the BRRRR allows investors to grow wealth by re-using the same pot of money over and over again. The result: infinite cash-on-cash returns and exponential growth, because there’s no waiting period while trying to save up enough money to have a down-payment for another property.

Now isn’t that sexy?

 

What does this look like in practice?

While we’ve seen why the BRRRR strategy is a phenomenal way to build wealth quickly, doing a successful BRRRR in real life can prove to be tricky. There are a lot of moving parts to the strategy, and you must have the right oversight and team in place to do it well. 

So, before jumping into doing a BRRRR, we encourage you to ensure you have all of the following skills and resources at your disposal. Doing so will vastly improve your chances of success (and avoid the walk of shame)!

 

Know your market (intimately)

As with long-term buy and hold investing, you must have in-depth knowledge of your investment market. 

You must understand which neighborhoods are attractive to renters. You must know what types of properties (SFH vs multi-family), what kind of finishes, and what kind of amenities renters expect. Also, you must know what they will pay to rent after you’ve fixed up your property. 

A lot of this information can be initially gathered from your team. Over time, as you do more and more projects, you’ll also gain the necessary knowledge yourself. 

 

Have the right partners

A successful BRRRR depends on having the right team in place. In fact, this is the most important component. There are five core members of your team. 

If you are BRRRRing locally to where you live, however, you may actually have fewer team members since you may be able to fill multiple roles (i.e. you may want to self-manage or you may want to purchase the property at auction and not have an investor agent). When you’re first starting out and gaining expertise, however, consider hiring experts to fill every role. 

 

#1 Investor agent

You must at least one excellent investor agent who has been in the area long term, who understands the market trends, and who has relationships with the right people (especially wholesalers) so you can snag those fixer-upper properties quickly. The right investor agent will be your thought partner, helping you think through all the strengths and weaknesses of each deal. He/she will help keep you from making errors. 

 

#2 Contractor

You need a fast, reliable contractor. 

When you’re doing a BRRRR, time is of the essence. This is not only because you’re paying high rates with your hard money loan, but also because your money is tied up in a property until you are able to rent it and secure your cash-out-refinance with a traditional lender.

Ultimately, the more times you’re able to re-use the same pot of money in a year, the greater the compounding growth to your real estate business. Therefore, having a contractor who is available as soon as you close on a property, who works quickly and efficiently, and who knows how to rehab rentals, is vital to your success. 

If you do enough BRRRRs, ideally your contractor will put you on the top of his/her list, and you’ll get special treatment since you’re such a great repeat customer. You’ll also gain efficiencies over time with your contractor since he/she will know what you want and left-over materials from one site can be used at the next. 

When initially choosing your contractor, you may want to consider picking a contracting company that has multiple sub-contractor employees rather than independent contractors. This will help ensure your project is done in the most efficient way. Many delays are caused by staggering steps of a rehab according to subcontractor availability. 

You’ll also want to manage your general contractor well throughout the BRRRR project and have a well-thought-out contract, with timelines and partial-payment plans in place. Your property manager or agent will sometimes be able to help you with managing the project for a fee if you’re doing it from out of state. Over time, though, as you and your contractor work together on multiple projects, you likely won’t need additional oversight besides what you are able to provide yourself. 

 

#3 Hard money lender

You have to develop a good working relationship with a hard money lender. 

Hard money lenders are private lenders who loan money to investors, usually for the short-term, to fund projects that traditional banks won’t touch (usually because the property is just not in great shape) or in situations where a seller has time/cash limitations (wants cash, wants a quick close, in a matter of days). One of the great side-effects of working with a hard money lender is that they are often investors themselves and they do their own due diligence before lending their money, so you actually gain another set of experienced eyes evaluating your deal. 

A hard money lender who can quickly approve you for a loan and get you the cash fast can make the difference between missing and securing a deal. As is the case with all other members of your team, your relationship with your hard money lender is a long-term relationship and as mutual trust grows over time, you will likely get more favorable terms and preferential treatment. This should help save costs and save time, further increasing your returns. 

 

#4 Traditional Banker

You need to have a great relationship with your lender. 

When you’re done with your project and have it rented out, you need a favorable appraisal from your lender. Ideally, you will gain good insight as to what that will be before you even purchase the property, so you can reduce the risk that you have to leave some of your money in the deal. Usually creating a long-lasting relationship with a local bank (rather than a large national bank) is the key to maximizing your appraised values and achieve infinite cash-on-cash returns. 

You’ll also want to build a relationship with a bank with favorable terms including seasoning periods. A seasoning period is a period of time after you get a loan where you unable to sell or refinance the loan. Often this can be up to a year. This is one of the reasons that investors often go with a hard-money lender upfront. They want to purchase a property and refinance it in a matter of months, not wait a full year to be able to get their cash out. 

 

#5 Property manager

Unless you are intimately familiar with a market and intend to self-manage, having an excellent property manager is vital to doing a BRRRR.

Your property manager most obviously needs to be able to give you insights into what your property will rent for after your rehab is complete. He/she will also be able to give you ideas about what finishes to use based on what renters are willing to pay for in your market, so you know where to spend your rehab money.

When doing a BRRRR, one thing you and your property manager should also be able to help you think through is your rental strategy. The most basic rental strategy is to rent your property to long term tenants. But there are numerous other niches besides this. 

One niche is section 8 housing because section 8 vouchers are paid by the room. We’ve seen section 8 housing work out really well in places where investors are BRRRRing single-family homes and adding bedrooms through the rehab process. 

For example, an investor may buy a $50,000 four-bedroom home, take two weeks to rehab it, costing $20,000, and then rent it out as a five-bedroom home for $1,200 a month. In this case, a local bank may appraise the property value now at $100,000 using the income method (using the income the property generates to estimate the fair market value rather than using comparable properties). If the local bank gives the investor a 70% loan to value, that means the investor is pulling that $70,000 out of that property in less than a month and moving on to the next BRRRR.

 

Pick the right property

When you’re investing in real estate, everything is about the numbers. A BRRRR is no different. In fact, it’s even more important to be working with exact values upfront so you ensure you can accurately predict your returns, even before you buy a property. 

In real estate investing there is a popular saying: “Don’t fall in love with the property, fall in love with the numbers.”

But how do you get accurate numbers? 

It all goes back to the quality of your team. You have to have accurate predictions for the rehab costs from your contractor, to have an accurate rent estimate from your property manager and to be able to gauge what your appraisal will be from your lender post-rehab. You have to know how much your hard money loan is going to cost you. Only once you have all those numbers can you make an informed decision to buy a property at the right price.

Once you have all the accurate costs collected, make sure to plug them into our cash-on-cash calculator to make sure a property makes sense. 

Download the Short Term Rental Cash-on-Cash Calculator

 

Are you ready to BRRRR?

While it certainly takes more effort and skill, doing a BRRRR is an excellent way to grow a real estate portfolio without a lot of money. Additionally, it allows the investor to collect numerous hours to meet the criteria for Real Estate Professional Status since each BRRRR requires significant oversight and coordination of team members.

Finally, besides the typical fast BRRRR that I’ve laid out in the scenario above, remember there are also several modifications on the BRRRR strategy (such as the “slow” BRRRR method we did when we house-hacked and the way we plan to build two duplexes from the ground up, rent, refinance all of our money out of the deal), so there are a lot of ways to do it.

Have you BRRRR’ed? Share your story with us!

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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