Hey guys! I am super pumped to put out this blog post on one of the investing strategies we teach here at Irby. It’s commonly known as the BRRR Strategy (Buy>Rehab>Rent>Refinance). By leveraging this one strategy our company has amassed a large rental portfolio. I believe this tactic, when practiced in concert with hard work and smart decisions, can create financial freedom for your family for generations.
There is an old saying that goes “you make your money when you buy,” and we think there is tons of truth to that. There are different factors that affect whether a purchase is considered good or bad and each is as important as the next.
What you want to remember is that when you are buying a property expect to not get the feedback you’re expecting. You’ll most likely have to do some negotiation with the appraiser to get what you deserve.
There is a way to know if you really did get a bang for your buck. You will always know how well you did because the profit you gained or loss will be obvious after the sale. When you have holding properties it can be easy to deceive yourself into thinking the appraisal wasn’t good. Bottom line; you will have to keep the buy and hold investors accountable so they don’t get lazy.
You should always keep in mind that the main goal behind the BRRR strategy is to compile all of your money that you put into a property out when you refinance it. If successful, you will have 25 percent built-in equity to reduce the risk. Remember to try to maintain this equity margin in order to be profitable no matter what your new home costs.
Another rule of thumb is to use the 70 percent rule by using the formula: (After Repair Value X 0.7) – Repairs = Maximum Purchase Price
Majority of lenders will finance at a 75 percent value. Therefore, you could also say that holders aim for 75 percent. We do this because we are looking for volume and can have some money to leave in the deals. There are two reasons why you should stick with the 70 percent guideline:
- It costs money to refinance. There are tons of fees that will eat away at your margin if you’re not careful. Those items are the appraisal, title work, and loan processing fees.
- Aiming for 75 percent offers no emergency. Typically people go over budget more than they go under budget so if you build a bit more of a margin it’s a better idea unless you want to go for volume. Since we are focused more on volume we would want to aim for 75 percent.
There are many ways to purchase your new property from using cash, a hard money loan, a private loan, or even seller financing. Now going into detail about the upfront financing is not part of the idea of this article, but it is still important to take into consideration the different upfront financing options available. You have to account for those when you start analyzing a deal to hit your 70 or 75 percent goal.
Let’s talk about rehabbing a rental. There are two important questions to keep in mind:
- What will it take to make the house livable and functional?
- What rehab decisions can be made to help add profit than take away because of costs?
There are a few additions you don’t really need to add value to your rental or property. Those items are:
- High-end Stainless Steel Appliances
- Granite Countertops
- Brazilian Hardwood Floors
- Hot Tubs
- Bay Windows
Also, don’t go through the trouble of finishing the basement or garage for your rental property. However, you will want to invest in two-tone paint, adding tile, and refinishing hardwoods to add value to the property.
Make sure you continue to maintain the house no matter if there are tenants in the rental or not and everything is functional. Not caring about the property or your tenants will hurt you in the long run. Your reputation will suffer and you’ll lose income. With that being said, there are many options to value-add rehab ideas for the rentals.
Let’s not forget to put effort into the front of the house too. The front is the first impression any renter has of the home, make it a lasting and good one. Bad first impressions can diminish the appraisal and cause prospective renters to go elsewhere. So always keep the front of your house in tip-top shape.
It is best to rent out your property before trying to refinance it because banks are usually reluctant to refinance an unoccupied dwelling. On top of that, you want to make sure you do your due diligence and screen your tenants to make sure they will actually pay rent. Appraisers also take into account how clean and nice your tenants are. First impressions are important all the way around from the people to the dwelling itself.
Don’t forget to let the renters know that you will be having an appraisal done beforehand. You can do this by a simple note by postcard or left on the door. The best part is all they need to do is make sure the space is clean because they won’t need to be present during the inspection.
It wasn’t that long ago when it was very difficult to find a bank that wasn’t reluctant to refinance a single-family rental property. Now you can do it with ease. Still, when looking into a bank there are a few questions that are pertinent to ask:
- Do they only pay off debt or can they offer cash out? If cash-out isn’t being offered you will want to move on to other prospects.
- Do they have a required seasoning period? After you’ve owned your home for a certain amount of time the bank will lend on the appraised value no matter how much money you have into the property; this is called seasoning period. That means that in order for the BRRRR strategy to work to your advantage you will have to borrow on the appraised value. In this day and age, a few banks will lend on the appraised value as soon as the property has been rented or rehabbed. These are often the best type of banks you can find.
The best way to find a bank that fits in this category is to ask around. Take advantage of talking to investors you may know to find out who they use of, ask us here at Irby, or you can even ask a local real estate club. The truth is, if a bank is lending to an investor there is a greater chance they will lend to you also.
You can also go to websites such as ListSource or DataQuick and put in what you’re looking for. They’ll find loans made in the specific city and price range you plug in to make it easier for you to compare. This will help you pick the best bank for your real estate transaction.
When you have your list you can start going through and picking or eliminating banks. Using the sites will help take the guesswork out of determining if they loan to investors in your area and price point.
Lastly, make sure any information you give the lender is as clear as possible to 1) make a good impression 2) speed up the decision making process. This is also a good thing to do for appraiser requests.
Now it’s time to do it all again!
Using the BRRRR strategy the right way will give you a cash-flowing property with little or nothing down. In conclusion, the BRRRR strategy is one of the best ways to build wealth in the real estate community.
If you have any more questions reach out to me! I am excited to teach others what I’ve learned and we can build our rental empire together!