OUR BRRRR STRATEGY Buy Rehab Rent Refinance Repeat

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1 OUR BRRRR STRATEGY Buy Rehab Rent Refinance Repeat ANDREW SYRIOS Our company is a big fan of the BRRRR method of real estate investment that Brandon Turner coined and BiggerPockets. In this article, I wanted to give an introductory primer on how to approach this investment strategy, from beginning to the part where you repeat it over and over and over again. B Buy They say you make your money when you buy, and that s definitely true. Although, to paraphrase Tolstoy s opening line to Anna Karina, all good deals involve a good purchase, but each bad deal is bad in its own way. The key to remember when buying property you intend on holding is that there isn t a great feedback mechanism. Yes, you will get an appraisal, but you can always disagree with an appraisal and who is to say whether you or the appraiser is right? I ve seen some absurd appraisals, and I ve seen homeowners believe their houses are worth some absurd price (never myself, of course). When you are flipping, you will always know how well you did because you will be able to look at what your profit or loss was after the sale. With holding properties, you can always deceive yourself into thinking the appraisal just wasn t any good. In other words, there is a tendency for buy and hold investors to get lazy. Don t get lazy!

2 2 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, but still have 25% built-in equity to reduce risk. So while you may be looking for a different type of property (flippers usually buy more expensive properties than holders), you want to get the same equity margin. Flippers often use the 70% rule as their guide. In short, the rule goes like this: (After Repair Value X 0.7) Repairs = Maximum Purchase Price Most lenders will finance 75% of the value, so you could say that holders can aim for 75%. We generally do this, but that s because we have some money we can leave in the deals and are looking for volume. (As a matter of fact because of our plentiful capital sources we are open to consider a buy/hold property appraising for 80-85% of what we have into them.) If this doesn t describe you, I would argue you should stick with the 70% guideline for two reasons: 1. Refinancing costs money. Most banks charge a point and there will be an appraisal, title work, and loan processing fees that eat away at your margin. 2. Aiming for 75 percent offers no contingency. People will go over budget more often than under budget so building in a margin is a better idea unless you are going for volume. Again, we are focused more on volume and so we aim for 75%, but overall, when I ran the numbers on our portfolio, our all in price came out to more like 80%. To purchase the property up front you can use cash, a hard money loan, seller financing, private loan, etc. The upfront financing is outside the scope of this article, but what s important to note here is that different upfront financing options results in different acquisition and holding costs, and you need to account for those when analyzing a deal in order to hit your 70-75% goal. R Rehab There are two key questions to keep in mind when rehabbing a rental: 1. What do I need to do to make this house livable and functional? 2. Which rehab decisions can I make that will add more value than their cost? Unless you are doing luxury rentals, generally speaking, things like the following are not necessary and will cost much more than either the rental or property value they will produce: Granite Countertops Brazilian Hardwood Floors High-end Stainless Steel Appliances Bay Windows Skylights Hot Tubs Chandeliers It s also rarely worth finishing a basement or a garage when it comes to rentals. But on the other hand, two-tone paint, refinishing hardwoods, adding tile and upgrading the landscaping are very often worthwhile.

3 3 Of course, the house needs to be in good shape and everything needs to be functional. Being a slumlord will hurt you in the long run as well as all our industry s reputation. We want to rent good properties, but luxury items will cost you more than get back. That being said, there are plenty of value-add rehab ideas that are great for rentals. As noted before, a more attention being treated to the front of the house is very important. For example compare these photos. The only differences are window shutters, cleaning the gutters, painting the front door, and adding bark mulch. In the next two, the only difference is adding window shutters, but it s a big one. A bad first impression can sink an appraisal because appraisers are, like everyone else, human. A first impression affects them in the same way it does a prospective tenant. So make sure the front of your houses are appealing. And here s yet another example: R Rent

4 4 R Rent Banks rarely want to refinance a property that isn t occupied so renting usually needs to come first. I have talked about the importance of screening before, and it s critical to screen diligently so you get tenants that will pay each month and not damage your property. But screening is also important on the financing side. While appraisers shouldn t take too much into account about how clean and pleasant the tenant is, as noted above, everyone is human and such impressions can make a difference. It is also worth noting that you will need to notify the tenant that you are doing an appraisal beforehand (I always recommend you request interior appraisals versus drive-byes as appraisers will be more cautious and likely downgrade your property unfairly with drive-byes). Just send out or post a note on your tenant s door about the date and time and then give them a reminder call the day before (unless your local laws require something else in addition to that). They don t need to be present, but you should ask them to clean up as well as to kennel any pets if they won t be home. R Refinance Not too long ago, it was difficult to find a bank that was willing to refinance single-family. Now, however, it has gotten much easier. Still, when looking for such banks, there are things that you will need to ask: 1. Do they offer cash out or will they only pay off debt? If they won t offer cash out, you will probably want to move on or have a strategy of putting on a private loan, having the bank pay it off, then using the money for the next project. 2. What seasoning period do they require? A seasoning period is how long you have to own a property before the bank will lend on the appraised value instead of how much money you have into the property. For the BRRRR strategy to work, you need to borrow

5 5 on the appraised value. Some banks are willing to lend on the appraised value as soon as a property has been rehabbed and rented. These are the best banks to find. The most effective way to find such banks is to ask around. Ask any investors you know which banks they use, or you can ask here on BiggerPockets, or go to your local real estate club and ask there. If a bank is lending to another investor, there is a good chance they will lend to you. Another way to find such banks that we ve used is a bit odd, but it has been quite effective for us. First, pick a market you are investing in, for example, I would pick Grandview, MO (a suburb of Kansas City). Then pick your loan range, i.e. $40, ,000. Then go to a website such as ListSource or DataQuick and search for every loan made in that city and that price range in the last year or so to non-owner occupants. It will probably cost you a couple hundred dollars but could be well worth it. Once you have the list, go through it and pick out all the banks. Right off the bat, you know this bank is at least willing to lend to investors in the area and price point you are looking for since they ve done it before. So there is a good chance they will do it again. Finally, make sure to provide the lender with as much information in as clear a way as possible to 1) impress them (remember, these are human beings, not computers making decisions) and 2) help them make a decision quickly. The same should go for whatever information, if any, an appraiser requests. R Repeat Rinse and repeat baby! If you do the BRRRR strategy right, you should have a cash-flowing property for little or nothing down. The BRRRR strategy necessitates delayed gratification and many buy and hold investors attest to the fact that it allowed them to survive until the fantastically profitable dynamics of real estate kicked-in. They will kick-in, and BRRRR will see you through until they do.