BRRRR Your Way To Financial Freedom : A Simple Strategy To Help You Reach Your Goals
Real estate investing consists of several different acquisition and exit strategy's. These different types of strategy's are what appeal to several new investors. The issue with having so many strategy's is that it is very easy to pull you off course before you have completely mastered, streamlined and implemented systems and processes for this specific niche.
Although there are many shiny objects in the real estate industry, once you learn the basic concepts and fundamentals of real estate as a whole, several of these strategy's begin to play off of each other. The concept that we are going to talk about today is a blend between a couple common investment strategies.
You will be purchasing a property at a fairly deep discount, which may include you doing a lot of direct to seller marketing. You will buying a property and adding value through strategic renovations in order to maximize the value of the property without over renovating the property, this is similiar to the rehab and sell strategy. Lastly, you will be placing a tenant in the property and becoming a landlord.
So in short, this strategy includes several of the more common real estate investment strategies and just may be the most lucrative of them all.... If executed properly.
So let's learn a little bit more about it.
What Is BRRRR?
Before we get into talking strategy and implementation, let's first touch base on the basics behind this strategy.
Buy Rehab Rent Refinance Repeat
With this strategy, you will be purchasing a value add property with the intentions of rehabbing it, stabilizing the property with tenants and then refinancing the property into a traditional mortgage. At a high level, you will purchase a property with cash (or use private money to get into the property), make the necessary repairs to reach maximum appraisal and rents, find a tenant and begin renting to them. Depending on your bank, credit union, portfolio lender (whoever you use), there is typically a 6 month seasoning period to refinance the property and pull the cash out or pay off the existing private lien on the property.
The 4 Stages Of The BRRRR Method
The most important part of any real estate investment is the purchase. In this business you have to pride yourself on buying great deals and this method is no different. We are going to focus on buying a great deal. Before we go into the purchase of the property, we have to know that we are going to implement this strategy so that we can work backwards to determine a purchase price that will fit this model. There are specific thresholds that we have to stay under in order to maximize the benefits that this strategy has to offer.
When go to refinance the property, a standard LTV that a lending institution will offer is 75%, so that is the number that we are going to work off of. (This means that the lending institution will place a mortgage on the property for 75% of the appraised value of the property).
1) ARV or After Repair Value
Run your own comparable market analysis or speak with your agent / broker. Residential buildings and commercial buildings are valued differently, so if you are unfamiliar with this process, please educate yourself or speak to someone that is familiar with this process. Make sure you get this number right, because it is the most important number for our analysis.
2) Repair Estimate
One of the most difficult aspects of a value add investment for real estate investors is accurately estimating the repair costs associated with the project. Understanding labor and material costs for your projects will take some time but there are specific documents that you can use to help organize and estimate your renovations.
Scope of Work
These are just a few of the documents that you can use to help you produce an accurate repair estimate on your project. If you would like more details on the Construction Documents that we use and our process, feel free to drop us an email and email@example.com and we would love to help in any way possible.
3) Closing Costs (Purchase)
Whenever you purchase or sell a property, you will have closing costs that you have to pay for. Let's start with discussing the purchase closing costs. The type of capital that you use to acquire the property will have an effect on how much you will have to pay at closing. For the sake of this post, we will touch on closing costs for a true cash purchase and also a private money purchase.
True Cash Purchase
Taxes paid in advance
Abstract/ Tax search & update
Closing document preparation
Government Recording Fees
Title Insurance (if used)
Private Money Purchase
All of the above costs
Origination Fees / Points
Daily interest charges
These are all costs that we will have to account for when running the analysis on our subject property to determine our purchase price.
4) Holding Costs
Your holding costs are costs that you will have to account for when the property is vacant. For this specific delivery method, your property will only be vacant when you are renovating the property and searching for a tenant. Your schedule will help you determine how long you need to account for the holding costs for this specific project. Here are some of the holding costs, that you will have to account for during this period of time.
Taxes (typically paid in advance at closing)
Lender Interest (if you used private money to acquire the property)
These costs should be minimal throughout the 1-3 month renovation and tenant search period.
5) LTV & Refinance Closing Costs
As previously stated, a standard Loan To Value on the refinance of an investment property is 75% (some lending institutions will go up to 80%). This means that the lending institution will issue you a loan on the property for 75% of the appraised value or after repair value of the property. To account for the closing costs associated with the refinance, we typically run our numbers off of 70% of the appraised value to account for 5% in closing costs on the refinance. This will really by the second step of the process that you go through to determine the price you are willing to acquire this property at to ensure it works for this model. Before we can refinance, there is typically a 6 month seasoning period that lending institutions require. This means that you will have to own the property for more than 6 months before you can refinance. Depending on your relationship with the lending institution, it is wise to start this process at about month 4, so that you can refinance the property on the first day after the 6 month seasoning period is up.
Determining Your Purchase Price (Example)
After Repair Value - $100,000
LTV (including closing costs) - 70%
Repair Costs - $20,000
Purchase Closing Costs - $3,500