Many people are considering a stronger focus on long term financial stability and creating passive income streams. Why not? Everyone shares the dream to make money and having the freedom to do what they love (aka: RETIREMENT! ).
Real estate makes a great option to gain consistent returns for future abundance. Real estate can be an active or passive investment, but either way you have control of your investment. You get to chose the location, actual property, style, and so much more. In addition, you can decide on solutions to problems such as replacing an AC or just getting the current one replaced. Alternatively, you have the option hire a property manager and have them make those decisions.
Beyond just control, real estate has a multitude of benefits including: tax benefits, loan pay down, appreciation and cash flow. Most of all, it just makes sense. The demand is high, as people and businesses will always rent property. Current home ownership rates in the US are the lowest in over 20 years.
Now that I have hopefully convinced you that real estate is a good investment, let’s cover strategy. A simple strategy to develop a profitable real estate portfolio is using the BRRRR method. This method stands for buy, rehab, rent, refinance and repeat. Brandon Turner at Bigger Pockets is credited for creating the term, but the concept has been around for a long time.
BRRRR method explained
However you do it, your first step is to actually buy the property. The important element to this step is to buy the property at the right price. That means finding a house that is available well under the potential value. A good rule-of-thumb is to keep the total costs (including remodeling costs) around 70-75% of the potential fair market value. You must be mindful and calculate any needed updates to the house before closing on the property. For example: if you find a house with a potential fair market value of $100,000 that needs about $15,000 of repairs, then you will not want to spend more than $60,000 to purchase the property to stay at 75% of fair market value.
Since you must find the properties at such a discount, you can’t just hire any real estate agent that only depends on data on the MLS. Many of these deals require hard work through direct solicitation or through real estate wholesalers. There is a great article at Bigger Pockets that provides additional sources to find real estate deals.
The step is my favorite. In this step, you add value to the property through updates or upgrades. This step is also very tricky because you must control your desires to over-remodel the property. It is important to keep in mind that you are not updating a house for you to live in, but as an investment. Sometimes “good enough” is perfect! A great example is with the kitchen. Granite countertops are ideal for your house, but you can often save over $1000 if use tile or another economic material for counter tops.
The next step is to start generating income. If you like working with people and are good at organizing your time, self management may be an option. It can be a great cost savings, as property managers charge from 8%-10% along with additional fees. However, a lot of people use property managers just for the convenience and experience. It all comes down to personal preference and availability, but I think it is always a good idea to start with self management when starting out. Gaining the experience of property management can help you better communicate when outsourcing it in the future.
If you self-manage, a great resource is Cozy. This site consolidates the listings, rental applications (including background and credit checks), rent payments and more in all at one source. The best part is that it is free for landlords to use.
Now you reach the point where you’ve purchased the house, you’ve made the updates, and you’ve got someone renting from you; this is the step where you convert the property to a long-term investment strategy. This is the point when the beauty of the strategy comes together. You assume liability of the mortgage, but the equity is built while your renters pay the mortgage.
You must plan to only be able to refinance 80-85% of the fair market value. That’s why it is ideal to only spend a total of 70-75% of the fair market value on the purchase and the updates. The difference of 5-10% is needed to cover closing costs and margin of error with the appraisal. Your estimate of fair market value sometimes can differ from the official appraised value.
When it comes to actual finance, I have found the most success with smaller community banks or credit unions. Some have a bit old school processes, but they are definitely more willing to work with you. I recommend shopping around and finding the best terms that work for you.
You cannot have success until you expand your portfolio. Utilizing the strategy, the possibilities are unlimited as you can continue to secure good properties that bring cash flow.
As with all strategies, there are particulars that one learns through experiences.
Below are a few lessons I have learned while executing the BRRRR strategy.
- Cash– To utilize this strategy, you must have access to enough cash to buy the house, cover the remodel costs and pay closing costs. This is the part of the strategy that scares most people to the point they do not get started. There are options ranging from credit lines from assets (such as you home, IRA or 401k), investors, friends/family, and many more.
- Vision – The strategy only works with properties if they are bought at the right price, which 90% of the time means the properties are distressed. So, you will have to look at a trashed house and create a vision of what it can become (while keeping to a budget)!
- Network– This strategy is based on your ability to find deals and that usually aligns with the strength of your network. These deals are not going to be delivered to you by a real estate agent. In most cases, you need to network to find the individuals that are selling houses off market (off the MLS). Also, I urge you to tell everyone what you are doing. Tell friends, family, co-workers that are you looking to buy houses and can close fast. You will be surprised how many people know someone that needs to sell their house fast or inherited property and just wants to cash out easily.
As with any strategy to grow your wealth, it takes hard work. However, the strategy works. With creativity, you can find funding and create a new future for your family. I currently have a small portfolio of rental homes and using the BRRRR strategy to expand my portfolio.