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Too many “potential” real estate investors sit on the sidelines because of the fear of the unknown. Maybe they heard one horror story of someone who bit off more than they could chew or way overpaid and lost a good chunk of cash. Maybe they think that they just do not know enough or that the timing just does not feel right. One more book, one more podcast, one more article or meetup group, they tell themselves. Then they will start investing. But have you heard of the BRRRR (buy-rehab-rent-refinance-repeat) strategy?
But what if you took the leap and killed it on your first real estate deal? How quick would that fear go away? How different would things be? What if you had the tools necessary to eliminate (or at least mitigate) that fear?
Let’s first chat about the potential upsides of diving into real estate investing.
We use for our own real estate projects and advocate the BRRRR strategy for real estate investing. If you are reading this, you are probably already familiar with the buy-rehab-rent-repeat-refinance (BRRRR) real estate strategy either because of us or other sources like BiggerPockets and their great books and resources. If you are not, the idea is as simple as this – buy a great deal on a property, increase its value by fixing it up, lease it to a tenant, find a bank to issue you a loan on the property, use the loan proceeds to buy more properties, and repeat the process.
We like this strategy so much because if you apply it effectively – which really only requires buying a property under value and doing enough rehab to drive up its cost – after just a short time you will end up owning a home with a tenant who is providing you cash flow and will have, through the process of the bank refinance, recouped all or close to all the cash you used to buy and rehab the property.
So, why is getting your cash out of a project fast so powerful? Money grows based on the velocity in which it can be deployed – the faster you can get it back the faster you can use that same cash to execute that next deal! How can one great deal propel you to the next, then the next, then the next until you really have realized some potentially life-changing financial results in real estate? Let’s look at a real life example and see the power of the BRRRR strategy that we advocate:
Let’s assume that you have $70,000 to start investing and decide you will BRRRR a modest number of properties. Say just two per year. You will do it in a market that is appreciating at only 3.0% per year. Each property will return you a cash flow of $100 per month. These numbers are truly modest and readily achievable.
You will buy each property for $50,000 and use $20,000 for rehabbing each property, resulting in after rehab values (ARV) of $100,000 per property. You have found a lender who will lend you 75% of the after rehab value when you refinance each property.
How will your wealth change in the next five years? The results are impressive.
Available Cash | Increase in Net Worth | Aggregate Net Worth | Number of Properties | |
Start of Year 1 | $70,000 | $- | $- | 0 |
Start of Year 2 | $70,000 | $58,400 | $58,400 | 2 |
Start of Year 3 | $70,000 | $66,980 | $125,380 | 4 |
Start of Year 4 | $70,000 | $75,565 | $200,945 | 6 |
Start of Year 5 | $70,000 | $84,151 | $285,096 | 8 |
End of Year 5 | $70,000 | $92,737 | $377,833 | 10 |
Look at that – in a period of just five years, by using the BRRRR strategy effectively and consistently, you now have ten properties in your portfolio and your net worth has increased by a total of $377,833. The best part – you did it all with the same $70,000 that you started investing with five years ago! Imagine now if you had never started or if you continue to wait.
Be a disciplined investor. Only buy properties you know are undervalued, so do your research. Try your best to buy properties that once you add together the purchase price, rehab amounts and closing costs you are going to be at an amount equal to close to 75% of the total price of that property after rehab (ARV).
Our Deal Analyzer tool is going to help you know that your numbers are solid and eliminate the doubts you may have about your ability to make precise calculations. It is simple – if the numbers do not work, do not buy it. Do not convince yourself that even though the math does not compute that you will be able to make the project make sense financially.
There will always be another deal – be patient and diligent, but be ready to jump when an opportunity surfaces.
All investments come with risks. Fortunately, real estate offers many downside protections not found in most other investment products. Our favorites are:
You can rent it, sell it, borrow against it, gift it, donate it, all among a host of numerous options. These options often do not exist with other investments. These protections can help you if you end up buying a project that you later determine does not suit your needs.
Simply stated, real estate prices historically have not been subject to the drastic ups and downs found with other riskier investment products. It is very likely that if you need to liquidate there will be a market for your investment properties, even those you may have overpaid for.
We are here to help you manage the risks of real estate investing in general and applying the BRRRR strategy to your portfolio of wealth-building assets.
More importantly, we want to encourage you to be a disciplined, yet eager and excited, investor. Don´t be one who tells himself or herself that tomorrow will finally be the day and never does anything about it.
Hopefully that $378,000 increase in net worth shown above is enough to get you going!
Don´t forget about your free trial of our BRRRR solution for a limited time – analyze deals, make offers and contract securely with your property managers, contractors and tenants using our fill-in-the-blank contract templates prepared by professional attorneys and investors. Get access to our Deal Analysis and Legal Solution and do more BRRRR deals than ever before! Learn more.
Sources:
Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple, by David Greene (Available on Amazon)
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