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in Real Estate Investing, Series: Getting Started in Real Estate · November 7, 2021

Real Estate Investment Strategies: The BRRRR Method

BRRRR (BUY, REHAB, RENT, REFINANCE, AND REPEAT)

This is Blog Post 6 of The Getting Started in Real Estate Series. Today’s topic is the BRRRR strategy.

BRRRR is one of the favorite real estate investing strategies among the real estate investing community and you will see why below.

So, what is BRRRR?

The basics:

  • You Buy a property that needs work
  • Renovate it (just enough).
    • By doing this, you end up increasing the value of the property. This is also known as forced appreciation.
  • Rent it at market rent
  • Go to a bank, get a cash-out Refinance loan.
    • Because you increased the value of the property by doing the right type of renovation, the bank gives you a loan that will cover either 100% of what you spent or close to that.
  • Once you get your money back, you Repeat the process and do it all over again.

In a perfect BRRRR 🥶 , you would get 100% of your money back while still cash flowing. I call this BRRRRfection.


We have done a few BRRRR deals, but I can’t say that I’ve accomplished BRRRRfection yet. At least, not by the book definition. However, the few we’ve done still fall under the BRRRR category. I’ll walk you through a real example. I had to dig out the actual numbers

BRRRR Example – The Big Horn Property

The Facts

Cash at Purchase$65,300
Renovation Costs$22,811
Holding Costs (insurance, utilities, interest, etc)$1,498
Total Cost$89,609
Appraised Value after rehab$130,000

Scenario A: The traditional BRRRR strategy would have looked like:

Refinance Loan at 75% of Appraised Value of $130,000 $97,500
Minus Closing Costs ($5,208)
Minus Total Cost of Property + Rehab ($89,609)
Total Net Cash Out from Refinance $2,683

In the scenario above, I would have recouped all of my money and be left with an extra $2,683, but I didn’t do this because I had a different strategy in mind. I wanted to leave this property with a higher cash flow while using the remainder equity to get a HELOC (Home Equity Line Of Credit).

Scenario B: The Refi/HELOC BRRRR strategy

Refinance Loan to Cover Purchase Price only (50% of Appraised Value) $66,000
Minus Loan Costs ($5,208)
Minus Total Cost of Property + Rehab($89,609)
Total Net Cash Left in the Deal ($28,817)

We left a significant amount of money in the deal, but for a good reason. We wanted higher monthly cashflow and the opportunity to pull out equity by using an equity line of credit. We wanted to have more borrowing options for buying future deals without having to be locked to a fixed mortgage interest payment. We would use the line for temporary funding and pay it down as we refinanced properties.

I also wanted to mention that in Scenario A, I would have had to wait an additional 2 months to be able to get a loan for the $97,500 which in turn would have resulted in additional holding costs. Most lenders have a 6-month “seasoning” period before letting you take out a mortgage that is higher than purchase price and closing costs. In our case, we were capped at $66,000 which was purchase price of $65,000 plus closing costs of $1,000. You can always find a lender that will waive the “seasoning” requirement, but don’t be surprised if you bump into this.

Two months after we closed on the mortgage, we applied through a credit union and got approved for a $38,000 line of credit which we then used to fund another deal. At the end, we ended up getting $104,000 out this property. If I had done the traditional BRRRR strategy, the max I would have gotten was $97,500 so it’s still a winner.

How Secured Line of Credits or (HELOC) work :

  • You have a property that is appraised at $130,000 and a mortgage of $66,000. A lender may give you a 80% loan to value secured credit line. What this means is that the bank will give you a line of up to $104,000 (80% of $130k) minus the mortgage. This would be $38,000 ($104k-$66k) which is what we got.
  • A secured line of credit means that if you default, they can try to foreclose in the property.
  • A secured line of credit is like a credit card in that it revolves, except that you can take large amounts of cash out and pay only 4% interest.
  • You draw money when needed and repay as you go. We used the $38,000 line to buy another property cash.
  • With this strategy, you are playing the long game. Now you have more funding to buy more if this is something you would like.

Let’s talk Cash Flow

One of the BRRRR pitfalls is that pulling too much equity can result in negative or very low monthly cash flow. The mortgage payment may end up eating all of your revenue. Yes, you may end up with infinite return because you didn’t put any money down, but do you really want a property that doesn’t cash flow. Let me compare the cash flow from scenario A vs B above.

Rent$1,200
Minus: Vacancy Reserve 10% ($120)
Minus: Property Management 10% ($120)
Minus: Maintenance Reserve 10% ($120)
Minus: Capital Expenditures 5% ($60)
Minus: Insurance ($55)
Minus: Property Taxes ($150)
Net Operating Income (Income before debt payments) $575
*Monthly expenses

Next, let’s see how much cash flow we get from each scenario above. Scenario A is the $97,500 mortgage and scenario B is the $66,000 mortgage.

Mortgage Service Scenario A
$97.5k
Scenario B
$66k
Net Operating Income $575 $575
Monthly Mortgage Interest & Principal @ 3.99% interest ($465) ($317)
Net Cash Flow $110 $258

As you can see above, either scenario would have been okay. It’s just a matter of choosing the best path for YOUR specific long-term goals.

Let’s Recap

If done right, BRRRR is a great way to get started in real estate without money. We discussed two approaches:

  1. You can take all of your cash out if the property allows it.
  2. Leave money in the deal temporarily and then get a secured line of credit.

Pros:

  • Potential to higher return
  • You force appreciation of the property and build equity
  • You may potentially get all of your money back
  • With a combination of loans, you may be able to buy without any of your own money
  • Getting cashback from refinancing is not a taxable event. No taxable gains until sold.

You may end up taking out too much cash and be left with no cash flow

Cons:

  • Similar to a Flip, you are counting that the value of the property will be valued at an amount higher than the purchase price and the cost of repair.
    • The risk is that you may overdo it with the renovations or over estimate the after repair value (ARV).
  • You may end up taking out too much cash and be left with no cash flow.
  • You might have to wait 6 months after purchase before refinancing
  • You may have to pay financing fees twice (at purchase and at refinance)

For more details in the Big Horn deal, you can also check out the following blog posts:

  • Big Horn – Purchase Breakdown
    • Full details on how we purchased this property
  • Big Horn- Deal or No Deal
Rehab – Details for Big Horn
Closing Statement – Big Horn

This post may contain affiliate links. I may get commissions for purchases made through links in this blog.

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New Blog Post 🚨 In this week’s blog post I am New Blog Post 🚨 In this week’s blog post I am going over why we bought a short-term rental, our experience so far. Plus what we did prior, during and after purchasing our first short-term rental in March 2022, a Cabin in Blue Ridge, GA.

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I can’t stress this enough. Some investors are l I can’t stress this enough. Some investors are looking to make money from day one, but that’s not always the case. It wasn’t for us and I’ve talked to a lot of rookie investors who have told me “Thank God I have my personal finance situation together.” 

This is just my opinion. Do you agree? Let me know in the comments!

Want to join a free community of like-minded individuals? Join our REI Coffee Chat Community where we talk real estate investing, personal finance and financial freedom, and much more! Link in bio @beyondjustnumbers

Want to learn more about investing in real estate? Read my blog www.beyondjustnumbers.com

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I used to think that investing in real estate was I used to think that investing in real estate was for the rich. I became in love with real estate while working for a real estate investment company that owned hundreds of units. This was back in 2011 and I was 20 years old at the time. I had less than 5 years permanently living the US, so I had no idea about anything. I grew up in Colombia and the only talk of money we ever had was the lack of it. 

The investors I worked for were a wealthy family, so naturally, I thought… Real Estate requires wealth. I don’t have wealth. Therefore, I cannot invest. 

I figured… well shit, I need become wealthy so I can invest in real estate. Eventually, after educating myself I realized how wrong I had it. You can build wealth BY INVESTING in real estate.

Took me a couple of years to figure it all out. Hence, why I didn’t start investing until 2019. I wish I had figured out earlier, but it is what it is. In just 3 years of investing in real estate, I was able to accumulate more wealth than I ever thought possible. 

Just to give you an idea…Did you know you could invest in real estate with as little at 3.5% of the purchase price? For a $150,000, that’s only $5,750. Buy a duplex that needs a little bit of work, fix it up, rent one side and live in the other. This will reduce your monthly expenses significantly, save the money and do it all over again.*

Of course it’s not that simple, but it’s also not that difficult. There are some particular steps and considerations which is  why I recommend doing further reading on the subject. 

Book Recommendation:
✅“The House Hacking Strategy” by Craig Curelop and ✅“Investing in Real Estate with No (and Low) Money Down” by Brandon Turner. 

#realestate #realestateinvesting
🚨 New Blog Post! Continuing the “Getting Star 🚨 New Blog Post! Continuing the “Getting Started in Real Estate Series” 

You’ve found a property either on your own or through a realtor, you’ve run your numbers, you’ve got a lender and now you are ready to make an offer. What’s next?

In this post I want to discuss a few items:

✅Key components of a real estate contract
✅How do you make a compelling offer to ensure you get the property you want
✅The main contract contingencies and how they work
✅Communicating with your realtor

I also provide real examples of what we have done personally. 

Check it out at www.beyondjustnumbers.com

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We see a lot of advice around hiring a real estate We see a lot of advice around hiring a real estate friendly CPA. However, when you look up  CPAs that specialize in real estate, they can be pricey.  However, that doesn’t mean that other CPAs or tax professionals aren’t good. They might not be particularly aware of certain items, but they can research and collaborate with theirs peers. Perhaps it may require you to do a little of work to compensate. Things you can do:
✅ listen to The Real Estate CPA podcast or join the Facebook group
✅follow social media accounts of the pricey Real Estate CPA and take notes of what they are saying
✅attend free educational events 
✅read BiggerPocket book on Real Estate taxes 
✅if you know anyone working with a really good Real Estate CPA firm, ask them what they are doing

Then use that to go your CPA or tax professional and be like “Hey, is this something we can do for me?” They’ll probably say, “Let me look into it”. 

If they are good, they are going to research it and/or ask their CPA peer group. (CPAs and tax preparers also have Facebook groups where they collaborate with each other).

Here is a piece of advice, if they tell you “No, we can’t use this loophole or no, you don’t qualify to use this strategy” —> Ask WHY and “How can I qualify in the future?.” This way you confirm they did their homework and aren’t just being lazy. Don’t just take no for an answer. You can then get a second opinion by asking a question in a forum or to your peers.

So don’t panic if you don’t have a real estate CPA or tax professional. 

Next video I’ll be answering the question… “Can I skip the tax professional altogether and do my own taxes?”

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