The BRRRR method is a strategy made popular and coined by Bigger Pockets. The objective is to help you quickly amass a portfolio with little (note, not $0) money. Your goal is to pull out as much money as possible with every deal. It stands for the following:
We’ve gone over this before, but if you haven’t seen it we have a guide on buying single-family homes here. You make your money on the buy. You need to get a decent deal here to make this strategy works. Your goal should be to buy a property for 70-80% of what it is worth. This ensures you can pull out most if not all of your investment. Purchase loans will typically be at 70-75% loan to value.
Experienced buyers will often use hard money for the initial buy because it’s faster and is typically easier to get approved. Refinances with traditional mortgages tend to get higher valuations if you didn’t use traditional financing to acquire. This is because the lender/appraiser doesn’t have an idea what you paid for the property if you use hard money.
Note that for your first few deals or if investing remotely you want to find “lipstick rehabs”. That means you are limiting yourself to paint, floors, tile, maybe some fixtures (fans, lights, etc.), and that’s it. The number 1 way to lose money if you are new is taking on large rehab projects. As we stated above, we want to minimize the rehab items in our buy (especially if we are inexperienced) and focus on what adds the most value. Here are some examples:
By renting the property before we refinance it we can typically get a higher valuation during the appraisal. Typically in Houston you can get valuations between 0.7-1.0% of the rent price. Meaning that a unit renting for $1,600 we can expect a valuation between $160-2285k in most strong rental submarkets in Houston.
Use every method possible to ensure you get the highest rent possible:
I typically want the appraisal done for the refinance asap. Tenants can be hard on properties and we want it looking the best it can look during the appraisal. Make sure the grass is cut, landscape looks good, etc. Do a walkthrough preferably before the appraiser comes. Every additional +1k helps you get out as much money as possible out of the deal.
I typically want 30 year terms to maximize cash flow. If you have excess cash to buy multiple deals you may consider a 15 year and look for the properties to provide a retirement nesxt egg as the loans become due. You can then get 30 year mortgages and live off the refinances once you have about 10 single family homes or so.
Screen your lenders. Look for lenders that will offer cash out refinances and not just pay off existing debt. Many banks will also look at how long you have held the property. This can range from 3-6 months in my experience. Try to identify 3 lenders that could take your deal as you are purchasing and rehabbing it. The best way to find banks is to ask other folks at meetups or online.
The investors with full time W2 income have the easiest path to getting loans. If you are a business owner you need to show income for at least the previous two years to qualify.
Once you have gotten as much money out of the deal as possible it’s time to look for the next deal. I always recommend to try and leave as much money as possible into the business of acquiring more houses. The faster you can accumulate a portfolio, the faster you can develop a snowball big enough to fund your lifestyle and retirement.
Once you have enough deals with large equity balances you can begin getting Home Equity Lines of Credit or full out refinances to purchase additional property. Your first 3-5 deals will be the hardest and after that the houses start making enough money to help finance other deals.
At our meetup we tell people investing in single-family that it’s a long game. Aim to make these deals as cookie cutter and boring as possible. Play for 10 years from now. You aren’t going to get rich off your first deal or your 2nd. You just need to follow principled guidelines and acquire deals as fast as you can. Once you have about 6 deals you really start to amass some cash. At about 10 deals you will be able to have your existing deals fund your new deals.
At StageCoach we help investors select the best properties for their portfolio and manage them as efficiently as possible. You need an expert in your corner who has your best interest at heart. If you would like to schedule a call please contact me at email@example.com.