Tag Archive for: BRRRR strategy

Buying on-market properties is a money-suck for real estate investors. Here’s why to use the BRRRR strategy instead.

There are a lot of ways to mess up the BRRRR method.

But when you understand it right, this real estate strategy creates cash flow and net worth almost out of thin air.

We want to put the power of BRRRR in your hands. This is the start of a series walking through the BRRRR process step-by-step.

Let’s begin with the fundamental idea behind BRRRR – the thing that gives this method its money-making magic. How does the BRRRR strategy create cash flow out of seemingly nothing?

BRRRR Property vs Buying Retail

This is the basic concept behind real estate investing. There are two types of real estate properties:

  • Retail – When we think of a house as “on the market,” it’s a retail property. These houses are sold at market price, a cost determined by current market conditions. In real estate, this includes supply, demand, location, interest rates, and a number of other factors.
  • Undermarket – Properties that might be considered “off-market” are sold at an under-market price. There’s something preventing the house from being sold at market value as-is. The home could be outdated, damaged, foreclosed, or suffering from some other condition.

To break down exactly why and how BRRRR works, we need to look at the difference between buying retail and buying under-market as an investor.

Buying Retail with the BRRRR Strategy Doesn’t Work

The problem with buying retail as an investor is the house comes with no equity.

Let’s say you buy a property worth $400,000 (listed for that amount). With a conventional loan, the lender will cover up to 80% of the cost of the house. So you’ll need to put down 20%.

When you purchase the house and make the down payment, you’re transferring wealth, not creating it. You’re taking the money from your financial account and transferring it to the physical property.

So, you’ve moved $80,000 into the house, got a loan for $320,000, and created no additional wealth from the transaction.

There are three main disadvantages to retail properties:

  • The property may create cash flow or wealth in the future as a rental property, but there is no wealth created from the purchase.
  • You’ll require money up-front (in this case, $80,000 plus closing costs).
  • You can only repeat BRRRR retail properties as long as you have the money to fund them.

Buying Under-Market for BRRRR

True BRRRR properties, however, solve all three of those problems retail properties have. A BRRRR property:

  • Creates equity & cash flow immediately (and over time).
  • Can be done with zero money down.
  • Is a repeatable process.

BRRRR is all about buying under-market properties – the houses that are unwanted and unloved. In this market going into 2023, a lot of these types of homes will pop up, resulting in some great deals.

BRRRR Purchase

There are certainly some nuances to BRRRR, but let’s look at the bare basics. Let’s take the same example used for the retail property.

You, again, buy a property with a value of $400,000. However, since it’s valued under-market, you can purchase it for only $250,000.

The catch is that the house isn’t necessarily worth the $400k as-is. The potential is there, but you’ll have to update and rehab it. Between those fix-up costs and the closing costs, you’ll have to put $50,000 more into the property.

So the total cost of the property ends up being $300,000, or just 75% of the value of the home.

Cost of the BRRRR Strategy

That 75% number is not only realistic but recommended for BRRRR properties. In down markets, it’s not entirely uncommon to see houses at 65% or below.

In this example, our all-in price (purchase + closing + rehab) is $300k, and the property is worth $400k.

Right away, we’ve created $100,000 in net worth.

Retail vs BRRRR: The Numbers

Now that we’ve explained the initial numbers, let’s do a side-by-side comparison to see why BRRRR is powerful enough to create generational wealth.

  • Value: We’re comparing two homes with the same value – same neighborhood, same block, same size. Let’s say the value is $400k.
  • Loan: For the BRRRR, our total costs would add up to $300k. Our leverage 100% covers this amount. For the retail home, we could get an 80% LTV, so our remaining loan is $320k. On retail, we have less cash flow because we owe more money.
  • Cash Transfer: With BRRRR, you’re moving $0 of your own money. This is why properties with the BRRRR strategy are so popular for investors. With the retail property in our example, you need to transfer $80k of your money as a down payment. 

There are two problems with the cash transfer requirement in retail properties. 1) You need the cash to get into it. And, 2) The last “R” in BRRRR is repeat, so you’d have to have $80k again for your next property and your next. On under-market BRRRR properties, the zero out-of-pocket costs free you up to repeat the process over and over.

  • Payments: BRRRR payments will be lower than retail payments by about $25-$50/month, simply because the loan amount is lower.
  • WEALTH: The BRRRR strategy property immediately creates $100k. The retail property adds $0. It only has the loan + the $80k that was yours to begin with.

BRRRR Strategy Explained: Why These Properties 10x Your Net Worth

How BRRRR Creates Wealth

The wealth in BRRRR comes from the difference between the value of the property and what you owe on it. This usually ends up being 25% of the value of the home.

If you multiply this process by 5-10 properties? You’ve suddenly got half a million to a million dollars in net worth.

Using the BRRRR strategy like this isn’t just wishful thinking. In 2010, we helped multiple families buy 10 properties in one year using this method. Many of their properties tripled and quadrupled in value over the last 10+ years.

The 2023 market is shaping up to look a lot like 2010. The time to buy is coming soon.

Using the BRRRR Strategy

Thinking about testing the BRRRR strategy for yourself?

We’ll be walking through the entire BRRRR process over the next few weeks. BRRRR is a simple way to generate wealth – but only if you really understand how the process works!

Send us an email at Info@TheCashFlowCompany.com if you have any questions. Check out our YouTube channel for more free information on BRRRR and other real estate investing strategies.

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You Are Doing BRRRR Wrong

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Most people do BRRRR wrong. Here’s the step they usually miss.

Buying properties at undermarket prices. Fixing them up. Keeping them as rentals. Refinancing.

We’ve helped clients with this process for over 20 years. What’s the biggest error we see people make?

They don’t start with the end in mind.

Many beginning investors take the order of the BRRRR acronym literally. They buy, rehab, rent, THEN try to figure out what the refinance will look like. That’s actually doing BRRRR wrong.

Going into the refinance blindly is how to do BRRRR wrong. At best, you won’t know how the property cash flows. At worst, you can’t get a refinance loan at all.

Let’s look at what you need to do instead.

How to Keep From Doing BRRRR Wrong

The refinance is where you make your money in a BRRRR. Refinancing determines the cash flow, your money out-of-pocket, and the financial success of the project.

If everything hinges on the refinance, why would you wait until the fourth step of the process to start figuring it out?

You need to mentally move the third R, “Refinance,” up to the beginning of the process, before you even buy.

Refinance Questions to Answer

There are certain questions you should know the answers to before you put money down on an undermarket property.

You can get the cheapest house out there, with the highest ARV… But if you aren’t able to get a decent refinance for it, you’ll still lose money.

Here are some questions you should be able to answer at the beginning to ensure you don’t do BRRRR wrong:

  • What loan-to-value (LTV) does the bank require?
  • When you go to refinance, will you have to bring in money? How much?
  • Will it cost more money than you have? Or more than you want to spend on this project?
  • Will you do a rate-and-term or cash-out refinance?
  • What will be your cash flow on the property?
  • What’s the minimum cash flow you need? What about the minimum the bank needs?
  • Does the bank require investment experience to lend you a refinance loan?
  • Does the bank have reserves requirements? (This is usually around six months’ worth of payments the bank requires you to have in savings or a mutual fund).

If you don’t know the answer to these questions up front, you end up like a lot of buyers who get BRRRR wrong and lose money.

You get to the refinance part of the process and learn you don’t have enough money to bring in. Or you find the cash flow is bad.

Prepping for a BRRRR Buy

Does it make sense to buy a property (with a higher interest loan), put all the money into repairs, rent it, and THEN figure out whether it’s a good or bad investment?

It takes just a little time and effort up-front to figure out if a property is worth pursuing.

We like to call this time up-front “building your BRRRR buyer’s box.” It’s a process that helps you prepare for the refinance ahead of time so you don’t do BRRRR wrong.

Going into a property, you should know:

  • Your max LTV
  • Your cash flow minimum
  • How much cash you’ll need to bring in
  • What rehab budget you can afford.

Do BRRRR Right

Download our free BRRRR Checklist to understand the numbers of your refinance. Make your rental property a success.

Leverage determines whether you’ve done BRRRR wrong or right. All real estate investing hinges on leverage, and our goal is to help you create the best leverage possible. 

Using the right debt will accelerate your business, while the wrong stuff will slow your investing career to a halt.

If you have questions about a BRRRR product, email us at Info@TheCashFlowCompany.com.

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Win at the BRRRR method

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How to Buy a Property with ZERO Money Down

Some people just win at the BRRRR method. How can beginners do it?

Cash-flowing rental properties… With little-to-no money down… That passively run themselves after fix-up… This is the stuff beginner real estate investors dream about. And it’s possible with BRRRR.

But there are a lot of ways to do BRRRR wrong that’ll wreck this beautiful dream.

How do successful investors make it work? Here are 5 ways beginners can win at BRRRR:

How to Buy a Property with ZERO Money Down

I. Understand the Meaning of BRRRR

BRRRR winners understand what BRRRR is – and just as importantly – what it’s not.

We aren’t just talking about the literal meaning: Buy, Rehab, Rent, Refinance, Repeat. We’re talking about understanding the strategy behind the BRRRR method. Successful investors understand the money side of these investments.

Types of Properties that Win at BRRRR

Foundationally, BRRRR means buying undervalued properties.

These properties have a lot of rehab needed, causing them to be valued much lower than other homes in the area. These houses are problems for someone else but opportunities for you. You can fix them up and get them in your rental pool.

We often see people who want to use the BRRRR strategy, but they buy their properties at 90% or 95% of the ARV. They buy close to retail price, and once they put the time, money, and effort into fixing up the property… They can’t even really use BRRRR.

BRRRR’s Two-Loan Strategy

BRRRR means using a two-loan strategy. At the beginning of the project, closing with a hard money bridge loan. At the end of the project, refinancing a traditional loan.

Using this strategy on an undermarket purchase captures the equity of the home to use to your advantage. If you buy a property too close to its ARV, the whole system falls apart and you lose your refinancing power.

 

To be successful with this two-loan plan, you have to search for undermarket properties you can get for 75% or less of the ARV. With this 75% rule, you can complete a BRRRR project with little or no money out-of-pocket.

Buying undermarket and using two strategic loans is the meaning behind BRRRR that winners fully grasp. But there’s much more to it.

What should you really look for when you buy for BRRRR?

II. Set Yourself Up to Win at the BRRRR method

There are two ways beginners can set themselves up for success using the BRRRR method: focusing on the numbers and putting together a team.

Numbers for Beginners

The BRRRR method is all about numbers. Beginners sometimes fail because they make a deal emotional and bid the property up. When buying properties, you have to stick to the math.

Your North Star for BRRRR investments is the 75% rule – the best properties only cost 75% of the after repair value.

The reason for the 75% rule is because that’s the number banks will rate-and-term refinance a conventional loan for. When you can do this type of refinance, you can finish up the deal without putting any of your own money in.

It’s smart to shop around for banks for your refinance loan, though. Some banks may allow you to buy up to 85% of the ARV, under certain conditions.

Get a Team Together

So you need good, low-priced properties. And the best way to find them is to build a good team. Especially as a beginner, you’ll need to know several of these kinds of people:

Realtors and Wholesalers

Knowing wholesalers and realtors can help you locate better properties and close with better deals.

Lenders

You’ll need private lenders for bridge loans and another lender for the long-term refinanced loan. Having relationships with lenders ahead of time speeds up a closing and can earn you a lower price.

Contractors

Ideally, from closing to refinance, BRRRRs are completed in 90 days. This means you’ll need contractors at-the-ready who can work efficiently and reliably to fix up your properties.

Property Managers

If you want your BRRRRs to be passive after the refinance, find a good property manager. A common beginner’s mistake is to take the first tenant who shows an interest – without any background checks or other renting requirements.

A good property manager can both find you better tenants and manage them for you. Many investors overlook this member of their team, but it can truly make or break your BRRRR experience.

Knowing several people from each of these categories gives you options to customize for each of your deals. Putting together a good and broad team will make the BRRRR method much easier and smoother — especially for a beginner.

III. Know What Makes a Good BRRRR Property

A good BRRRR property follows the 75% rule. But that’s not the only criteria you should follow. What else makes a good BRRRR property?

What to Look for in a BRRRR Property

Here are the factors successful BRRRR investors consider in their properties.

Single-family properties

For multi-family or commercial tenants, lenders have different requirements. They often need you to hold your loan for 12 months after purchase (or even 12 after tenants move in). That timeline doesn’t work well with the BRRRR method. You’ll have a much easier time with single-family homes.

Rent prices

“Knowing your numbers” also means knowing the rent prices in the area of a property. Cash won’t flow on your investment if you’re unable to charge enough rent.

Desirable Areas

Find properties people want to live in. If you wouldn’t want to spend time there, good renters probably won’t either.

Vacation Rentals

If you’re doing vacation rentals, do the research on:

  • What areas people want to visit
  • What the rates are in the area
  • What third-party booking sites would be most profitable
  • What fix up levels you’ll need
  • Whether there are good hosts or property managers in the area.

Don’t Rush into Bad BRRRR Properties

Beginners fail at BRRRR when they don’t choose properties wisely. Don’t just buy property to buy property. You can own ten bad rentals and make no money. BRRRR should be a system that builds cash flow.

We see people do one or two BRRRRs then stop because it’s not what they expected. They put too much money in, or the area isn’t good, or their renters aren’t paying, or the rent isn’t enough to generate cash flow.

Those issues aren’t BRRRR’s fault. A prepared investor, beginner or experienced, can always succeed with BRRRR properties.

IV. Know the Numbers of a BRRRR Deal – An Example

We always talk about “knowing your numbers.” But what exactly do we mean? Here’s an example of an ideal BRRRR property using the 75% rule.

Example Breakdown of a BRRRR Deal

After repair value (ARV) is the number the house should sell for once it’s all fixed up and on the market. This number is often dictated by what similar properties in the area are going for.

To get the best long-term rates, you refinance your second, permanent loan. In order for it to cover everything (i.e., you don’t have to put any money down), all your costs must be 75% or less of the ARV.

PURCHASE PRICE + REHAB + CARRY COSTS + LOAN CLOSING COSTS = 75% of ARV

Let’s say, for example, other properties in the area are selling for $200,000, so that’s your ARV. You want to spend 75% less than that, so we’ll do:

$200,000 X .75 = $150,000

When the ARV is $200,000, all costs of the job should only be $150,000 or less. This includes the closing price, carry costs, rehab costs, and any loan costs.

V. Know Good Lenders for BRRRR

People who win at BRRRR understand the two most important aspects of the process: getting properties undermarket, and organizing their lenders early on.

Lenders are an important member of your investment team. Here’s how to get them ready for your BRRRR investments.

BRRRR Lender Options

You’ll have a hard money or private money lender up-front. Then, in the second half of the project, you’ll have a more conventional lender with a traditional loan.

This traditional loan is usually 30-year with fixed rates, but comes with some constraints. You’re limited to ten properties with this kind of loan (including your own home). There’s also usually a limit on loan-to-value ratio, and conventional loans won’t let you put a loan in an LLC’s name.

Another option for this second loan is DSCR no-income loans. DSCR loans come in a variety of options: five- or seven-year ARMs, standard 30-year fixed mortgages, and more. Successful BRRRR investors know all their options for refinancing.

Set Your Lenders Up Ahead of Time

People who win at BRRRR set up all their lenders before they jump into a deal.

The amount loaned for the purchase and for rehab can very a lot from lender to lender. Good investors will always know how much their hard money lenders will give them.

Hard Money Mike, for example, does a lot of 100% loans if the cost is 75% less than ARV because we know the investor can easily refinance out. We know we can set them up with a rate-and-term refinance, and they’ll have no money out-of-pocket.

BRRRR winners don’t get into a property, get it fixed up, and then figure out the long-term loan. Winners figure out firstwhether they can get the cash out they need, and how.

Smart BRRRR investors have a pool of lenders they work with. They know what each lender can offer, and which will best fit their current strategy, ability, and deal.

 

 

Find out more on how to leverage up your real estate investments on our Youtube channel.

The Cash Flow Company can help you with BRRRR loans and all real estate investor loans.

We also can help you find and set up real private money from those around your area.

We scour 100’s of loan programs across the country every month locating the best investor friendly loans.

 

Win at the BRRRR method

Win at the BRRRR method

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