How I Bought, Rehabbed, Rented, and Refinanced 14 Properties at Once
Our strategy is pretty simple. It's what Brandon Turner has so helpfully termed the BRRRR strategy—namely buy, rehab, rent, refinance, and repeat. Recently we just completed our largest refinance to date as we refinanced 11 houses, 2 duplexes, and a fourplex. This is easily the biggest back end loan we've done and culminates the last phase of what we planned would be a "rinse and repeat" strategy.
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Our BRRRR Strategy
The strategy works like this: Up front we buy a fixer-up property, usually an REO from HUD, Fannie or Freddie. We’ve acquired properties in multiple ways, but the most common is to simply make lots and lots of offers on REOs. Unfortunately, the downside of an improving market is that these properties have become harder to find. We are starting to move into direct marketing, but there are still deals to be had on the MLS.
When we get a property under contract, we look to get a private lender (as opposed to a hard money lender) to loan us the money for the purchase and the rehab at 9 percent interest only with no points. That's substantially less than a hard money lender (who will usually be around 12-15 percent interest and 3-5 points). Private lenders can be anyone, including parents, relatives, colleagues, friends, acquaintances, etc. So tell people what you do and what you are willing to offer. Make networking a priority. You never know who has some money sitting in a CD earning 0.2 percent interest and would jump at something like 8-10 percent interest.
The key here is to be all in for 75 percent of the property's market value or less. This means that you will have to work very diligently to learn to budget correctly so that 1) you will finance the right amount up front and not have to bring your own money to the table and 2) you will ensure that you don't spend so much on the rehab as to eat away your equity margin.
The reason you need to be all in for less than 75 percent of the property’s market value is because that’s what a typical bank will loan on a refinance to an investor. The goal is to buy these properties for no money down and create both a sizable amount of equity and solid cash flowing units at the same time.
I should also note, most banks have a “seasoning” period of usually around a year. Before that, they will only loan on 75 percent of the cost you have into the property. For this strategy to work, it needs to go off appraised value. So make sure to buy properties that will cash flow, even if just barely, with a 9 percent interest only loan fully financed.
And of course doing all of this is no simple task. Rehab budgets are infamous for blowing up out of proportion. We have certainly had our share of bad experiences and actually had to leave a little of our money in this package of 14, although we were able to refinance the majority out. (For help on estimating rehab costs, consult J. Scott’s The Book on Flipping Houses.)
Generally, though, it’s always important to be conservative with your numbers. Expect something unexpected to come up and that the rehab will cost more than originally anticipated. We put a 20 percent contingency for such things into our budget, and I would recommend you do the same.
Appraisers also seem to be a bit conservative these days. I don’t have good data to back this, but it is certainly my gut feeling. I think that after some of the shenanigans that went on before the 2007-2008 crisis, many appraisers have made a concerted effort to not appraise properties at inflated values. However, in my opinion, many have gone too far in the opposite direction. Which of course means that you have to get an even better deal up front.
The next step is to rent out the properties. Regardless of whether you choose to manage the properties yourself or hire a management company, make sure that either you or they have very strict rental criteria. No bank is going to lend on a portfolio of properties unless that portfolio is performing. And while it’s bad to have a vacant property, having a bad tenant is even worse. It will require that you evict them and often keep the property off the market for an extended period of time while you fix all the damage they did. Good tenants will come to those who wait (and market effectively, of course). And good tenants will often stay a long time if you provide a good property up front and keep up with the maintenance.
When it comes to the final phase, my best recommendation is to network, network, and then network some more. Go to your local real estate club or ask around on BiggerPockets for lenders that are lending to buy-and-hold investors. One time we even did a search on ListSource for anyone who had made a loan on a non-owner occupied property in a suburb we invest in. Then we just went down the list of banks and made one call after another.
Early on, we were turned down a lot. Banks kept telling us that they “had taken a lot of losses in single family investment properties.” It didn’t seem to help when I told them that prices were 40 percent higher back then, and we’re buying those properties because of all the losses they took.
But just as with making offers, finding quality lenders is a numbers game. The more you connect with, the more likely you are to find one that will lend to you. And finally banks are realizing that their "buy high, sell low" strategy didn't make a lot of sense (or they are more liquid now and the regulators are finally getting off their back). Still, we've found that it's pretty much only local banks that are interested in this kind of product (most of our properties are in C and B areas). The interest rates we've seen are usually around 5 percent and the amortization at 20 years.
Related: How to Estimate Rehab Costs with No Construction Background
One last note, if you are refinancing a package of properties together, make sure to ask for separate releases. This allows you to sell or refinance one property in the portfolio while keeping the rest of the loan in place. Otherwise, you may be required to pay the whole loan off if you want to sell or refinance just one of the properties.
This example shows the power of the BRRRR method. Done right, it can create a sizable amount of wealth and cash flow for little money down—or perhaps none if done right. This 14 property refinance is a big step forward for us in our business, and hopefully it will illustrate this lucrative business model better.
Next week, I’ll discuss and even bigger step forward for us and the lessons we learned from it.
[Editor’s Note: We are republishing this article to help out our newer audience.]
Investors: Have you ever used the BRRRR strategy? Have any questions about the process?
Let’s talk in the comments section below.