BRRRR Strategy Questions and Some Clarification

13 Replies | Cincinnati, Ohio

I have been standing on the sidelines watching many of my Cincinnati REIA counterparts make their way in Real Estate. The unknowing of it all tends to turn me away but I keep coming back. This time it is for good. I am currently looking for my first multi family and have a question about the BRRRR method. I understand the perpetual nature of this strategy and the struggles with finding traditional refinancing options once an appraisal is done and you want to pull all of your equity out. My question is related to the very first renovation costs. I was listening to the BP Podcast 197. There was a guy who used this strategy to purchase a large number of units over a short period of time. He however started his whole process with small loans from family and friends.

To most people (NON REI) my life is pretty good right now. I have a good Job, my wife has a good job. We make more than we spend but I am a slave to the 9-5. I could start to save up but I want to think creatively and fund my first rehab another way. What suggestions do you have?

Also, in that same podcast, there is mention of the 2% rule when evaluating properties on the MLS (his strategy). What does this mean? Is it similar to the 70% ARV number?

The 2% is the return on investment what your money makes you.  As for creative financing there are several ways: equity partner, angel investor, personal loan, business loan, double close or wholesaling a property, or using credit cards. 

Tag me if you have more questions. 

Originally posted by @Michele B. :

The 2% is the return on investment what your money makes you.  As for creative financing there are several ways: equity partner, angel investor, personal loan, business loan, double close or wholesaling a property, or using credit cards. 

Tag me if you have more questions. 

This is incorrect the 2% rule states that monthly rents are 2% of purchase price. 

For example the total gross rents would be $4k/month on a $200k purchase price.

With that being said it is very difficult to find deals that meet the 2% rule in this market cycle.

return on investment is not the way you just calculated.....(Net Profit / Cost of Investment) x 100.

So, you have to do the long numbers end of loan how much will you be paying....add taxes, insurance and miscellaneous expenses .....use that number as your divisor......

the net profit is the amount of profit you made/make....

To be honest this is even more confusing. 

I was looking for the 2% rule. ( Brian Garrett your explanation makes sense)

I know how to calculate Cash on Cash ROI

I guess that episode of the podcast was old because nothing around here is close to 2%. Especially from the MLS

@Joshua Herald I invest in Greater Cincinnati currently. There are still 2 or even 3% rent ratio deals out there, but typically they need massive renovations or are in very rough areas. I look for properties in C+ areas, (think working class, decent schools, lower crime rates). A good deal on or off market in these areas are 1.5% rent ratios, meaning a 100k house would rent for 1500/mo. They are not easy to find, but they are out there. As many of the podcast say, you have to make a good deal, you wont be given one in this market. Meaning adding value, adding a bedroom, reducing expenses, raising rents, square footage, etc. The other metrics I look for before I would buy is a 15-20%+ CoC return, meaning if I invested a total of 20k on a 100k property, my profits annually would have to be 3-4k or so. I also look for 200/mo cash flow per door after fixed expenses (taxes, insurance, utilities, etc.). That leaves me at least 100/mo per door on maintenance and cap ex reserves for larger expenses (roof, windows, mechanicals, etc.), my cost should be less but it gives me a good buffer/ extra profits.

Deals are out there, you need to determine your metrics and stick to them. Stay consistent and persistent. 

I know I keep referring to the podcast but another lead generation tool he would use was the MLS. I know this is what realtor use but is this a service I can pay for. The guest mentioned that he would meet every morning and go over the list one by one to try and get ahead of everyone else. I would love to do this but I have called around and realtors are not interested in this unless its directly their territory Im look all over tri-county not just loveland or forest park.

@Joshua Herald why not just have realtors look on the MLS for you and then use them as the buyer's agent? They will send you the "good deals" for sure if you are using them as your agent. This business always has to be mutually beneficial, and every business relationship should be profitable to both sides. My banker makes a lot of money when I buy an apartment building. My contractor makes a lot of money when I renovate. This is ok as we all make a lot of money in the long run!

@Joshua Herald I am sure you can find one that knows more than one area. Your traditional realtor might" farm" just one local community, but there are plenty of agents that know multiple sub markets. I would try to find one of those locally. 

The 2% rule is a very high level measure of cashflow. It's just a quick simply approach to if a deal makes sense to even pursue the actual numbers. I only buy properties after researching and plugging in all actual expense values and rehab numbers. When I use the "2% Rule" it's a little different than most, this referse to my mortgage amount I put on the property after rehab. My plan is to first and foremost refinance the property and receive 100% of the capital that I've invested into the property back out from a refinance. This can be done on almost typical flip property when you buy correctly. The problem is if you are into a house for $150K and it only rents out for $1000/mo it doesn't matter if it appraises for $200K or not, it's not going to cashflow.  My second rule is that the mortgage I put on the property is 50 times the monthly rent. In other words I use the 2% rule on the mortgage.  The typical example in my area would be a 3 bed 1 bath house that I purchase for $30K, put $10K into it, it appraises at $50K and rents out for $900/mo.  I'm good to put a $40K-$45K mortgage on the property which is ideally everything I've put into it.  I'm typically buying 100 year old houses in C class markets. I would never touch D class property for any price or cashflow rule and I'm simply not able to find 2% rule deals in B class markets right now.