Feeling the BRRRR!!!

This post will summarize my response to question from a subscriber to our YouTube Channel, Mr. David. David, I appreciate your question! 

David had questions regarding the BRRRR strategy. For those of you who are not familiar with the BRRRR strategy it was popularized by Brandon Turner and stands for Buy, Rehab, Rent, Refinance, Repeat. 

It's a strategy you can utilize if you're trying to buy a lot of rental properties or you want to minimize your OOP costs. This is the exact strategy I used to build up my portfolio. It's the only way really, unless you have bookoo money, to continually buy rental properties, because you're basically getting paid to close! But you have to find good deals. 

I'm going to walk you guys through an example of a property where I've successfully implemented the BRRRR strategy where I'll attempt to answer any questions you have about BRRRR, make sure it's clear on what it is, and how you guys can use it to grow a substantial portfolio (and how I used it to scale to buy a couple dozen properties in only a few years). 

So first and foremost, you have to find a good deal! or none of what I'm about to show you matters. All I'm going to show you in this post is the math behind BRRRR but the most critical piece is really finding a good deal. That is where this starts. So I'm assuming that you've already found a good deal... Now let's look through the numbers. 

• Purchase Price - $96,200
• Repairs - $13,000
• Closing Costs from Private Lender - $5,000
• ARV - $160,000
• Loan (80% ARV) - $128,000
• Cash Back - $23,600
• Net - $5,600

First things first, to reiterate, we said you want to find a discounted property. We bought this property at a purchase price of $96,200 and the rehab was $13,000. We were all in at about $110,000. The ARV of the property (from the bank appraisal) was $160,000 and closing costs and points from the private lender (who provided the $96,200) were about $5,000. 

We purchased the property at $96,200 using private money but you can also use hard money, money from your own pocket, a home equity line of credit, family, friends, etc. You can use money from any source to buy on the front end! The trick, and what the BRRRR process really creates is the second part - the refinance. 

ARV is $160,000 but this was only an educated guess from our CMA. 

After we finish the repairs, we go to the bank that we have a relationship with and they lend us 80% of the ARV. They send out an appraiser and he/she appraises the property at $160,000. The bank then agrees to lend us 80% of $160,000 or $128,000. 

After we subtract the purchase price and bank closing costs we walked away with $23,600. That's what the check we received at closing (and I felt like a boss for a minute :)). 

However, we didn't make $23,600 because I self funded the repairs and we had closing costs and points from the private lender on the initial purchase. If you're making monthly interest payments to the initial lender, you would also subtract those from your final check. Total closing costs and interest from the private lender was about $5,000. 

Therefore, if we subtract repairs and closings costs from our check from the title company, we end up with a net of $5,600 ($23,600 - $13,000 - $5,000). Meaning we actually made $5,600, after we BRRRR'd this property! Getting paid to buy real estate is a success in my book!

To summarize we, found a property that was undervalued. Purchased it with private money at $96,200. Spent $13,000 in repairs to get it appraised at $160,000 from a traditional bank (I highly highly, highly recommend local credit unions). They gave us a loan for $128,000, which paid off the private lender $96,000, covered the cost of repairs ($13,000) and closing costs on both sides. 

We basically took the bank money, paid the private lender off, paid our closing costs and repairs, and walked away with $5,600. 

If you're worried about paying the private lender on the closing document of your final refinance, the bank will directly pay the primary lien holder or the first lender, and send you a check for the difference, which is this case was $23,600.

It sounds simple (and it is) but it's not easy! We spent thousands of dollars marketing to find this particular seller that wanted to sell at a price that made sense. We built relationships with contractors to complete an on-budget and on-time rehab. We built a relationship with a private money lender who closed when we needed to close. We had a relationship with a credit union that trusted us and wanted to refinance the deal. 

I don't tell you that to scare you but to show you there are a lot of moving parts behind the scenes that came together to make this happen. Which is why you need to get on BiggerPockets and local meetups to network so you can build a reliable team that's there when these deals come along. 

In my opinion, this is a one of the most powerful strategies in real estate. I do not know a better way to build a rental portfolio. If it wasn't for the BRRRR strategy, I wouldn't have the portfolio I have today. 

Note: you don't always have to walk away with money to make the BRRRR strategy a success. If you can buy a property and only have a few thousand OOP, as long as it meets your goals, then it's still a success.