How We Got a Million-Dollar Property Portfolio for (Almost) Free

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(It wasn’t inheritance.)

Everything you need to achieve your dreams in life is available to you. All you have to do is find a strategy that makes sense, step up, and take action. Your life can change forever. Ours has.

But you do need a strategy. A plan. A formula.

On BiggerPockets, Brandon Turner has described an interesting investment strategy, which he eloquently calls the BRRRR strategy: Buy, Rehab, Rent, Refinance, Repeat.

My own property investment mentor refers to this process as “recycling your money.” (Apparently, it’s even good for the environment.) Whatever you call it, at its core, it’s nothing more than a simple home equity loan. People use home equity loans every day to buy luxuries like boats, cars, and expensive vacations. My wife and I used it to get a million-dollar investment portfolio for free. I believe it’s one of the true “secrets” of wealth building.

Here’s how it happened.

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Buy

We started with only some home equity. Honestly, it wasn’t that much, but it was enough. We borrowed money against our personal home, which allowed us to put deposits on two 3-bedroom single family residences (SFRs). These were in what you would classify as “C” neighborhoods — lots of renters and good cash flow if you know the math.

Rehab

We did some minor rehab — more like redecoration than renovation. We only took on simple jobs like patching holes, fixing broken things, adding fresh paint and new carpet throughout, putting some new concrete in the driveway or adding a path, and maybe building a shed. That kind of thing. We still had to coordinate plumbers, electricians, builders, carpet and flooring installers, and more. We even had to remove a bit of asbestos from one house. But we also did a lot of the grunt work ourselves with help from friends and family. The main tasks we took on were painting the entire interior of each house, some exterior painting, and some landscaping.

Of course, you can go a lot further with this. Sometimes it isn’t necessary. Our goal initially wasn’t to make a fortune from the renovation. We made our choices primarily to make the properties attractive to potential tenants. Perhaps next time we will target the renovations a little more at achieving a better valuation.

home-appraisal-cost

Related: How I Bought a Multi-Million Dollar Apartment Complex at the Age of 26

Rent

We managed to rent both properties quickly and with positive cash flow. We did notice that the property that was on the more busy road rented more quickly and at higher rent than the one down a lane. This was despite the fact that the house down the lane is a nicer property. A lesson for the future, perhaps.

Another thing we learned here was to do the renovations while you are waiting on the property to settle. I’m not sure whether this is legal in all countries, but we negotiated it in as part of the contract for both properties. It worked like a charm for the first property — the tenants were handed the key on settlement day. The second property was a little more difficult since existing tenants needed to move out and we had to do the majority of the renovations post-settlement.

Refinance

Once the rehabs were complete, we obtained updated valuations. Happily, the values of both properties had gone up as a result of the rehab. Taking these valuations back to the bank, the bank was willing to loan us some more money against the value of these properties. We got about 50% of our original deposit on the first property and 80% on the second one. That wasn’t a perfect showing, of course — the goal is 100%.

Repeat

But together it was enough for a deposit on a third 3-bedroom SFR. Same deal — paint, carpet, fix-ups. Valued and rented. We got about 60% of our money this time.

In our market, property values shot up in 2015. The rents have also increased slowly but steadily over the intervening two and a half years. Combined, these two factors allowed us to go back to the bank and “recycle” the rest of our money through additional home equity loans.

A Look at the Numbers

We initially took out $72,900 from our home equity for initial deposits. We also spent $9,756.77 on rehab costs — yes, that’s across all three properties. This made a total of an $82,656.77 investment of our own money.

Related: Great Portfolios Don’t Happen by Chance: Here’s How to Put Together Your Plan

Accounting for reinvestment in the third property and subsequent home equity loans, we have “recycled” a net total of $93,370 out of the properties.

Bank lending over here can be pretty competitive, and if you have a good mortgage broker, they can usually get the best deal. It is common here for banks to provide some “cash back” when you sign up a new loan with them if you — or your mortgage broker — know to ask. Generally, this is enough to cover closing costs, including legal fees, building inspections, valuations, etc. In our case, we were able to take advantage of this for each of these three loans, and therefore, I have not included closing costs separately.

So why the extra $10,713.23? As it turned out, the bank was willing to lend us a fair amount more than what we have invested so far. However, we like to ensure that the properties remain cash flowing. In other words, we like the rent to pay all expenses including mortgage payments. Still, along the way, there have been a few minor capital repairs that we had not accounted for appropriately, and we had to use our own money. Taking the extra equity out was a way of recouping that.

mid-year-checkup

Playing With House Money

So, with some hussle, time, and focus — and, of course, a little good fortune — we now own a rental property portfolio valued at over $1,000,000. We have more than 40% equity in this portfolio, and we have none of our own money invested.

It sounds too good to be true, but it turns out that this way of thinking can be applied to many types of investment, not just property. It can be done relatively easily with stocks as well. Simply purchase shares at a good price, wait for them to go up in value, then sell enough of them to cover your initial investment. The remaining shares that you own are free.

I’m no gambler, but even I have heard of the term “playing with house money.” This is what you’re doing once you’ve completed a cycle. And it’s a great feeling.

Conclusion

So, what are we going to do now? Start all over again, of course. With our own money in the bank, we will keep paying down our own home mortgage and setting aside additional funds to start the cycle over again. As I mentioned, our market has seen substantial growth in the last 18-24 months. This means that it’s much harder to find cash flowing deals. But I feel confident they will return. Until then, we will be putting ourselves into a position to capitalize.

Obviously, we needed some money up front. So this strategy doesn’t help if you’re having trouble coming up with the initial deposit. But ultimately, you can get all of your money back to reuse all over again. We found out about this strategy by reading books and websites like BiggerPockets and getting some mentorship from more experienced investors. We have not yet achieved our goal of financial freedom, but with this strategy, we are well on our way. The key is to take action.

Any questions about this process? Have you used the BRRRR strategy?

Let me know with a comment!

About Author

Brad Lohnes

In 2013 Brad awoke from lifelong financial slumber and took responsibility for his family’s financial future. His primary vehicle for wealth-building is buy-and-hold real estate. He is passionate about financial education and helping others learn the tools they need to take control of their money. Brad believes there is nothing more empowering than self-reliance.

12 Comments

  1. Ajay A.

    @Brad Lohnes,

    Thank you for this inspiring article. I wish you good luck and hope to read more success stories about your journey to financial freedom. I’m an aspiring buy-n-hold investor, looking to buy my first investment property and your article helped reinforce my own reasons and ambitions for choosing this path

  2. aaron cullen

    Hi Brad,
    Thanks for posting, good read and congrats on some great buys. I have a question about the $90k funds used to purchase and rehab. Are you paying monthly for this line of credit or did you refinance it with your primary? Either way you are still paying for the money right? I think it’s a fabulous way to grow wealth, just wanted to make the clarification.

    • Brad Lohnes

      Hi, Aaron. Thanks for reading and your question. There are a number of ways to do it. In our case, we refinanced our home to a new bank and set up a standard fixed mortgage for a portion and a revolving line of credit for the money we wanted for investment. Yes, this does mean that you’re paying for the money. But, as long as you have a mortgage on your own home, no matter how you structure it, you’re paying for the money one way or the other. Even if you just save up the cash, that is money that could be going against your home mortgage, so not doing so means that you’re paying for that money.

      We offset this by tightening up our budget and increasing our payments against our own mortgage. It’s a priorities question and I probably need a whole article in order to elaborate on my thinking on this. The advantage of understanding the BRRRR strategy, though, is that you have a timeline to get your money back.

      Thanks for the question.

  3. Jennifer Tornus

    I am early on in my REI career, but am employing a similar strategy! It’s great to see someone else’s story on how they have leveraged equity.

    I am fortunate my very first home (personal home) has escalated in value over the 5 years I have owned it. So far, I have used my Home Equity Line of Credit to buy one home and one duplex with cash and as the down payment for a second duplex. Plus some needed repairs.

    Now I’m almost tapped out and will be looking into the refinancing part of the equation to pull some of the money back out and start over. I’m a little nervous about this because, from a bank’s perspective looking at my assets/liabilities/income, the HELOC looks like a large loan.

    • Brad Lohnes

      Hi, Jennifer. Thanks for reading and sharing your situation. Yes, once you get to a certain point with equity/debt/income, it gets harder. We’re about at that point ourselves. But that’s why it’s good to learn from some of the people more experienced than me, for example here on BP, or getting a local, in person mentor if you can. I’ve got a busy couple of months but then I’m scheduled to meet up with my mentor to review our own situation and whether it’s time to get creative with financing or whether there still some fuel in the mainstream bank engine. 🙂

  4. shawn yeager

    Hi Brad,

    I’ve contemplated this avenue for financing some additional investment properties but I’m leery. How do you protect yourself from liability if the financing is tied to your personal home? Or is it even a concern?

    Also, it would be great to see more in depth numbers on general terms for your financing- interest rates/amortization. You’re paying interest on both your down payment and financing- doesn’t that eat up your net cash flow?

    We would have access to $40k for equity loan- but I’ve been on the fence. Thanks!

    • Brad Lohnes

      Hi, Shawn. Thanks for reading and thanks for your questions.

      First, I want to point out that I’m not a financial adviser – I am only sharing our personal experience. So please consult a professional with respect to your own personal financial situation. 🙂

      That said, you can look at it through a couple of different lenses: math is one lens, or you can look at it through the lens of philosophy.

      Philosophically, as long as you have a mortgage on your personal home, there is risk. If you lose your ability to pay that mortgage, the bank can take your home away from you. This is just a fact of life. For this reason, many risk-averse people spend 20-30 years doing nothing financially but pay the mortgage on their home. Now, if you get super-ninja, start really young and nail that mortgage in just a few years, then there’s no question that will set you up well for a long career investing without the risk of losing your home. House hacking is another avenue here. But if not, you have lost a lot of time for assets to grow.

      But if you’re a little further along, you have to ask, is it better to pay off my home, or is it better to build assets? If you want a forest, will you plant one tree and wait for it to mature, or will you plant as many trees as you can effectively water?

      That’s how I view it. Our priority is building assets. We have a home with a mortgage, and we work hard to pay that down. But the priority will always be building more assets. I don’t honestly care when my home gets paid off as long as I’m productively building assets. Once I’m financially free, I don’t have to worry about the mortgage on our own home anyway. And in the meantime, I absolutely do. So I’d rather be building toward financial freedom.

      This has proven itself out in our case. In the last three years, we could have paid down somewhere between $30k and $50k of principle on our mortgage. Or we could have increased our net worth by several hundred thousand. I know which I prefer. Market conditions will vary, but remember our tenants are also paying down the loans on the rentals.

      I’ll try to spell all of this out more clearly in an upcoming article. Look for it! And thanks for the question. 🙂

    • Brad Lohnes

      Also, to your liability question. Our personal home loan is in our name and is with Bank A, including the revolving line of credit. Our rental properties are with Bank B (and Bank C, etc.) and are in our company name. Banks here require personal guarantees on the mortgage, but the properties themselves are with different banks and are not cross-collateralized. Does that help?

  5. Pyrrha Rivers

    Brad, I LOVE IT!!!
    I started my investing just like you, with a HELOC. I’m not as Ninja as you are but I’m on my way and love to see you lay out your trajectory.
    Mine has been slower because I live abroad and I’ve purchased 2 properties with cash. Refinanced one after 8 months but the second I own in my LLC and it has been difficult to refinance. Lately I’ve found a couple companies that lend to entities, but with only one mortgage, a HELOC and a third property which I took subject to, I don’t find the prospect of paying 12% and points for the refi when I have excellent credit, so I am considering quit claiming the property to myself in order to refinance it and pull out some of my cash to keep growing.
    On the other hand, owning it outright is not a bad feeling, so I’m a bit on the fence but continue to save for down payments.
    In any case, as you say, your tenants are paying down the mortgages, so you get to have other people money working to pay for your assets.
    Thanks for sharing!

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