How to Take the BRRRR Strategy to the Next Level with a 198-Unit Apartment Building

by | BiggerPockets.com

The buy, renovate, rent, refinance, repeat method (BRRRR) can be very effective to grow your rental portfolio if you implement it properly. This method works for single family and small multifamily deals—and it works on larger properties as well. In today’s video, I am going to show you how I used the BRRRR method to take my real estate investments to the next level.

The only way to make the BRRRR strategy work is to find the right deal. The property has to need a “face lift.” Perhaps the kitchens are dated, the windows are old, the carpets are damaged, the bathrooms need updating, or the heating system needs replacement. But the key factor is that the property has to have good “bones,” meaning it doesn’t need structural repairs and it isn’t becoming functionally obsolete. It’s just the ugly duckling. This is where the BRRRR strategy becomes super valuable. You find a property in a good area with a good structure that simply needs some cosmetic repairs. Those cosmetic repairs are predictable and add value to the rents you will get once you lease it out. With that increase in rents, the property value goes up, which allows you to refinance. It’s a fairly simple equation, and it can be scaled up on larger deals.

Related: Case Study: How I Made $40,000 on My Recent BRRRR Real Estate Investment

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The Deal

We found a deal in North Carolina that fit the equation. The kitchens were dated, floors needed replacement, the exteriors were drab and dated, there wasn’t any landscaping on site, and the property didn’t have any amenities like a playground or pool. On top of that, the vacancy was high and the units that were leased were rented for around $140 per month below the market rent. By adding an average of $140 per month, per unit, we increase the yearly revenue to about $330,000 per year. Notice that we didn’t increase expense; we just did renovations. By doing this, we’re increasing the cap rate that will justify our refinance.

The creative part of these types of deals is figuring out how you will finance the renovations. On this project, renovations will cost around $8,000 per unit. We will get the money for this by using equity, investors, and loans—$8,000 x 198 units at 6% debt cost will come in at $480 per unit per year or $40 per month. In a nutshell, we pay $40 per month to renovate each unit to make $140 in additional rent, which yields us $100 in cash flow per unit per month. This adds up quickly on larger deals, as $100 x 198 x 12 = $237,000 per year. Once we achieve stability and renovate all 198 units, we will refinance the short term loan and pull out some of our investor’s capital to return to them, which increases their ROI on the project. Watch the video for a full breakdown of the numbers on this one.

The BRRRR method is simple if you apply it properly. It works if you are just starting out and you’re doing smaller multi-unit family properties or if you’re looking for a way to elevate your portfolio to the next level. Be sure to watch the video to hear all the details on this deal!

Questions? Comments?

Leave them below!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area.

One of DeRosa’s mantras is “to make money while making a difference.”

22 Comments

  1. Joshua B.

    Matt another great video. This is an amazing example how the BRRR strategy, primarily used by investors on primarily SFH, has the power to scale up to larger projects. This shows once again that learning and understanding the fundamental concepts will continue to help your business as it grows.

    • Matt Faircloth

      Hey Jim,
      Good question. We actually don’t renovate with tenants in. We go after the vacant units first. Then as renewals come up, we tell tenants that they can either renew at the new rate and move to a renovated unit or move out of the complex. For senior citizen tenants or those needing assistance, we will provide a crew to help them move. That way we end up with a fully renovated complex after all the leases renew.
      Matt

  2. Mike Shep

    Great project and informative video Matt! Just a couple questions:
    1. How are you finding the deals? And, aside from just looking at the condition by driving/walking by, how do you get the financials to determine how a property is performing?
    2. Can you give just a brief overview of how all the financing looked including both the purchase and the renovations? Did you do that in 2 phases or combine both into same original package?
    3. Jim McNeill had asked my exact question–how do you do renovations on occupied units?
    4. Time to complete? guessing 18 month timeline

    Thanks again and great job!

    • Bernard PEARSON

      Thanks great video. Thinking about purchasing a 2 Family 3 BR (1BR & 2BR). Considering a 203K loan to do the Reno (its an ugly duckling on a great street) asking price 299,000 post reno estimate value 380,000 ($35K in Renos with the 203K). and Gotchas with using a 203K for the BRRR

  3. Bernard PEARSON

    Correction to my first post **** Thanks great video. Thinking about purchasing a 2 Family 3 BR (1BR & 2BR). Considering a 203K loan to do the Reno (its an ugly duckling on a great street) asking price 299,000 total in would be 334. Post reno estimate value 380,000 ($35K in Renos with the 203K). Are there any “Gotchas” with using a 203K loan for the BRRR

    • Matt Faircloth

      Hey Bernard,
      Sounds like a winner! I have not done a 203K myself but I have heard that you need to use a contractor that’s approved by FHA and the inspections to release construction draws to you can be very cumbersome. Also as I understand it, you have to pay for the construction phases out of your pocket and get reimbursed by the bank as you go, so you will need 10K or so in operating capital to advance the contractors and then get paid back by the bank.

      Matt

    • Matt Faircloth

      Hey Philip,
      A bridge loan is just a short term loan from a bank. It’s typically interest only and designed to give you enough funds to perform a renovation and then refinance into a long term loan (in lender language it’s called rolling to a perm). Larger banks that want your refinance business will give you these types of loans but I have not seen them offered on a deal less than 100 units.

      Matt

    • Matt Faircloth

      We are targeting getting all the renovations done in 2 years. We will renovate units as tenants move out and give them an option to move to an updated unit or move out of the complex, that way we will get all 198 renovated in that time frame.

  4. Jessie Silva

    Great post again Matt, I always love reading your posts! I’m still somewhat new to the BP community and I always had my own formula/strategy that I look foward to implementing on multi-family properties that is strikingly very similar to what you guys called the “BRRRR” formula. My “Magic Formula” as I call it, goes as follows;

    1. Buy an underperforming asset
    2. Force equity
    3. Refinance the asset
    4. Be in for free positive cash flow
    5. Watch the asset appreciate over time
    6. Sell at a higher price (optional)

    However, me personally I would always consider selling the asset once I can force some value and is stabalized so I can fully liquidate and “trade up” my properties (buy bigger deals as I recieve more capital). I see my properties as moving chest pieces – so I wouldnt like to sit on them for very long. I would consider my money getting “lazy” and I want my cash moving at high velocity. So generally I would consider holding within a 3-5 year span.

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