Understanding the BRRR Method

On today's podcast episode I talk about the Buy, Repair, Rent and Refinance strategy commonly referred to as the BRRR Method. This is one of my favorite real estate strategies and one of the easiest ways that I know to create long term wealth with real estate. 

The Buy, Repair, Rent and Refinance Strategy was the method that I used to make my first million dollars in real estate. It has helped me, and many of my students become multi millionaires.

Ironically, out of all the real estate investing strategies that there are, it's the easiest strategy to employ for a beginner and requires the least amount of effort.

The BRRR Method consists of four components

• BUY
• REPAIR
• RENT
• REFINANCE
  

BUY

The first step is to find a rental property that would work using the BRRR Method. Your goal is to find a property that you can buy, repair, rent and refinance where all of the costs of the purchase and renovation of the property are covered. Once you locate a property, you purchase it using a loan from a private lender. I teach my students how to get private lender loans at my real estate training events. 

REPAIR 

The second step is to repair and renovate the property. We call this stage the "rehab" stage. Before you can rent the house to a tenant, you will need to make the property rent ready. How much work is required to make the property rent ready depends on the property. Some houses only need a new coat of paint and fresh carpets. Others require more renovation like updating the flooring, the kitchen, and the bathrooms. Some houses require major renovation like new roofs, central air conditioning, plumbing or electrical work.

In some cases you may be able to buy a property that is already rented (with a tenant in place). In this scenario you can skip the repairs because the house is already rented and does not need to be repaired. However, usually, for the BRRR Method to work, you would need to buy the property at a substantial discount to market value. And that means that most of the time the property would require repairs.

RENT 

The third step is to rent the property. You will need to have a tenant in place in order to be able to refinance your mortgage. The bank will want to see the amount of rent that the tenant is paying, and will want to verify this by getting a copy of the lease, and also by confirming that the rent is being deposited into your bank account. You would typically collect the first month's rent, last month's rent and a security deposit from the tenant when renting out the house.

REFINANCE

The fourth step is to refinance the mortgage to a lower interest rate fixed mortgage. In order to refinance the mortgage the bank will require an appraisal. For investment properties, banks will typically lend 75% of the appraisal value. A house that appraises for $200,000 would be able to get a mortgage for $150,000.  The goal with the refinance is to get enough money from the bank in the refinance to pay off the private lender and to cover the purchase price and the repairs plus all closing costs and other fees like points, interest, and insurance. Done correctly, (like in the example I used in this podcast episode) you can buy a house with no money down using the BRRR Method. 

EXAMPLE

On the podcast episode I spoke about a house that could be purchased for a purchase Price $80,000. Assume you could get a private lender loan from someone like me for $70,000. If this property required repairs of $30,000 and fees and points and closings costs were $10,000 then your total cost to purchase and repair this property would be $120,000. 

After the house was repaired, let's say you rented it to a tenant for $2,000 which is the going market rate. Now that the house is rented, your goal would be to refinance the mortgage so your mortgage broker orders and appraisal and the house appraises for $200,000. The bank is willing to lend you 75% of the appraisal amount which is $150,000. I recommend the 15 year fixed rate mortgage so that your house is paid off in 15 years (or less if you pay a little extra each month).

You have to pay back the private lender loan of $70,000. You also want to pay yourself back the cost of the repairs ($30,000) plus the cost of the fees and points and closing costs from when you purchased the house ($10,000). In some cases you may have used Home Depot cards to pay for materials and you may have paid your contractor with a credit card. 

HERE IS THE BREAKDOWN

Purchase Price $80,000

Private Lender Loan $70,000

Fees and Points $10,000

Total Cost $90,000

Repairs $30,000

Total Cost Including Repairs $120,000

Your Cash Out of Pocket (or credit cards used or a combination of both) would be the $10,000 down payment, plus $10,000 in closing costs, points, fees and insurance plus the $30,000 in repairs. The total cash out of pocket would be $50,000. This could be borrowed from a relative or friend or it could be a combination of credit cards, savings and Home Depot cards.  

APPRAISAL

Appraisal $200,000

Bank Loan: $150,000 

Pay off Private Lender $70,000 (you are left with $80,000)

Pay yourself back the $10,000 down payment

Pay yourself back for the repairs $30,000 (or pay off the Home Depot Card)

Pay yourself back for the fees, points, closing costs and insurance $10,000

Refinance Fees $5,000

Cash left over $25,000

EQUITY

At this point you would have a house that is appraised at $200,000 with a mortgage of $150,000. Your equity would be $50,000. You also have the cash left over from the refinance which is $25,000. You would have increased your net worth by $75,000 by buying this property. 

HOLD THE PROPERTY UNTIL THE MORTGAGE IS PAID OFF

Assuming that the value of the house doubles in 15 years, and the rent doubles in 15 years then you would own a $400,000 house free and clear (with no mortgage) and you would have $4,000 per month in rent coming in (in 15 years). This is how you become wealthy. If your goal was to have $20,000 per month coming in, then all you would need to have is 5 of these houses.

What makes this such a powerful strategy is that you are not limited and can buy as many houses as you want. As long as they fit the formula, you can buy unlimited real estate. So in the example above if you borrowed the $50k from a combination of your savings, a relative and credit cards then when you refinance you would have that money back and would be able to do it again and again and again. And if you get 15 year mortgages, then no matter what happens in those 15 years, your mortgage will get paid off and you will own the property free and clear. And if you pay a few hundred dollars extra each month you can have your mortgage paid off in as little as 10 years.

CREATING WEALTH AND FINANCIAL FREEDOM

The BRR Method is the easiest way to create wealth and financial freedom. This is the easy way to get wealthy but it does require patience. And it works, as so many of my students can tell you! 

If you want to learn how to get started with the BRRR Method I encourage you to attend the Buying Rentals and Building Wealth Boot Camp where I teach the BRRR Method.

You can find out more information about that boot camp at this link: https://www.lexlevinrad.com/buying-rentals-building-wealth-boot-camp/

If you want to increase your returns by 3 to 5 times and pay off your mortgage quicker, then you can rent the properties to short term tenants using the Airbnb platform instead of long term tenants. We teach this Airbnb method at our Airbnb and Short Term Rentals Boot Camp.

If you want to learn more about my real estate training program, and more about our upcoming events, boot camps and my coaching program visit www.lexlevinrad.com or call my office and speak to one of our Student Support Managers at [phone].