16 May Anatomy of a BRRRR Deal – It’s Like Playing With House Money!
Imagine buying an investment property, getting tons of cash flow every month, creating tens of thousands of dollars of equity, and then getting all your original money back while having the privilege of still owning the investment property?! It’s like you created a money generating machine out of thin air.
In the past few years, the term BRRRR has become popular among many real estate investors. It stands for Buy, Renovate, Rent, Refinance, and Repeat. It is a clever way to continuously recycle your money, thereby accelerating your cash flow and wealth building.
You buy a fixer upper in cash. Then you renovate it to bring it up to your standard while creating sweat equity. Next you rent it out on a long term lease, typically for a fairly high amount since you’re offering a high quality unit. Six months after buying the property, you conduct a cash-out refinance to pull out most, if not all of the money you initially invested in the deal. With your original cash back in your pocket, then you might as well repeat the process by buying another property.
Here is a textbook BRRRR deal we recently conducted so you can visualize how to do it for yourself.
June 12th: A 3 bedroom, 1 bathroom house is listed for sale for $160,000. Seller was a landlord who had previously rented the house for $800 a month.
June 17th: Listing agent drops the price to $155,000.
June 21st: We make an offer for $130,000 cash, with no inspections and no contingencies. We state that we can close by July 6th. Our earnest money deposit is $10,000.
June 22nd: We reach agreement on a price of $136,500. We immediately bring contractors in to provide estimates on work. The planned work includes: adding a half bath; painting the kitchen cabinets; installing new countertops; painting the interior; installing ceiling fans and new light fixtures; cleaning up the shed; removing debris (from the neighbor’s yard since it looked terrible); installing refurbished appliances; and changing all the doorknobs.
July 1st: We hold the settlement a few days early since we want our contractors to get started sooner. We intend to have the place rented by August 1st. The purchase price plus closing costs is $137,588.28. Our renovation budget is set at $17,500. Our homeowner’s insurance is $882.26 per year.
July 11th: We show the house to a prospective tenant who was moving into the state with their family. The person had come to an Open House we held earlier that day at another one of our rental properties. They asked if we had something bigger. We said we were about a week from finishing the renovation yet we stated that they could come see the house right away.
July 16th: We sign a one year lease with that tenant for $1,555 a month.
July 17th: The renovation is completed. The budget was $17,500, and we spent $17,302.36 to stay within the budget.
August 1st: The tenants move in.
Late December: We start the mortgage refinance application.
January 6th: We meet the appraiser at the house to show the improvements we made. The house appraised for $202,000. Since we were conducting a cash-out refinance at 75 percent loan to value, our loan amount would be $151,500.
February 5th: We conduct the refinance at a title company. One hour later, at the same title company, we buy another 3 bedroom, 1 bathroom fixer upper house in cash (using the same cash) for $135,000.
$136,500 Purchase price
+$1,588.28 Closing costs
+$882.26 Homeowner’s insurance
+$843.34 Property taxes
+$17,302.36 Renovation costs and utilities
$157,116.24 Total money spent
– $9,330.00 Rent received August through February
$147,786.24 Total money out of pocket minus rent received
$149,167.47 Cash out refinance amount ($151,500 loan minus refinance costs of $2,332.53)
So, we put $147,786.24 into the deal yet received $149,167.47 back. We also created $50,500 in equity out of thin air. The house is modernized and will not require major maintenance costs for some time. Our cash flow with the loan in place is about $700 a month.
We did not even have to advertise the house for rent, since the tenant we found had come to an Open House we held on another rental. That saved us time and money. Best of all, we used that $149,167.47 to purchase and renovate another house. That house is currently rented too!
Most lenders require a minimum six-month seasoning period after the property is purchased. That’s why we wait six months to pull our cash out.
Check out our video on a BRRRR deal with did!
The BRRRR Method involves little risk for us, since we are able to pull out our original investment money and recycle it. We constantly buy undervalued assets, increase the value, generate cash flow, and take out our original investment dollars to put into another undervalued asset. That’s like playing with house money!
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Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania. He became a full-time real estate investor in 2004 after serving in the U.S. Navy. Tai has made colossal mistakes in investing (and learned some things along the way). He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics. Send an email to tai@investandtransform.com.
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