By Ryan Stephens | www.Kepler.Properties
As many real estate investors already know, one of the major keys to financial freedom is passive income from rental properties. For the average person, buying one property is hard enough. However, with the right strategy in place buying rentals can be simple. The BRRRR strategy, when executed correctly, can assist investors with:
- Buying property cheaply
- Rehabbing the property and adding value
- Renting for cash flow and passive income,
- Refinancing to pull investment dollars out, and
- Repeating the process with the cash pulled out from the refinance.
Here’s a simple example of how the process works…
We recently bought a property in the Morgan Park neighborhood of Chicago for $40k cash. After putting $50k of repair work into the property, we were all in at $90k. Our property management company helped us place a tenant in the home at $1650/mo.
Next we contacted our lender to schedule an appraisal and get the ball rolling on refinancing the property. Most banks will only refinance 75% of the new value of the home (this is called LTV or Loan to Value). The appraisal raised the value of the home to $162k. At 75% LTV our new mortgage was ~$120k or $950/mo (mortgage and escrow).
With the property renting for $1650 and our mortgage being $950, we were cash-flowing at $700/mo. This was great, but it was far from the best part. Remember, we refinanced a property that we already owned outright. Our all-in expenses on the property totaled $90k. The bank cut us a check for $120k with the refinance. After paying ourselves back the purchase and repair expenses, we would take home an additional $30k ($120k – $90k = $30k). We had a renter covering the mortgage, $700/mo going straight into our bank account, and additional profit of $30k from the refinance. All said and done, we now had $120k to apply toward our next purchase and rehab.
- Know your rental market and the rental rate you can expect to receive.
- Have a good lender ready to go for the refinance. Make sure they offer cash-out refinancing. This is refinancing your existing loan for a higher principle amount and keeping the extra cash.
- If you already have a mortgage on the property, be sure to evaluate any seasoning restrictions. Seasoning refers to the maturity of the existing loan. Many lenders will not refinance a loan that is less than 12 months old. Work with a lender who will.
- Work with a contractor who understands your strategy and can recommend good “value added” amenities in the property. These amenities are improvements that increase the property’s value more so than the cost of the improvements themselves.
- Work with a property management company. More times than not, they’ll save you time, money, and stress.
- Analyze the deal at 70% LTV to add contingency to your rehab budget and to account for refinance and appraisal fees.
- Consider using a private money loan if you don’t have the upfront cash to purchase and rehab a property. See our blog on Hard Money Lending!
Have you completed a BRRRR project? Tell us how it went in the comments section!