BRRRR is a well-known acronym in the real estate investing world, and it was coined by Brandon Turner over at Bigger Pockets. The letters stand for…
This is the science, so to speak, on how to build a sizeable rental property portfolio that you can ultimately use to support yourself financially. Let’s look at each of these stages in more detail.
In the buying stage, you’re obviously looking for a rental property to purchase, but what kind of property should you be looking for? Great question.
While I can’t cover all the nuances you should be looking for in this post (check out this post), I would recommend sticking with 2-3-bedroom single-family homes. In my experience, houses of this size appeal to a broad audience and seem to cash flow better than other size houses and multi-family properties.
I also strongly recommend hiring an experienced real estate agent to help you find properties, negotiate terms, and determine ARV.
ARV stands for after-repair-value and represents a projected value the property will be worth after you rehab it. This number is critically important as you’ll find out later in this post.
Getting money for purchase and rehab
Unless you’ve got loads of cash, you’ll need to work with a lender to arrange for short-term financing for the purchase of the property rehab costs.
I don’t recommend working with banks as there is often too much red tape, and most banks just aren’t investor-friendly when it comes to short-term financing.
I recommend hard money lenders for short-term purchase and rehab financing. Hard money lenders are legitimate financial institutions that exist exclusively to finance investment properties.
I’ve worked with several hard money lenders over the years, and the company I strongly recommend is LendingHome. LendingHome will finance up to 85% of the purchase price, and up to 100% of the rehab costs.
Now, while LendingHome will finance up 100% of the rehab, you must do the work first, and then make draw requests to get reimbursed as various stages of the rehab are completed.
So, if you don’t have the cash to pay for the rehab pre-draw, then I recommend setting up a few lines of credit to get the capital to get the rehab going.
The great thing about these two vendors is you can just pull what you need, and the funds are usually in your bank account within 1 business day. You’ll be able to pay down these lines as you get your rehab draws.
If you’re LLC is too new to qualify for a business line of credit, then I recommend looking at peraonal lines of credit offered by Wells Fargo and Regions Bank. These are just the two I use. There are a number of lenders that offer personal lines and personal loans. You can easily find them online.
There are two critical items to figure out before you start your rehab. ARV and a rehab budget. Remember that ARV stands for After-Repair-Value. Your real estate agent will help you determine this number.
Once you have your ARV, you need to make sure your purchase amount + your rehab budget does NOT exceed 75% of the ARV (I’ll tell you why in a bit).
Let’s look at an example…
You identify a 3-bedroom house that needs some work. Your agent determines, based on the rehab you’re proposing, the ARV will be $100K. Let’s say you’re able to purchase the property for $50,000. So, what is your maximum renovation budget?
Well, remember, your total investment CANNOT exceeds 75% of the ARV. Since the ARV is $100K, 75% of that is $75K. With a purchase price of $50K, you’re left with a $25K renovation budget.
With that amount to work with, it’s time to make a renovation budget. Download a renovation spreadsheet like this one, and start plugging in your numbers. If you’re brand new to renovating houses, you’ll need to lean more heavily on your agent or a local contractor to determine your costs.
Also, don’t forget about holding costs like loan interest payments, property taxes, utilities, homeowner’s insurance, etc. These need to be included in your budget as well. If you find that your renovation budget and purchase price exceed 75% of the ARV, then you should forego placing an offer on the property.
Once you’ve found a property, and finished the rehab, it’s time to find a tenant. Renting a property for the right amount and to the right person is critical. To make sure you only rent to qualified tenants and charge the right amount for rent, check out these posts.
While the refinance stage comes after the rehab stage in the BRRRR acronym, refinance could come before renting. In fact, I prefer to refinance before I rent, as a vacant house makes it easier for the appraiser to access and see all the lovely work you’ve done before a tenant fills it up with stuff.
In the refinance stage, you’ll want to work with a local lender to get a long-term loan on the property. You want to work with smaller banks that keep their loans in-house, and don’t sell them. Banks that keep their loans in-house are called portfolio lenders.
Why you must work with portfolio lenders.
Larger national banks typically sell their loans on the secondary mortgage market. The largest buyer of mortgages is a government entity known as Fannie Mae. When a bank sells loans to Fannie Mae, they must abide by Fannie Mae guidelines.
One of those guidelines is that a borrower cannot have more than 10 mortgages. The bottom line here is that this guideline limits real estate investors to 10 mortgages, and if you’re going to live off rental property income alone, you’ll likely need more than 10 properties.
Well, the good news is that because portfolio lenders keep their loans in-house, they don’t have to follow Fannie Mae guidelines, so, guess what? With portfolio lenders, you can have as many mortgages as you want! As I write this post, I have close to 40 mortgages.
As I mentioned earlier, portfolio lenders tend to be your smaller, regional banks. Call them up and set up meetings with one of their commercial loan officers.
How much do I borrow?
Ok, here’s where ARV comes back in. Many banks will only loan up to 75% ARV. So, going back to our earlier example, you’ve got a rehabbed house that’s now worth $100K, and, between purchase and rehab, you’ve got $75K in it.
Well, since the lender is going to loan you 75% of its value, guess what? You’re going to get all your cash back & pay off your short-term loans, so you can move onto the last stage in the BRRRR process: repeat.
In this final stage, all you need to do is repeat the process I just outlined. Exciting, huh? You can now start building your real estate business. Take your time, learn as much as possible along the way, and choose your deals carefully.
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