Good morning,
Welcome to the first BRRRR Pro newsletter featuring the Frugal Mogul. Handing you the wheel!
Thanks! If you follow me on Twitter, you know well that I am of the opinion that the BRRRR strategy (buy, rehab, rent, refinance, repeat) is the most powerful strategy available for real estate beginners.
Why? Because for most of us (myself very much included), securing the down payment funds to purchase a real estate deal may take years.
What happens when you finally use those funds to acquire your first property… take years to replenish the acquisition fund again? That may be fast enough for some, but I wanted to grow my portfolio at a much faster rate.
The BRRRR strategy, when successfully implemented, will allow you to keep using the same one pool of funds to acquire a new property every 6-12 months.
Sounds magical, right? That is because it is! Thanks to the BRRRR, I have purchased four properties valued at $1,350,000 and I have $2,000 of my own money left on those four deals, and I am actively trying to acquire property number five.
Let me make this clear, though: The BRRRR does not happen without effort. Over the next few weeks, through Resilient REI’s weekly newsletters, I will walk you through the ins and outs of this powerful strategy.
This first week, we will review the four steps you need to take before you buy your first BRRRR deal.
Four Steps Before Your 1st BRRRR
Step 1: Save the down payment
I am of the opinion that you can’t buy real estate without a down payment. At a minimum, you should have 20% down to buy your first investment property (usually this is sufficient for a condo or single family home).
For a BRRRR, you will need 20% of the total acquisition price + the rehab cost.
For example, if you buy a property for $150,000 that requires a $50,000 renovation, you will need 20% of $200,000, or $40,000. Don’t forget that closing costs and initial escrow payments for such a deal would range from $5,000 to $10,000, so in this example you’d need to save approximately $50,000.
Don’t be daunted by this! Once my wife and I started getting serious about buying our first investment, we saved a similar amount in roughly 2 years.
Step 2: Line up a lender
Your lending partner is going to be absolutely critical when BRRRR’ing.
First, you will need to identify a hard money lender or private lender that can fund the first stage of the deal (the acquisition and the rehab).
You will then need a standard bank for the refinance portion of the transaction later on in the deal. As you identify these two lenders, remember:
- You will need to call more than one. Call dozens of lenders at this stage!
- There are lenders for every borrower (hight DTI, low credit score, etc.). Don’t stop at the first “no”
Step 3: Find representation
As a buyer of real estate in the US, the real estate agent’s representation is free to you (with rare exceptions).
But not all agents are made equal, especially when it comes to representing investors. I cannot emphasize enough how critical it is for investors to work with real estate agents who are also investors.
As a beginner real estate investor, working with an agent that invests in real estate themselves will help you in the following ways:
- They can help you identify good deals more swiftly
- A showing will also act as a “mini inspection” as these agents have often rehabbed many properties
- They can help you start building your team by recommending local lenders, tradespeople, and contractors
Step 4: Know your market
DO NOT wait until you have the first three steps above completed before you start researching your market.
Once you have the down payment funds, the lender, and the agent, you should already be an expert in your local market.
Here’s what you can start tracking today:
- What are the types of properties you will target that are in turn-key condition selling for? This will help you understand your after repair values
- What are the types of properties you will target renting for?
- How quickly are properties selling/renting in your target market
In Conclusion
I hope this is a helpful starting guide. On the next “episode” we will dive into the “B” of BRRRR, talking about the critical steps when buying your first deal. Subscribe to Resilient REI’s awesome newsletter and stay tuned!
More from the Frugal Mogul
See you on Friday
