I still remember getting to the last R of the BRRRR for the very first time. There is no way to properly describe how fantastic it feels to remove all of your funds from a real estate deal. I’d say you feel like Superman, but Superman was never given the power to create money out of thin air, so you actually feel BETTER than Superman. I hope that you find yourself feeling these feelings sooner than later. When you do, follow these four steps before jumping into your next deal.
R is for Repeat – Four Steps to Help You in the BRRRR’s 5th Stage
Step 1: Take a Breath and Reflect
If your BRRRR was successful, you just achieved an incredible feat. You took a depressed property, brought it up to par through a rehab, rented it, and removed ALL of your money out of the deal so that you can do it again. This is not easy, and successfully completing a BRRRR may end up giving you too much confidence. So, before you jump into your next deal, take a breath and reflect on all of the things that went wrong, as well as all of the things that went well. Once you do that, consider some adjustments:
- Would you use the same contractor again?
- Did you overspend on any of the rehab items?
- Was your lender the right partner for you?
- Were you too optimistic projecting the after repair value (ARV)?
- What would you adjust to your tenant-sourcing strategy?
Step 2: Where to Park the Cash
One of the most wonderful “problems” of the BRRRR real estate investor is receiving a lump sum of cash after performing a successful cash out refinance. On my first BRRRR, I put down a little less than $50K and then found myself holding a check for $100K after the cash out refinance. It was a wonderful feeling, but a problem remained: what the heck do I do with all this cash?
Your answer will vary depending on your risk profile and timeline for your next investment. For me, I decided it was an opportune time to invest in some beaten down stocks (my first cash out was close to the COVID-19 stock market crash), but a more reserved investor might just park it in their bank’s savings account. While the choice is entirely yours, make sure you have given this some thought prior to closing on your cash out refinance. My one and only recommendation is that you use the proceeds to buy more real estate, instead of consumer goods such as cars or boats! The time for that is still much later on.
Step 3: Don’t Take Your Eye Off The Prize
Applying the BRRRR strategy goes beyond just finding and fixing properties. It is about growing a portfolio of properties that will ultimately give you financial freedom. While you seek out and rehab your next deal, do not forget your now growing property portfolio. If you focus solely on growth and acquisition and forget to properly manage your existing properties, you will eventually find that all of your hard work has been for naught. Always stick to your standards and make sure your properties are well taken care of. If you are to achieve financial independence through real estate, you will need to take care of your properties well.
Step 4: Analyze the Market (Again!)
After every BRRRR, you must take a close look at your market to make sure that the strategy still works for the next deal as it had for the previous deals. This is important because real estate can change quickly, and those caught unprepared may be left holding on to investments that no longer make financial sense. Make sure you check for recent inventory levels and comparable sales numbers, and then adjust your offers on the next property accordingly!
If you follow all of these steps, you will be well on your way to creating a real estate empire by recycling the same original pool of funds. I wish you much success!
Frugal Mogul 🏡 (@RealFrugalMogul) / Twitter — twitter.com
Sharing my journey to financial independence through real estate. Follow for live tweets as I go from 0 to 15+ rental properties (currently at 4).
Monday’s podcast was all about ADUs (Accessory Dwelling Units). These can be excellent ways to add rental units to your existing properties. But they are not without challenges.
5 Top ADU Myths with Derek Sherrell