The BRRRR Rental Property Investment Strategy Made Simple
David Greene
Every dollar you invest in real estate should come back to you — so you can invest it again.
Greene's entire framework is built around velocity of money: how many times the same dollar can work for you. Buy below value, force appreciation through rehab, refinance out your capital, and repeat. The math compounds faster than almost any other strategy available to an individual investor.
Everything Greene wants you to walk away with
In the traditional method, you finance first. In BRRRR, you finance last — after you've already added value. This one change in sequencing is what lets your capital cycle back to you and compound.
Buying below market value and adding real equity through a smart rehab is what makes the entire math work. Every deal should be purchased for as far under market value as possible — this is the foundational tenet.
When you force appreciation through rehab, the bank appraises higher than what you paid, and your refinance returns most or all of your original cash. You can then immediately redeploy it into the next deal.
You need four people to invest in any market: a rockstar agent, lender, contractor, and property manager. No system survives a bad team. Assemble your operators before you're scrambling inside a deal.
There are three kinds of distress: market, personal, and property. Property distress — homes in bad physical condition — involves the most work but is the easiest to find and the most reliably profitable for BRRRR investors.
Your total cost — acquisition plus rehab — should be 75% or less of the after-repair value. This aligns with typical bank lending at 75% LTV, which is what makes a full capital recovery possible on the refinance.
When you first start, focus on two things: how far below value you're buying, and whether the property will cash-flow positively. Repetition builds mastery. The napkin method — rent minus mortgage, tax, insurance, and management — tells you fast.
When a contractor justifies every line item with materials cost, labor hours, and timeline, you eliminate massive uncertainty. Add a bonus/penalty clause tied to completion date to align incentives and protect your rehab budget.
Bathrooms and kitchens are the biggest bang for your buck. Replace carpet with durable laminate, use tile in small high-impact spaces, and match your improvements to how appraisers in your specific market value properties.
Move slowly until you know your process works, then scale. If you BRRRR your first deal, the second comes faster. BRRRR that one, and the third comes even faster. The compounding effect is what makes the strategy transformational.
These notes are inspired by direct excerpts and woven together into a readable guide you can follow from start to finish.
By David M. Greene
BRRRR is an acronym that stands for Buy, Rehab, Rent, Refinance, Repeat. It describes the order of buying a rental property and then pulling your capital back out in the most efficient way possible. The goal is not just to grow your wealth at a consistent rate, but to do it at an exponential rate.
BRRRR is the best way to buy a property if your goal is to own more than one or two. The single most important act a real estate investor can do to grow their wealth is to add value to a property—whether through purchasing below market value or adding value through a rehab. The problem with the traditional model is that you leave so much equity in the deal when you are done that you can’t access that capital to buy the next property—and the next property is where you always make the most money.
The BRRRR method works the same as the traditional method, but in a different order. That one small difference leads to a radically different result. When you use the BRRRR method, you start by paying cash for the property rather than financing it. In real estate, investors add value in two ways: they pay less than a property is worth (“buying” equity), or they increase its value by improving its condition (“forcing appreciation” or “building” equity through the rehab process).
With BRRRR, these are the first two things you do—you add value before you finance anything. After the rehab, you put the property up for rent and immediately start collecting cash flow. This cash flow is higher than in the traditional method at the outset because there is not yet a mortgage on the property. Once the property is bought, rehabbed, and rented, then you refinance it. The amount financed is based on the value of the property after it has been fixed up—when it is higher.
When the bank evaluates the property to give you a loan, it is valuing a property that is fixed up and worth more under the BRRRR method. With the traditional method, the bank evaluates the property before it has been fixed up, making it worth less. A loan can be secured by an asset at any time, not just upon purchase.
In the traditional method, you finance first. In the BRRRR method, you finance last. This one seemingly insignificant difference in the order in which you finance your property is the difference between buying two houses a year or buying 24 houses a year. Small hinges swing big doors, and BRRRR is the ultimate small hinge.
There are several ways to increase your profit. The most basic way is to earn more (raise rent) or spend less (decrease expenses). While many believe in putting as much down on a property as possible to increase cash flow by lowering the mortgage, this is a too-simple view that doesn’t consider enough of the facts. If you make sure the ROI you earn on your money is higher than the interest rate you are paying to borrow the money, you come out on top.
Definition — Velocity of Money
Velocity of money describes how many times you can make the same source of capital work for you. The faster you send out money and recover it along with a profit, the faster you can build your wealth. Think of it as how many houses you can buy with the same dollar. If you buy a property that earns a 10 percent return each year, you have to wait ten years before you can get that money back and reinvest. If you buy a property and pull out 100 percent of the capital you put in, you can immediately buy another property.
The BRRRR method is the most efficient way to buy property, period. It is so powerful that it often makes sense for new investors not to buy their first property until they have saved, found, partnered with others, or otherwise secured enough capital to buy a fixer-upper property with cash. If you can BRRRR on your first purchase, your next deal will come that much faster. If you BRRRR that one, the third will come even faster. Your learning curve will be so radically steeper that it is worth taking longer to get started in order to move so much faster once you begin.
Mastery is more than being able to copy a movement over and over. It is understanding why that movement works and finding new ways to use it in different areas of your life. You should expect your money to work hard for you, just as you would if you had employees. The traditional method allows your money to be lazy. The BRRRR method forces it to work hard and serve you better.
Rental properties on the MLS that don’t need much work typically don’t see as large of a discount. Every deal you buy should be for as much under market value as possible. “You make your money when you buy” is one of the oldest and truest real estate maxims around. Look for ways to add equity to every single deal—adding bedrooms, bathrooms, square footage, and other improvements are great ways to watch your wealth grow quickly.
Fear is healthy. It can prevent mistakes and sometimes protect you. But as an emotion, you can’t follow it blindly. Think of it like a sign on the beach that says “caution: high tides.” You should note the warning and check the conditions. If the tide is low, enjoy a great day of surfing. If it is high, wait. If you can’t tell the difference, educate yourself before jumping in.
Volume amplifies your results, both positive and negative. When you are losing money, volume causes you to lose a lot more. When you are making money, you can make a lot more. Use volume as a tool when you have found a good thing—but only once you have found a good thing. Move slowly until you know the process you are using is leading to the result you want, then step up your volume.
Definition — Three Types of Distress
There are three kinds of distress you target as an investor:
1. Market distress is when an entire market, economy, or area is in a rough time. This is the easiest time to find deals, but the one you have the least control over. If you rely on market distress, you will spend the majority of your time waiting and not investing.
2. Personal distress is when the owner of a property is in some form of distress in their personal life that is affecting their finances—examples include divorce, a lost job, a death in the family, trust sales, or sudden medical expenses. Personal distress is how professional, full-time investors and most wholesalers target deals. It offers the highest margins, but it is also the most difficult form to pursue.
3. Property distress is when the property itself is in such bad condition that its value is affected. Examples include leaking roofs, foundational problems, significant pest damage, and obsolete floor plans. Property distress involves the most work, but it is the easiest form to target and the one you have the most control over finding. As a BRRRR investor, this is the type of distress you will typically target the most.
If a property will rent for 1 percent of the price you paid for it, it is likely to cash-flow positively. This is a preliminary screening procedure meant to save you time. The more expensive a property is, the less strictly this rule needs to apply—a $500,000 property would not need to rent for $5,000 a month to cash-flow positively, whereas a $50,000 property needs to be close to $500. The rule applies most strictly to lower-priced properties, which is where most investors operate. In periods of historically low interest rates, mortgages are abnormally low, giving you more slack even when a property doesn’t quite meet the 1 percent threshold.
Your total expenses for a property (acquisition plus rehab) should add up to 75 percent of what the property will appraise for when you are finished. You are essentially willing to pay 75 cents on the dollar for what you buy. The 75 percent figure aligns with the fact that most banks are willing to lend at a 75 percent loan-to-value (LTV) ratio.
Single-family properties are valued by looking at surrounding homes and finding “comps” closest in size, number of bedrooms, and condition. This is what an appraiser will examine. Multifamily properties are different—lenders know they are purchased to run a business, so they are valued based on the amount of profit they generate, not what other nearby multifamily properties sold for. To increase the value of a multifamily home, you increase its profitability. To increase the value of a single-family home, you improve its condition to compare favorably to other, more valuable nearby homes.
Appraisers in different areas use different formulas. For example, a California-based appraiser gives more weight to proximity and condition than to square footage. In the South, appraisers are more likely to use price per square foot than condition. Understanding your area and how homes are valued there is a terrific way to make sure you are adding as much value as possible to the properties you buy and rehab.
If you want to add value to a property that is undersized, adding square feet is the fastest, cheapest, and most efficient way to do so—especially in areas where appraisers use price per square foot. They take the average price per square foot for nearby properties (say, $100), multiply it by your home’s total square footage (say, 1,100), arrive at $110,000, and then adjust up or down based on condition.
Look for three things in a deal: to be all-in for 75 percent of ARV, to cash-flow positively, and to be in an area that won’t cause you a headache. Also look for areas that appreciate faster than the surrounding neighborhoods, so you can refinance several times over the period of ownership and reinvest the money you pull out.
Key Insight
“Overcome fear with math.” Learn to analyze properties and you will feel much better about your buying decisions. The best way to get good at analyzing deals is through practice. Repetition builds mastery.
When you first start analyzing properties, focus on two things: how much you are buying a property for under its value (how good the deal is), and whether the property will cash-flow positively. Learn to find comps and compare them to the property you are evaluating—agents, appraisers, and wholesalers can help, and you can also use listing portals like Zillow.com or Realtor.com. Next, learn to estimate rehab costs. Talking to contractors, handymen, and other investors builds confidence and helps you know if you are overpaying. If you are using the BRRRR method, you are very likely to be doing significant rehabs.
To quickly determine whether a property will cash-flow, write down the five inputs involved in just about every purchase and calculate them on a piece of paper—or a napkin:
When looking to buy in a new area, your first priority should be to find your “Core Four”—the four people you need to invest in any market, any time. These are the people who will run your business, make you money, and help you become successful.
Agent: A rockstar real estate agent is a top producer who knows everybody and is well liked. They find deals before anyone else, negotiate the best, and have the brightest minds. They have the most talent on their teams, the best mentors, and they demand excellence from everyone around them. They are never hurting for business, don’t lower their commissions, and know real estate like the back of their hand. Rockstar agents have the best referrals because they only work with top lenders, contractors, handymen, and property managers.
Lender: A rockstar lender doesn’t throw in the towel easily. They have access to the most loan programs, and when a loan doesn’t work, they know how to find one that will. They know how to help you repair your credit, find ways to get you better rates and terms, and solve problems when they arise. They are tenacious, resilient, and they hustle. A rockstar lender won’t say “no” without proposing an alternative solution.
Contractor: The ideal contractor for an investor understands your business goals, not just their own. They know what needs to be done, how to do it, and how to save you money. They can tell you the best plan of action for your property before you even look into it, communicate with the city to get permits approved, and provide recommendations that other contractors wouldn’t think of. Great contractors know the best roofers, HVAC services, plumbers, and electricians.
Property Manager: A first-rate property manager knows the areas you are investing in, manages many rental properties there, and has a large sample size of properties from which they have learned. They have access to the best handymen and repair crews because they have been looking for them for their own properties.
The answer to “How do I get the best to work with me?” is simple—become someone worthy of working with them. Learn to give value first. Find out what these rockstars need in their business or their life and bring that to them. Before you can learn what others need, you have to first learn how their job works. Once you figure that out, it becomes apparent how you can help. Trying to bring value to someone before you understand their business model is an exercise in futility. Give them great reviews online on Facebook, Zillow, Yelp, or Google. Call their boss and tell them how great they are. The search for talent should be number one on your list when looking for great deals.
It is a well-known fact in real estate that cash offers are the strongest offers. One of the main reasons is that they come without financing contingencies. A cash buyer does not need a loan contingency because there will be no loan. They also don’t need an appraisal contingency because there is no lender requiring an appraisal. To a seller, this is very appealing.
Because you are looking to pay as little as possible, make your offer stronger in more ways than just the offer price. By significantly reducing the time needed for inspections and alerting the title company that you want to close in ten days, you can write all-cash offers with little or no contingencies for ten days or sometimes less.
Most people look at money as something to be spent—earned, then consumed. When you adopt this mindset, budgeting feels unfair. Instead, learn to look at money like a seed to plant. Your seeds produce more seeds, just as your money produces more money. Tell yourself the purpose of earning money is to invest it, and spending money is really eating into your future. This attitude helps you avoid feeling entitled or discouraged about not spending what you make.
If you want to be successful, get in the habit of asking yourself: “What is my most important next step toward executing this technique?” and writing down the answer. By breaking big tasks (such as finding an agent on a top-producing team) into smaller ones (search Zillow.com for top agents with teams, email the team leader, ask for agents to interview, come up with a list of questions), you can make it much easier to develop a strategy and start taking action.
Having one agent looking for deals for you is great. Having several is even better. Seeking out multiple agents lets you tap into different networks. Some agents network with investors and hear about deals before they hit the market, while others network with attorneys and know about sellers in distress due to divorce or death. Diversifying the people you talk to increases the reach of your network, and increasing connections helps you find more deals.
Although wholesalers can get you incredible deals, there is no guarantee they know what they are doing or that the information they provide is accurate. They are not licensed and do not owe you a fiduciary duty of responsibility. The biggest risk with wholesalers is inaccurate information, or in some cases, a complete lie.
Direct mail: These cards state you are looking to buy houses in any condition and usually spell out what you can offer—cash, quick close, no Realtor fees, no closing costs. Sending a single wave of direct mail isn’t likely to get a result, but sending several waves consistently over time is much more likely to work.
SEO: Building an online presence that attracts motivated sellers searching for solutions.
Personal networking: Building relationships that surface deals through word-of-mouth.
Professional networking: The key is to find people who are more likely to come across distressed sellers than the average person—examples include divorce attorneys, probate attorneys, bankruptcy companies, and morticians or funeral homes. Make a list of these contacts and follow up with them regularly.
Auctions: These are typically foreclosure auctions where banks try to sell properties before taking them on their books (at which point they become REO, or “real estate owned”). Foreclosure auctions can provide great deals but can also be incredibly risky. Most properties are sold with no contingencies, cash only, and very little opportunity to conduct due diligence.
Tax liens: Generally, you are buying the right to foreclose on a house by paying the money the owner owes in taxes to the government for them. By paying their lien, you are compensated with the right to take the house—the asset securing that lien. The caveat is that different areas have different laws governing this process. Some give the owners a period of time to pay you back; if they repay on time, they keep the property.
Driving for dollars: You get in your car and look for obviously distressed properties. Signs of obvious neglect include: an overgrown lawn, newspapers piled up in the driveway, neglected landscaping, dead grass, boarded-up windows, rotting wood, a roof with plants growing on it, and broken windows. Receiving a letter in the mail can be annoying for the recipient, but delivering a letter in person puts a face to the name and lets them know how serious you are.
If buying right is the most important thing you can do to make money in real estate, getting the rehab right is the second most important. When you don’t put in the time and effort on the front end to find high-quality candidates, you will pay for it on the back end through shoddy work, lackluster results, and a terrible experience. If you found a rockstar for every member of your Core Four, you could follow their advice, let them do their thing, and watch as your net worth and passive income grows on its own.
If you want to make the talent search easier, start looking for team members who invest themselves. Becoming likeable is one of the fastest ways to becoming successful. In many ways it is more important than being smart, hardworking, or experienced. Likability makes everything easier.
While there are many definitions, it can be boiled down to this: a contractor is licensed, and a handyman is not. Sometimes using an unlicensed handyman can save you a lot of money over using a licensed contractor.
When you hire a handyman, ask them how much money and time they will need. Then ask if they accounted for materials not being delivered on time, employees not showing up, dump fees, tools, and similar costs. Often they have not. If you are going to use a handyman, understand that you are taking on the role of general contractor and hiring them as a subcontractor. You cannot hire a handyman to do a job and expect them to also manage the logistics of that job.
The key to having a bid work for you is to make it as specific as possible. By requiring the contractor to write their bid in a manner that justifies every expense, you can see exactly what you are paying for and how much. This alone removes massive amounts of uncertainty. You want your bid to look like a menu, where you have the option of adding items, removing items, and choosing the items you feel are a good value while removing those that aren’t.
Ask the contractor how much the materials will cost for a job, then ask how many hours the labor will take. With these two data points, you can tell if you are overpaying. To verify the labor estimate is honest, call another contractor and ask them on average how long it takes one of their subs to do the same task. Always get multiple bids.
The first thing to add to the bid is the timeline for the job to be completed. Ask the contractor how long they think it will take—don’t pressure them into your timeline. Let them give a number they believe they can hit. Then confirm: “Are you positive? It’s okay if you take longer, I just need to know up front so I can plan.” If they reconsider, accept the revised number and confirm again. Then add a buffer. If they said nine weeks, give them ten. Offer a bonus of 5 percent of the total job cost if they finish on time as a way of rewarding them and building the relationship. But also include a penalty: if they go over, subtract 5 percent from the last draw, and an additional 5 percent for every week beyond that. Spell out these terms on the bid and have both parties sign the contract.
A few of the more common items involved on most rehabs include: paint, flooring, shower and bathroom remodels, landscaping, dry rot repair, countertops, painting cabinets, removing trees, roofs, HVAC installation, adding closets, hanging doors, installing slightly used appliances, installing ceiling fans, new vanities, new toilets, new light and bathroom fixtures, new baseboards, replacing windows, and cleaning.
Upgrade hacking is about making a property worth more for less money than it would normally cost. It is a mindset of looking for ways to get the most value for the least money, marrying an understanding of how properties are valued with an understanding of what materials cost.
Spending too much on hardwood floors, granite countertops, or top-of-the-line cabinets and baseboards is usually a big mistake. Those items can be easily destroyed, and they usually cover a large surface area—meaning you need a lot of them. This logic works in reverse for bathrooms: tile is extremely durable (solving the durability problem) and bathroom surface areas are on the smaller side (solving the cost problem). Bathrooms are a big “bang for your buck” category when it comes to impact on property value.
Bathroom upgrade hacks: A rainfall showerhead can be added for under $400 total (showerhead under $200, additional plumbing and valve under $200), as long as you are already tearing out the existing shower and exposing the plumbing. For the sink or vanity area, if you already need to replace it, consider spending a couple hundred dollars more for a vanity with a granite countertop and upgraded faucet—more durable materials and a big wow factor for very little extra.
Kitchen upgrade hacks: Kitchens are the biggest “bang for your buck” area of a property. One quick upgrade hack is to purchase stainless steel appliances instead of standard white ones when the appliances need to be replaced anyway.
Landscaping hacks: Consider using items that won’t likely ever need to be replaced. Pouring concrete is more expensive than sod, but it is very difficult to mess up concrete. Sod can die easily and tenants aren’t likely to take good care of it. Mulch is another great hack—it costs a couple of dollars a bag and can be replaced with every vacancy for very little. Avoid complicated sprinkler systems, as they add more things that can break and unnecessarily increase repair costs.
Flooring hack: If you buy a property with carpet that needs replacement (and this will happen often), consider replacing it with a very tough and durable laminate instead of more carpet. Carpet is the cheapest option but also the least durable and easiest to ruin—you are almost guaranteeing you will replace it with every new tenant. While laminate costs more upfront, it saves money in the long run.
One of the best ways to make your property more valuable is to add square footage, especially when it has less than the average surrounding properties. Look for parts of an addition that are already in place. It may cost $30,000 to build an entire new master bedroom, but if the property already has a concrete pad poured, a roof overhang, electrical run to it (such as an outdoor patio fan), or is very close to indoor plumbing, you can likely fold that area into the square footage for very little extra money.
Another way to add value is to increase the number of bedrooms or bathrooms. The biggest value jump is from two to three bedrooms, as more people look for three-bedroom homes than two. A great upgrade hack is to take an area of the house that isn’t providing much value and convert it into a bedroom. In most cases, all you need is some drywall, a closet, and possibly some French doors—an extremely cheap way to add a large amount of value. The same concept works for homes with only one bathroom; adding a second can add significant value and make the property much easier to rent.
Both appraisers and renters give the most value to the kitchen and bathrooms—especially the master bathroom. Going all out on crown molding in the family room or designing a super fancy fireplace may be elegant, but it isn’t likely to add much value from either an appraiser’s or a renter’s standpoint.
You can save on kitchen remodeling by painting cabinets rather than replacing them. Many investors mistakenly assume they need to replace cabinets in every property. In most modern kitchens, people opt for either very dark cabinets or white/light gray cabinets—it tends to be one extreme or the other. Avoid the old brown oak style; if you have those, stain them a darker color.
Many hacks that work in kitchens also work in bathrooms. You can paint bathroom cabinets just like kitchen cabinets. When tiling a shower, don’t install a glass shower door—they are extremely expensive, easy to break, easy to get moldy, and need frequent cleaning that your tenants often won’t do. Also consider replacing standard toilets with low-flow toilet and sink options in your rentals, which is an obvious choice when you are paying for the water.
Once you find a tile you really like, start ordering the same one for every job. This hack saves time and effort since you don’t have to shop for new tile every time you work a rehab project. Experienced flippers and fixer-upper investors tend to use the same materials, over and over, on every project.
The trick to getting landscaping done cheaply is to use cheap labor for as much of the project as possible, and skilled labor only to finish up what cheap labor couldn’t do. One effective approach is to hire cheap labor to rip out existing problems—weeds, broken concrete, rocks—and replace them with options easy enough for cheap labor to handle.
For backyards, if you have a narrow side yard not being used for much, put up a cheap chain link fence to create a “dog run” (if you allow pets). This gives you a feature to advertise in your listing without spending much. For front yards, stick to two things: don’t put in plants that die easily, and pay cheap labor to keep bushes, weeds, and the front lawn trimmed. Don’t buy expensive plants for the front yard—your tenants won’t take care of them.
When reviewing flooring options, shoot for tile in bathrooms and kitchens, laminate everywhere else, and carpet in bedrooms only if it is already in good shape. Keep in mind: if you leave carpet, you will probably be replacing it later. If you choose laminate, you will use a lot of it, so find something on sale or cheap that is also durable. If you choose tile, only use the expensive options for small surface areas.
Ceiling fans are a great item to make a property more desirable without breaking the bank. The trick is to do this only if there is already a light hardwired into the ceiling. If there isn’t, it can be very expensive to have an electrician run wiring, and it is probably not worth paying for. But if there is already a light in the room, the majority of the work is done for you.
Properties that need a new roof can be great buys. If you specialize in buying properties that won’t qualify for conventional financing and use cash, needing enough cash to replace the roof doesn’t pose a problem—just budget it into the contractor’s bid. In some areas, a new roof will lower the insurance premium and save big money over time. If a roof needs replacement, get it done before you finance the property, so you can recover your investment and put it back into the next property.
If your relationship with your property manager isn’t established yet, consider paying them to check on the work your contractor is doing. This saves you time, improves your relationship with your PM, gets them more directly involved in your business, and lets your contractor know that other people are monitoring them. To check up on the work, have the PM take pictures and video on their smartphone so you have proof of the project’s status.
Never pay for an entire project up front. Your contractor could skip town, someone could steal the money, or they could quit before the job is finished.
Send money in 25 percent draws, and ask the contractor what work they will be doing with each draw. After they have finished the work from the first draw, send someone to confirm it was completed. Include the scope of work that should have been done so your team member knows what to look for, and have them send you pictures and videos.
Another safeguard, especially the first time you work with a contractor, is to buy the materials yourself. Have the contractor write an itemized bid with materials separated from labor. Then have the contractor call the store and place the order. You call and pay for the order over the phone, and either have materials shipped to the property or have the contractor pick them up. This way you don’t worry about the contractor overcharging you for materials or stealing the money intended for them. It also gives you the opportunity to find materials on sale or build up your credit card points.
Rentometer.com uses an algorithm that considers rental properties near the subject property and calculates the numbers you need for a preliminary rent analysis. You want the average rent to be at or near 1 percent of the sales price, and you want the average rent to be close to the median rent. If there is a huge discrepancy between the average and the median, that could indicate potential problems.
BiggerPockets offers calculators at BiggerPockets.com/calc that do the deal analysis for you. Most of the work involves finding the right numbers to plug into a formula. They have calculators for flipping, wholesaling, cash flow, and BRRRR.
Asking property managers is the hands-down best way to get accurate rent numbers for your potential rental property.
The health of the employment sector has a huge effect on your home’s value. When wages in an area rise, home prices tend to as well. Markets known for only one industry—oil fields, fishing, automobile manufacturing—are very vulnerable to a huge collapse in demand if something disrupts that industry, and a loss of demand will lower values.
The next reason people choose where to live is the desirability of an area. This is why you hear about school districts, crime, and “walkability scores.” Proximity to parks, shopping, and nearby freeways all become a factor.
If properties are being rented out in seven to ten days from the time they are advertised, you know it is not important to fix them up substantially—a bare-bones rehab will do. On the flip side, if properties are taking more than 30 days to find a tenant, consider a larger rehab to attract more people.
A huge indicator of limited supply is big construction equipment visible in the skyline when driving through the downtown of an area. New home builds are an easy way to know there is limited supply, as most new home builders are very careful not to overbuild and only build when there is very strong demand with insufficient supply.
Without a doubt, the two biggest expenses that hurt your bottom line when it comes to real estate investing are repairs and vacancy. The one and only metric that affects the price a home sells for is how many people want it. Every decision you make should be geared toward drawing multiple offers.
Traveling employees taking part-time positions in hospitals who know they will be leaving in a matter of months or years are not likely to buy a property—they are going to rent, and the first place they will look is as close to the hospital as possible. Many successful investors have raved about the success they have had buying near hospitals.
Properties near the best schools tend to appreciate the most. This leads to higher-priced homes attracting wealthier families, which often leads to more well-behaved children attending those schools, increasing the school scores even more.
If you have a tenant move in during the winter, don’t assume you need a 12-month lease that will also expire during the winter. Consider a 15–16 month lease for the first run, timed to expire in the spring when other people are looking to buy or sell. This way, when you get a winter vacancy, you are primed to advertise when everyone else is already looking. This one move can decrease your vacancy costs by thousands of dollars over time.
When you notice a tenant is keeping great care of the lawn, reward them. One easy way is to wait for the lease renewal and, if the property is in good condition, have the property manager raise rent by only $50 a month instead of the usual $100.
When you interview a property manager, look for several character traits: blunt honesty, pickiness with who they take on as clients, specificity about how they handle problems or which employees handle them, details about the systems they have in place, a proactive rather than reactive approach, specific market knowledge about real estate, and flexibility to learn better ways or improve at their job.
The most common cause of unmet expectations is poor communication of those expectations in the first place. Sometimes one party is too shy, sometimes too busy. Sometimes one believes it is “common sense.” Other times one is afraid of conflict. Regardless of the reason, if you don’t communicate your expectations, you have no one but yourself to blame when things go badly.
There are several things you need to cover with your lender to avoid ending up in big trouble. Make sure you find out: how much you are able to borrow (pre-approval amount), what the current interest rates are for investment property, how long the “seasoning” period is before you can borrow money against the property, what your LTV (loan to value) will be, what your closing costs will be, how much it will cost to buy down the rate, what your “cash out” refinance rate is, and whether the lender works with out-of-state investors.
Get pre-approved with at least two lenders. Rates fluctuate, so the lower lender today might be the higher one six months later. Closing costs differ between lenders. Some have the skill to solve problems, while others (like online lenders with great rates) will cave as soon as one thing goes wrong. If your loan falls apart, you want to jump right in with a backup lender rather than restart the entire process from scratch. Additionally, if a lender knows you are comparing them to someone else, they are more likely to give you a better rate or closing costs.
Asking a lender about their seasoning period is crucial. You don’t want to get involved in a project assuming you can take a loan two months after completion, only to discover a six-month seasoning period that locks up your money. Different lenders and different loan types have different seasoning periods. Portfolio lenders tend to have more flexibility, while conventional lenders often do not.
Your LTV percentage has a big impact on your ROI. The best lenders will have programs with a 75–80 percent LTV. Some mediocre ones will do 70 percent, and anything less than that is typically considered not ideal for investors. The higher LTV you can get, the more of your money you can pull back out of a deal, leading to higher ROIs and more money to invest later.
Ask your lender specifically about lender closing costs. These tend to be broken up into origination fees, underwriting fees, points, application fees, credit report costs, and others. Some lenders try to bury their fees among all the other title, escrow, and tax-related fees and tell you to expect “2 percent” of the purchase price. Don’t accept this—ask for a “net sheet,” a list of all closing costs, and compare between lenders. Many lenders are trained to quote you only one specific closing cost, like the origination fee. Don’t get fooled—ask for the full picture.
In some cases, lenders will offer the option to “buy down” your interest rate—paying more in closing costs for a better interest rate. Ask how much it costs in dollars, then calculate how long it will take to recoup that amount in loan savings. Also be sure to ask what their rate is for cash-out refinances, as they may be assuming you want a purchase loan, not a refinance.
When a bank considers offering you a loan, they weigh the “opportunity cost” of lending you the money. If they are low on funds, they can’t lend to someone else. You solve this by offering to put money on deposit with them. This strengthens the relationship, gives them capital to lend elsewhere, and makes your loan application stand out among other borrowers. It makes your loan much more difficult to turn down and offers less risk for the bank.
LTV (Loan to Value) is the amount of money a lender will let you borrow against the value of the property. LTC (Loan to Cost) is the amount they will let you borrow against the total amount you invested in the property. When reaching out to lenders, ask right away if they lend against the value or the cost. If they lend against the cost, they had better have a very high percentage (like 95 percent), because they are essentially telling you there is a zero chance you will pull out more than you invested, or even all of it. For this reason, avoid banks that only lend LTC.
Conventional loans are what most real estate investors start with. Although you can find conventional loans for as little as 3, 5, or 10 percent down, those products are only for primary residences. For a rental property, you need a minimum of 20 percent down, sometimes 25. Most lenders classify conventional loans into three categories: primary residence, vacation/second home, and investment property. Investment properties are considered the riskiest and carry the highest interest rates. Vacation homes come with slightly better rates, and primary residences get the best rates and terms.
Jumbo loans apply when borrowing more than the conventional loan limit. These borrowers are considered higher risk, which means less favorable terms, higher interest rates, and more lender fees. Most investors don’t make money buying at the top of a market, so jumbo loans don’t come up often.
Portfolio loans matter once you want to finance more than ten properties. Currently, you can’t have a conventional loan on more than ten financed properties. Portfolio loans are not sold on the secondary market, so their terms are less favorable. They aren’t insured by the government, making them riskier to the lender. Expect adjustable rate mortgages and higher interest rates. Developing relationships with institutions that offer portfolio loans is a crucial part of growing your portfolio beyond ten properties.
Hard money loans are primarily used by house flippers or investors looking for a “bridge loan” to get into a property and later refinance into a more stable loan. They are often used to purchase property that would not qualify for conventional financing. The cost of these loans is very high.
Owner financing is when the owner of a property agrees to be the bank and hold a mortgage note against their property. This is often used by investors who can’t qualify for any more loans but still want to buy. The borrower usually offers a down payment, and the seller finances the remaining balance.
Private financing is when one individual lends money to another, usually for the purpose of buying or financing investment property. It can be short-term (for flips) or long-term (mortgage notes).
HELOC (Home Equity Line of Credit) is a loan given against the equity in a property. HELOCs are “second place” mortgages that are usually cheap and incredible opportunities to get money to invest at a low rate. They function like a line of credit—you only pay for money you have borrowed, and when you pay it back, you don’t owe anymore. Lines tend to stay open for a 10 to 15 year draw period. After this period, you either pay the balance in full or, in some cases, it converts to a traditional amortized loan with principal and interest payments.
An 80/10/10 loan is a way of structuring two loans together to avoid mortgage insurance for borrowers who don’t have 20 percent to put down. It works as follows:
Because the first loan is at 80 percent LTV, no mortgage insurance is required.
A very underrated way to own an investment property for free is to use an FHA or VA loan (or a 3–5 percent down conventional loan) to buy a property, then rent the rooms out to others who pay you. Done right, you can often get your entire mortgage paid, or even more. Buying a two-, three-, or four-unit property allows you to rent out the units you aren’t living in and use that rent to reduce your own mortgage. Combining both strategies—renting units and getting roommates—increases your cash flow even further.
Real estate provides high returns relative to the number of negative traits it carries. Every investment is risky, but when you compare all the ways you can make money in real estate versus losing money, real estate comes out far ahead. When you compare all the ways you can control your outcome in real estate versus other investments, real estate wins every time. Real estate also acts as an inflation hedge—as inflation increases, property values and rents increase along with it, like a buoy rising with the tide.
In the BRRRR method, you don’t sell the property—you refinance it. This functions as your “exit” because you are recovering your capital. BRRRR investors function similarly to flip investors, just with a different exit strategy: the goal is to increase the ARV as much as possible, then refinance instead of selling.
Capital gains are only assessed upon the sale of a property. If you don’t sell, you don’t pay capital gains. Refinances aren’t taxed like sales—in fact, they aren’t taxed at all. By not selling your property, you keep more of your money. This is one of the most compelling reasons to hold property for the long term rather than sell it. You also avoid paying closing costs and commissions associated with a sale.
You make money in many ways with buy-and-hold real estate: from the cash flow your property produces (taxed at a reduced rate thanks to natural shelters like depreciation), from rent increasing every year, from the loan being paid down every month by your tenants, from the property increasing in value over time (inflation does most of the heavy lifting), from increasing value through a rehab (forced appreciation), and from buying right (paying less than a property is worth). The only time you get taxed is on the cash flow it produces (at a reduced rate) and when you sell.
Section 1031 of the IRS code allows you to sell a property and reinvest the money into a different property without paying taxes on the gain until later. This is a deferment, not an avoidance—you will still have to pay the taxes down the road. There are strict rules: you only get a short period of time to identify potential replacement properties, then 180 days to close on them, plus a litany of other regulations that make executing a 1031 much more difficult in practice than it sounds in theory.
Building an efficient, repeatable system means continually asking yourself diagnostic questions about your process.
Action List — Four System Questions
You wear 20 percent of the clothes in your closet 80 percent of the time. You use 20 percent of the apps on your phone 80 percent of the time. In real estate sales, 80 percent of the business is done through the top 20 percent of agents. In real estate investing, 20 percent of your actions will produce 80 percent of your results.
On every episode of the BiggerPockets Podcast, co-hosts ask each guest what sets apart successful investors from those who give up, fail, or never get started. The overwhelming majority say the same thing—some form of “persistence.” Successful people understand things are always going to be tough in the beginning, and it takes persistence to get through the initial learning phase before you reach the good stuff. The value isn’t found in the first time you do something—it’s in the tenth. The first few times you do anything, the goal shouldn’t be to excel or even succeed. It should be to learn.
Even when someone isn’t asking for money, they will still likely require your time, energy, and effort. Just like money, these are finite resources. Protecting them is just as important as protecting your cash. Failures, when interpreted correctly, allow you to improve your systems and therefore improve your odds of success in the future.
To scale your deal flow, reach out proactively to the key players in your network. Below are the core messages to adapt for each role. In each case, you introduce yourself as an active real estate investor, acknowledge the specific frustrations of their role, and position yourself as the solution.
Lenders: Let them know you are actively looking for property and willing to be pre-approved through their business. Ask for their loan application and a quick phone call to discuss your file. Offer to buy any great deal that falls out of escrow or crosses their path, and let them represent you on the sale, refinance, or both. Offer to leave them a positive review on the platform of their choice.
Property Managers: Let them know that if they find a client selling a property they manage, you would be grateful to know first. If you buy it, you will keep the property in their portfolio to manage, along with any additional properties you buy. Also ask to be notified if any of their clients come across a deal they cannot buy.
Wholesalers: Acknowledge the time they put into deals that don’t close—whether buyers back out or sellers won’t make concessions. Position yourself as a strong buyer who can get due diligence done quickly, close quickly, and keep your word. Let them know you will buy, refinance, then buy from them again.
Agents: Let them know you would be grateful for any great deal that falls out of escrow or crosses their path. If you can buy it, let them represent you on the sale, and list it if it’s a flip property.
Attorneys: Let them know you would be grateful for any deal that crosses their path. Position yourself as reliable, honest, and trustworthy, with the goal of becoming a resource and asset to help them serve their clients better.
Key Insight — Compound Interest Applied to People
Many people have grasped compound interest as a financial concept. Apply that same principle to people. Geometric progression doesn’t happen by repeating the same act over and over. It happens by capitalizing on new opportunities, creating opportunities out of those, then creating opportunities out of all of those.
The most important reason to rely on systems is the ability they give you to increase your volume.
Contractors: Doing repeat deals with the same contractor who values your business is one of the single best ways to save money, primarily because rehab costs are often the biggest expense in the entire process. When you use the same contractor, you develop a system with that person—they know how you want bids, how soon you will pay, and what they need to do to keep you happy. Once you are saving your contractor money through volume, it is acceptable to ask them to reduce their profit margin on jobs. The volume you provide allows them to justify a smaller margin.
Property Managers: Increasing portfolio volume gives you more negotiating power to lower PM fees. Once you have three to four properties with one PM, ask for a 1 percent decrease in their management fee. At six to seven properties, ask for a 2 percent decrease. At ten or more, ask for a 3 percent decrease.
Agents: Rather than asking to shave an agent’s commission, a much better approach is to let them know you expect to see the best deals first. This will make you far more money in the long run than saving a couple hundred or thousand off the commission. Asking for a reduced commission can actually backfire, making agents more likely to bring their best deals to someone else.
Materials: If you buy enough from hardware stores, you can get set up for a “contractor’s discount” or something similar. Stores want repeat customers, so if you are buying in volume, they want your business.
#1. “BRRRR is bad because having more equity in the property is safer.”
When you use the BRRRR method correctly, you are still left with equity in the property—equity you created, not capital you put down. Even if a property loses equity, it only matters if you are selling. You can avoid needing to sell by making sure the property cash-flows positively. Cash flow plus reserves allow you to weather any storm in the market and sell at a date that makes financial sense.
#2. “The BRRRR method takes too long. I want to get started now!”
Even though you get started later, you make far more in the long run. Taking more time to start is a wise investment if it allows you to BRRRR over a significant period. This argument also assumes the only way to buy a fixer-upper is with your own cash. Alternatives include: partnering with someone who has money, borrowing private money, using a hard money loan to buy and rehab then refinancing into a long-term loan, taking out a HELOC on a different rental property, taking out a business loan, taking a note against your car, finding someone with a self-directed IRA and borrowing from them, borrowing against your own retirement plan (when applicable), or using seller financing for the short term.
#3. “BRRRR is riskier because you have to invest more money when you buy.”
If you zoom out and take a broader view of the whole process, the BRRRR model is actually far less risky than the traditional model. You end up putting much less money in the deal at the end, improving your ROI and reducing your risk at the same time.
#4. “BRRRR only works if you’re willing to do a massive rehab.”
While more BRRRR purchases tend to be bigger remodels, this doesn’t have to be the case. The BRRRR model has been used successfully buying deals from wholesalers that needed very little rehab—a thorough cleaning and some paint. These aren’t as common as fixer-uppers, but they do occur.
#5. “BRRRR is for cash buyers and that’s just not me.”
You can pool resources with other investors. For example, a group of investors can put money together and buy a large, multi-unit apartment complex, with about 75 percent agency debt (a bank loan) and the investors kicking in the remaining 25 percent of the down payment plus rehab costs. Once the rehab increases the property’s value, you have an asset you can borrow against again.
#6. “What happens if the appraisal comes in low and I can’t get all my money back?”
You have three options: challenge the appraisal by presenting your comps and try for a better result the second time; pay for a new appraisal (if your lender allows it) and hope for a better result; or consider selling the property and hope for a higher sales price than your appraisal, banking on the fact that your buyer’s appraisal may come in higher than yours.
#7. “BRRRR remodels are always big and that intimidates me.”
Real estate investing is all about adding value, especially BRRRR investing. A rehab is one of the easiest and simplest ways to add value precisely because nobody wants to do them. If everybody were willing to do rehabs, there would be no opportunity for investors—people buying homes to live in would be snatching up all the cheap properties. Opportunity exists because a rehab can be intimidating and therefore creates a barrier to entry.
With BRRRR, you know you will be getting capital back after the purchase, so you don’t have to worry about “missing out” on the next deal. You can buy here and you can buy there, because you have enough capital to do both. This mindset is incredibly powerful for your own ability to make progress and take action.
Principle
Don’t sacrifice your future by not taking action today.