THE Most Important Real Estate Investing Strategy Pt. 1

The first time that I spoke to an investor that had 10+ properties, it blew my mind and seemed so out of reach. I was struggling to get my first deal, and this person had figured out how to do it, and done it, 10+ times over.

 My first inclination was to think that they must come from wealth or have a C-Level role at a big company. But after spending a lot of time around other real estate investors, I found out that that’s rarely the case. Usually, they are just savvy investors that have learned how to recycle their capital to reduce the amount of time they need to spend saving down payments between their deals.

In some cases, they don’t need to spend any time saving for their next deal, they just recycle their initial capital, over and over and over again.

 So what is a BRRRR and how does it let you recycle your capital?

The gist of a BRRRR is that we want to buy an undervalued property that we can force a lot of appreciation on through strategic renovations. Then we are going to refinance that property to try to pull out as much of our capital as possible.

 A “Perfect BRRRR,” is one where you are able to pull out your original downpayment and all your renovation expenses

Since you’ve pulled out every dollar you put into it you basically just got a free property. Crazy Right!? Now you can go buy your next BRRRR!

 Let’s start with the acronym and then break it down step by step. BRRRR stands for Buy, Renovate, Rent, Refinance, Repeat. 

 Buy

This is hands down THE most important part of the BRRRR. You need to be buying at a discount, which generally means that you are buying off-market. You can BRRRR things off the MLS, but once that many people have seen a property your odds of getting a discount are not good. The exception is if you spot opportunities to add value that others have missed, like being able to convert something into a triplex where others only saw duplex potential.

 To buy deals off market, you can market directly to sellers, network, or buy them directly from real estate wholesalers that specialize in finding great deals and then selling them to other investors. Shameless plug, I have a real estate wholesaling business and you can get access to our deals by signing up at www.ontariopropertydeals.ca.

As a rule of thumb, the uglier the house, the better the BRRRR. It doesn’t cost much more to renovate a house from 2/10 condition than it does to renovate a house from 5/10 condition. So if the price reflects that it’s currently a 2 you’re going to have a much better spread between your purchase price and your After Repair Value (ARV)

 Don’t be afraid of ugly houses. Even ones so rundown that banks won’t lend on them.

You can get access to private money through investor focused mortgage brokers which is a topic for another piece.

Renovate

Before renovating you want to figure out your ARV. Your ARV is basically what you expect the house to be worth after your renovations and it’s going to be based off of sales of comparable properties in the area.

 The real key here is to be strategic and only do the renovations that are going to add the most value. It’s not a flip. You don’t need to have the trendiest finishes, new appliances and hardwood flooring.

Often you can get away with things like painting the existing kitchen cabinetry and adding new hardware, or  replacing a vanity and retiling the washroom.

Some renovations that can really make your ARV pop are adding additional bedrooms, bathrooms and even additional units. These will change the comparables used to appraise your property’s value and tend to give you the most bang for your buck.

Adding additional units has the advantage of significantly increasing your rents, which is vitally important to qualifying for mortgages as you scale your portfolio.

 Rent

Once you’ve completed your renovations you’re going to want to rent out the units. This will help you qualify for the mortgage on what is now a property of significantly greater value than when you purchased it.

The greater your rental income is versus your property’s expenses the less impact it will have on your ability to qualify for additional mortgages. This is particularly important as you build your portfolio and your T4 income becomes smaller relative to your total mortgage debt.

Technically, you can refinance prior to renting, especially early in your empire building, but over time as you accumulate properties that rental income is likely to become more important to being able to qualify on your refinance.

One last note, do your homework in advance and make sure that your rental income will at least cover your expenses. If they don’t, you’re just banking on appreciation and that is gambling not investing.

You’ll stop qualifying for additional mortgages pretty quickly with a portfolio that has negative cashflow.

Refinance

This step is pretty straightforward. Now that our property has been renovated and rented out we are going to refinance it with a bank, preferably an A-Lender at a great rate. 

Here, we are aiming for the highest appraised value possible as this is going to determine how much the bank is willing to lend you on your newly renovated property and as a result, how much of your upfront expenses you are able to recoup.

This is not totally within your control and appraisals can vary significantly. You can help your case by putting together a list of comparable properties and articulating clearly why you think they are good comparables as well as any advantages your property may have over those comparables.

There’s no guarantee that this will increase your appraised value, but it can help avoid a situation where the appraiser chooses poor comparables and misses some better, more favourable comps.

If your property appraises for more than 125% of your original purchase price plus all expenses then you will pull off a perfect BRRRR and get ALL of your capital back, which allows you to….

Repeat

This step is pretty straightforward. Take that capital and roll it into your next project. These days, the odds of getting all of your capital back are fairly low, so you may need to explore partnerships or private money in order to get into your next deal if you don't want to wait. Still if you do this well, you will be much closer to having your next downpayment than if you’d just purchased a turnkey rental.

 Next time we’ll go through my first BRRR project to see what this looks like in real life including some of the mistakes we made and challenges we faced.

 As always follow me at www.instagram.com/waylon_mcgill to follow my real estate adventures in real time.