The Most Important Real Estate Investing Strategy Pt. 3

If you read the first two articles in this series, you’ll know that we converted a single family home in Brantford ON back into a duplex, rented it out and then refinanced it to pull as much money as we could out of the deal.

From the start of the project until it was rented out and self-sustaining we needed ~$205K of upfront capital and it took just over 5 months from closing on the property to completing our refinance.

So the initial numbers looked like this:

Purchase Price: $298K

Closing, Reno & Carrying Costs: $120K

Total Investment: $418K

New Appraised Value: $490K

Equity Created: $72K

When I say that we created $72K of equity I’m referring to the fact that we took a $298,000 asset and spent $120,000 to renovate it, but the new value was actually a lot more than $298,000+120,0000. It was $72,000 more to be exact.

When we refinanced we got a new mortgage for $392,000, which is 80% of the new appraised value ($490,000).

We were able to take that $392,000 to pay out our original mortgage and get our original downpayment back ($298,000).

From there we had $94,000 left over, which paid off all but $26,000 of our $120,000 of renovation costs, which included all of our taxes, insurance, interest on loans etc.

So we left $26,000 of our own money in the deal. Not bad on an asset that’s worth almost a half million dollars. For context, to buy that property turnkey we would have needed a $98,000 downpayment, plus land transfer tax and closing costs and there would be no way to refinance any of it out.

 The great thing is not only did we get most of our capital back, but we now have an income producing asset that is generating great returns.

Now, let’s take a look at the ROI calculations.

Monthly Rents: $3,125 + Hydro

Monthly Expenses: $2,610

Monthly Cashflow: $515

Annual Cashflow: $6,180

With the two units rented out, the property is now cashflowing a little over $500/month. Not enough to retire off of anytime soon, but remember the last step of the BRRRR is to repeat this. $500/deal can add up quickly and that number is generally going to go up over time as rents increase and your mortgages get paid down.

 Cash on Cash Return: 23.8%

We calculate this number based on how much money we left in the deal, in this case $26,000. That is the amount of our own money that we weren’t able to pull out of the deal on the refinance. 

On that $26,000 we are getting a return of $6,180 (rental income) or a 23.8% return. That in and of itself is an amazing return and vastly superior to any reliable return available to most investors in traditional financial instruments like ETFs, Stocks, or Mutual Funds (gross).

Fortunately for us, this is only 1 of the 3 ways that our newly BRRRRed property is creating wealth for us, and actually the least significant.

The second way that our BRRRRed property is creating wealth for us is through appreciation.

 Appreciation (5%): $24,500

We used a conservative number of 5% for appreciation, and although the real world appreciation was closer to 35% ($170,000!!!), we’ll keep our original projection for our purposes since it is more suggestive of what you can typically achieve with a BRRRR.

In year 1 we would expect to make around $24,500 in appreciation, and that number will generally grow every year as appreciation compounds like interest. This alone would be nearly a 100% return on the $26,000 that we left in the deal in year 1.

Keep in mind appreciation is tax free income if you refinance your property or get a HELOC on it.

Mortgage Paydown: $11,760

This is the third, and most overlooked way that your new property is going to create wealth for you. Your tenants are going to be paying off your mortgage for you, and you will be rewarded with increasing equity in your property. A good shorthand is that you pay around 3% of your mortgage value down per year. 

In our case we were paying down $11,760 of our mortgage in year 1, which represents an additional 45% return on our $26,000.

 Total Annual Return ($): $42,440

Annual Return (%): 163%

And the final, most important numbers, our total returns. Our property is generating $42,440 per year for us, for a total return of 163% on an investment of $26,000. Much of that income has tax advantages over other forms of income, specifically appreciation which can be pulled out of properties tax free either through refinancing or through a HELOC.

You can also refinance your property more than once, which we could do now to get the rest of our initial funds back and then some.

So that’s it, that’s why I believe that the BRRRR is The Most Important Strategy in Real Estate Investing.

If you’re interested in following my real estate investing journey follow me on instagram @Waylon_McGill