There are several different niches to make money in Austin real estate. Depending on your goal in real estate you can choose from wholesaling, rehabbing & selling, buy & holds, lease options, sub 2’s, wraps, BRRR strategy among several others. I recommend that you focus on one specific medium to master until you move onto your next venture.
A very profitable strategy, if done right, is the BRRR strategy.
Now what does this strategy consist of?
BRRR stands for Buy, Rehab, Rent and Refinance.
In my opinion this is one of the most lucrative strategies to invest with if your goal is to begin producing passive income and building a real foundation for your Austin real estate investment company.
How to Implement BRRR
Just like with every investment pursue, this strategy also starts with the buy. We are going to focus on buying a great deal. We want to purchase our BRRR property as if we were purchasing a flip. (were looking for similar numbers). This is where being able to market efficiently and pick up off market discounted deals comes into play. Without a greatly discounted property with good
bones this strategy will not work. I say, off market deals because with the increased competition for foreclosures, REOs and MLS listings, you will need to begin to find your deals off market if you are going to survive. So we are looking for properties that are at least 50% discounted with a good foundation, mechanical’s & roof. One downfall with this strategy is you are going to have to purchase these homes with cash or raise the money from private money lenders/ hard money lenders as soon as you get the deal under contract.
Once you figured out how you will finance the deal, it is now time to focus on the rehab aspect of this project. The key with this strategy is to be all in (money wise) under 75% of the properties market value. When it comes to the rehab, you are going to rehab this property in a different manner. I try to rehab my BRRR properties at a level that is in between a flip and a rental but still stay under my goal of 75% of the market value (this is why the buy is important). You need to
find a middle ground when rehabbing so you spend the least amount of money but still reach the max, when the home is appraised. The reason that you need to be 75% all in is because this is typically what a lender will loan on a cash out refinance to an investor. So when rehabbing these properties make sure your not putting to much money into the rehab where you will not be able to cash all of your money out. So work the numbers prior to the purchase. Come up with an ARV estimate of the home. Take 75% of that number. Come up with a maximum purchase price you can offer for the property. Whatever you have left over from the (75% of ARV – Purchase Price) is what you will have to work with as a rehab budget. Make sure this budget is enough for you to rehab the property properly to reach full market value (or come pretty damn close)
The goal is to find a property that you will be able to refinance your total amount invested (plus some) and have a property that cash flows for you each month with essentially no money out of pocket after the refinance.
Now it is time to find a quality tenant to put into your property. Regardless weather you choose to hire a property manager to manage the property or you decide to manage the property yourself, make sure you do you due diligence when it comes to screening and placing a tenant in your property. This is step has the potential to make or break your investment. When it comes to r
entals, the tenant you allow to rent your property has the potential to determine the degree of success you will have with this investment.
Lets go over a quick scenario on how this should work at this point.
You bought a deeply discounted property with good bones & mechanical’s with cash. You rehab the property to a degree where you reach the full market price potential for the property. This rehab should take no longer than a month in most cases since the rehab should be mostly cosmetic. You will find a high quality tenant during the rehab process. You will have your tenant in the house and paying rent after month 1. From months 2-6 you will be reaping a very high cash flow return since you bought the property in cash. On day 1 of month 6 you will refinance this property.
This is the fun part. You made all the right moves, now it is time to take all of your money out and repeat the process. But, let me say this before you start to implement this strategy, you have to speak with as many lenders as possible to make sure that you will be able to refinance the cash out. You will have to go through a similar process as if you were going to get a mortgage (not as extensive) but they are going to check your credit and income/ debt levels to ensure you will be able to pay for the property if it is vacant. So I suggest either finding a referral to a
investor friendly lender to picking up the phone and explaining your situation to each and every one of these lenders to see if they can help you out. You have to know going into the strategy that you will be able to refinance your cash out or you will be stuck.
Early on you may get turned down by a lot of banks, but I promise you there are investor friendly lenders that will be willing to work with you.
So lets touch on the specifics of the refinance. As stated earlier, these banks will cash you out up to 75% of the appraised value on the refinance. As banks typically do, they will send out an appraiser to evaluate the market value of your property.
You want to begin the refinance process at about month 4 so that you have everything in order so you will be able to refinance on day 1 of month 6. There is a holding period for the banks that they require you to have owned the property for 6 months prior to you being cashed out.
Example BRRR Property Strategy
So now that we understand how this strategy works and how we need to implement it to make the most profit, lets go over some numbers and an example scenario of how we want this to look.
We have a property that has an ARV (After Repair Value – Fair Market Value) of 105,000.
The bank is going to let us refinance at 75% of the Appraised value = 78,750.
We purchase the property for 49,000
After closing costs we are in for a total of 51,000.
The first month during rehab we have holding costs of 500 (taxes, utilities, insurance) = 51,500
75% appraised value (78,750) – Total Amount In (51,500) = 27,250
I like to subtract 5,000 from this number to be safe (contingency, wrong ARV)= 22,250 Rehab Cost
So we have 22,250 as our rehab budget.
We have come to the conclusion that we can rent this property out for 1,100.
For months 2-6 (since we bought with cash) we will cash flow about $600 a month.
So for months 2-6 we will make an additional 3,000 from our cash flow.
After month 6 we refinance and we now have a property with no money out of pocket (we may have made money on the cash out refinance – if your good like that) that is going to cash flow about $300 dollars a month.
*Lenders will allow you to implement this strategy for your first 6 rental properties
* Properties 7-10 will have to be turn key deals.
As you can see, this is a very lucrative strategy if done right. You have the ability to build up your portfolio essentially with no money out of pocket. If you get a great deal and calculate the numbers properly, there is no reason that you should not be able to make a killing off of this strategy.
Let us know below what kind of success you have had implementing this strategy and if you would recommend it to others.
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