Despite its funny name, BRRRR is the hot strategy for the 2020-21 market.
It combines the strategies of buy and hold with flipping for profit.
But rather than exposing yourself to a large downside risk, with only the potential of making a quick profit, you are covering your downside risk and building long term wealth and positive cash-flow.
What the heck does BRRRR stand for?
- B - Buy
- R- Renovate
- R - Rent
- R - Refinance
- R - Repeat
This is the perfect strategy for someone who is limited in terms of down payment capital, wants to build a portfolio of property and multigenerational wealth, but also wants to put their design and reno skills to good use and create sweat equity in their properties.
This is the exact strategy I used in the early days to build my portfolio, and it is part of the overall strategy I use now in the Real Estate Investment Partnership that I manage today. There are some simple rules to this.
I call these, the rules of 20.
You can’t pay more than 20 times the gross annual rent of the property
If a property rents for $2,500/ a month or $30,000 year, you cannot pay more than 20 times its annual rent or $600,000.
Here is why. With 20% down, and assuming a 3% interest rate and 30-year amortization, your payment comes in at 2000/mo add in property taxes, insurance and a little for maintenance and you are at a break even.
Despite there not being any positive monthly cash-flow, you are still getting over 10k per year in equity build up as your tenant pays your mortgage.
You must get the property for 20% less than its after reno value.
It is important that you adhere to this rule before buying. Lot’s of homes need cosmetic help, not all of them will give you the lift in value you need to make the strategy work.
Often the neighbourhood places a ceiling on how much a home can sell for no matter how cute you make it. In these cases you need to make sure you are buying it at a bargain price.
Many neighbourhoods however have a range of property values that will allow you to make improvements and reap the appropriate rewards.
For example: So let's assume the after reno value of the property is $700,000 - Following the rule above, you need to make sure you can buy it for no more than 80% or $560,000 (This is what a home with deferred maintenance goes for in Kelowna in 2020)
Buy the property with 20% down and get a mortgage with a re-advanceable line of credit, which you will be using this line of credit down the road to extract some tax-free capital to go on and repeat the strategy.
Stay within 20% of the median price for a single-family home.
You are always safest to buy property that the masses can afford. The sweet spot for affordability is between $550,000 and $850,000
Here is how the math shakes out on the example above of buying a distressed property for $560,000 that you feel you can drastically improve the property with around 50k
Warning: you must spend $50,000 on the low hanging fruit; floors, paint, trim, fixtures, landscaping refresh, bathroom refresh, etc. Replacing roof, furnace, windows will chew through your budget and not give you the lift that a full cosmetic overhaul will.
- Buying the property for $560,000 Your mortgage is $448,000
- Your mortgage after one year is $440,000
- The after reno value of the home is now $700,000
- Based on 80% Loan to Value you can withdraw $120,000 on your HELOC once the appraisal confirms your new value for the bank. (80% of 700,000 = $560,000 - $440,000 = $120,000)
This is the amount of your original down payment, you go and do it again. That takes us to the final R in the BRRRR strategy, Repeat!
This is a manoeuvre you can repeat five times with conventional banks; there are ways to go well beyond this, but that is an article for another day.
If this strategy sounds like too much work, I hear you; we have been doing this for the better part of two decades and have assembled the dream team to assist you every step of the way.
For a free, 15-minute virtual coffee on how you can create your own financial freedom through real estate investment strategies like this and many others, click here and let’s see where it goes.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.