BRRRR Strategy Questions and Some Clarification

[Joshua Herald]

I have been standing on the sidelines watching many of my Cincinnati REIA counterparts make their way in Real Estate. The unknowing of it all tends to turn me away but I keep coming back. This time it is for good. I am currently looking for my first multi family and have a question about the BRRRR method. I understand the perpetual nature of this strategy and the struggles with finding traditional refinancing options once an appraisal is done and you want to pull all of your equity out. My question is related to the very first renovation costs. I was listening to the BP Podcast 197. There was a guy who used this strategy to purchase a large number of units over a short period of time. He however started his whole process with small loans from family and friends.

To most people (NON REI) my life is pretty good right now. I have a good Job, my wife has a good job. We make more than we spend but I am a slave to the 9-5. I could start to save up but I want to think creatively and fund my first rehab another way. What suggestions do you have?

Also, in that same podcast, there is mention of the 2% rule when evaluating properties on the MLS (his strategy). What does this mean? Is it similar to the 70% ARV number?

[Joseph Cornwell]

@Joshua Herald I invest in Greater Cincinnati currently. There are still 2 or even 3% rent ratio deals out there, but typically they need massive renovations or are in very rough areas. I look for properties in C+ areas, (think working class, decent schools, lower crime rates). A good deal on or off market in these areas are 1.5% rent ratios, meaning a 100k house would rent for 1500/mo. They are not easy to find, but they are out there. As many of the podcast say, you have to make a good deal, you wont be given one in this market. Meaning adding value, adding a bedroom, reducing expenses, raising rents, square footage, etc. The other metrics I look for before I would buy is a 15-20%+ CoC return, meaning if I invested a total of 20k on a 100k property, my profits annually would have to be 3-4k or so. I also look for 200/mo cash flow per door after fixed expenses (taxes, insurance, utilities, etc.). That leaves me at least 100/mo per door on maintenance and cap ex reserves for larger expenses (roof, windows, mechanicals, etc.), my cost should be less but it gives me a good buffer/ extra profits.

Deals are out there, you need to determine your metrics and stick to them. Stay consistent and persistent.