What You Need To Know: The Trick in 3 “R” in BRRR Method

The Trick in 3 “R”

BRRR is one of the best real estate strategies. I love it because it allows you to build wealth in a short amount of time with a low amount of cash reserves required. The trick is when it comes down to the third “R” where it separates the flippers from the buy-and-hold guys. It's that third “R”, and we'll talk about that and the rest of the BRRR strategy. So let's go!

How I Used BRRR Strategy To Build a Portfolio of $10+M In Value

I’m Johnny Lynum been investing for over 17 years now and have just done it all. Between a little bit of wholesaling, with deals that we don't like to buy, to our primary strategy of fixing and flipping to executing the BRRR strategy to keep and add single-family houses to our rental portfolio. We buy apartment buildings as well, too. We run our investment company virtually, which is a little bit unique. We do deals all across the southeast and in different cities over a 10-hour drive away. Some of our rentals we actually lived in before as the Air Force moves us around every so often. Overall, it worked out really, really well. Thus, I wrote a book last year “Millionaire Real Estate Success Strategies: What They Forgot To Teach In School.” It goes without saying that I'm all about real estate!

Infinite Return

The BRRR strategy allows you to keep real estate with little to no money in the deal. We’ll start talking about cash-on-cash returns and the different types of investments. This is one of the strategies that allow you to get an infinite return. An infinite return is you're getting a cash return each month, and you didn't invest any money in the deal. That's what an infinite return is. Let's go!

What it stands for

Buy

You have to buy real estate at the right price! We underwrite most of our deals between 70% and 75% of the after-repair value. Here's a quick example. So if the house is worth $100,000, then I can go get a loan when I refinance, for $75,000.In the case of a BRRRR deal, if I buy the property for $40,000 and I put in $30,000 into renovations and the bank gives me $75,000. I pull all my money out, plus I received $5,000 for closing costs and the rest goes into my pocket. Now, if I'm making $500 a month in passive cash flow after I pay my mortgage, taxes, insurance, and property management company - that $500 represents an infinite return That's one of the biggest strategies that you can leverage with the opportunity to buy a distressed asset.

Renovate or Rehab

On the renovation side, You will need to work with a contractor to make the necessary improvements to bring the property up to today's standards. Being able to properly estimate and budget for the renovation is critical to your ability to execute the BRRRR strategy. You will need to get renovation estimates from at least two contractors. Additionally, you may choose to have a home inspector provide an inspection report to capture what needs to be repaired. After renovations are complete, then you can move to the next step!

Rent

You can work with a property management company to rent it out, or you can rent it yourself if you want to be a hands-on landlord, it's all up to you. We manage a handful of our properties so my wife can receive a real estate professional designation from the IRS. Now in the passive losses that we have in our portfolio, we can bring that over to the active income that I have with the Air Force. We've been able to wipe out taxes on that income and it works really well. That's something you can talk to your CPA about and find the right strategies on how you can leverage real estate to save on taxes. The bottom line is if you want a property management company, you need to interview a couple of different companies and get referrals. Typically, for potential residents, we look for at least a 600 credit score, no evictions, and no charge-offs when it comes to utilities. They must make at least three times the monthly rent as well. If they meet those criteria, then, we're good to go without an issue.

Refinance

To refinance, find a bank or a lender. There are a lot of lenders out there and you want to find a good banker before you even buy your first property. Some of them have higher rates, especially now. However, there are a lot of non-traditional banks you can get to refinance your property with. You will factor monthly mortgage payments into your cash flow projections. This is why you must secure and get good deals. At the right price, you can take on a higher interest rate. It is also good to know, mortgage insurance and taxes are escrowed to pay each month for your property.

What does that look like? In my case, getting at least a 10% cash on cash return, or pulling all my money out for infinite cash returned, then it's all good. You want to go and meet with your banker at least once a quarter, depending on your deal volume, and foster a good relationship.

Recently, we refinanced a townhouse that we're doing a BRRR strategy on. We secured a 5.5% percent interest rate, which is a five-year arm. It resets every five years for locked-in for a 5-15 year term, 30-year amortization. It's in the LLC and is not on my personal credit report.

We refinanced our apartment building after holding for two years and got a 4% rate locked in, which was a super deal with getting a 4% rate on our apartment deal.

Repeat

Just do it over again and find another deal. This is how you scale fast, you do four BRRR deals a year, where say for example you make $250. We're gonna be conservative using $250 per month cash flow. (You should make more than that, where rents are today). But $250 on 4 BRRR deals that you can pull the money out, no money in, now you're bringing in an extra $1,000 of passive income a year. Your mortgage is paid down by your residents each month plus the tax advantages that you get as an owner of real estate with the depreciation plus the long-term appreciation over time. You do that for five years with four houses each year. You're gonna build up to now you got $5,000 a month coming in passively. And you got no money left in the deal. You can't beat it. That's the power of the BRRR strategy to go.

If you've used the BRRR strategy before and you know additional benefits that you found or some more cons that you ran into, share that down in the comments. I’d love to hear about your experience too!