Financial Freedom in One Year?

When I first became interested in real estate investing I remember reading about people who had successfully built up passive income streams through real estate to cover their basic living expenses in as little as 4-5 years.  Brandon Turner later posted a video "how to retire in 3 years through real estate investing."  At the time this seemed very far fetched and nearly impossible.  The math is pretty simple, ~$200 per unit in net cash-flow per month.  Take your monthly living expenses, divide by $200 and you have your freedom number.  For me, I knew that I would need about 23 units to cover my basic living expenses.  

The next question is obvious.  How in the heck can I afford to buy 23 houses over the next three years.  Here in Kansas City my average rental house is about $60,000, and that means my 20% down payment would be $12,000, add closing costs and its going to be close to $15,000.  So 23 houses x $15,000 = $345,000 and that's not including the reserves you will need for maintenance, vacancy etc.  I have a good paying job, but I definitely did not have an extra $345,000 laying around.  

My initial plan looked something like this.  I had enough money to buy one house, I would live frugally and save $1,500 per month which would allow me to buy one house per year. Eventually I would have enough equity in the first houses I purchased to cash-out refi and buy more.  Even with the equity gains this plan was going to take a really long time, close to 10 years.  

So how do you get this snowball rolling much faster, and how do you do it safely?  One option would be to simply borrow the money and pay someone interest, but that would cut into your cash flow and it would increase the number of properties you would need. It would also leave you very exposed to becoming over-leveraged.  I read many horror stories about people losing their portfolios in the 2008 crash for this very reason and I wanted to make sure I had plenty of margin on my cash-flow to absorb a market decline.

There was one particular strategy that I read about on BiggerPockets that stood out as the solution to all of my problems.  Brandon Turner coined it the BRRRR strategy and to me it seemed like complete genius.  The strategy goes like this,  Buy a distressed fixer upper, Renovate, Rent it out, Refinance and Repeat.  The key here is that by buying a distressed home at a discount and renovating, you are creating a lot of equity in this transaction.  It combines house flipping with buy and hold investing. My last BRRRR property went something like this:

B - Purchased a distressed fixer upper from a wholesaler for $35,000

R - Renovated the property, cost was $14,000

R - Rented the property out for  $850/month

R - Refinanced the property at 80% of the appraised value which came in at $65,000  (.8 x $65,000 = $52,000 loan)

The new loan covered my purchase price and the rehab, which meant I got all of my money back out to go do it again.  This is huge if you want to grow your portfolio quickly because you can continue to grow without running out of money.  

This process still has its limitations though because it is a lengthy process. From the time you find a house and sign the contract it takes about 2 weeks to close, the rehab is another 4-6 weeks, then it takes another 3-4 weeks to get the property refinanced.  If we were going to do one house at a time our acquisition rate would be about one house every 3 months. We also found that appraisers in our area tended to be very conservative and it was difficult in practice to get all of our money back out.  On average we were leaving $5-$10,000 in each house when we refinanced so again we found ourselves running out of money.  

One of the things I love about real estate investing is that you can be extremely creative and there are lots of different ways of doing things.  Since I started a year ago I have been constantly learning, adjusting and optimizing our strategy.  I am now working with multiple partners and we have managed to scale our business very fast.  

Our current strategy combines both traditional house flipping with the BRRR strategy.  In order to keep the money coming in faster than it is going out we now flip one property for every two that we BRRRR.  This keeps the money coming in faster that it is going out and it also allows us to continue to build up our reserves as our portfolio grows which is extremely important.  We have also used systems and processes to scale our business. We are currently doing 9 rehabs concurrently which brings our acquisition rate up to about 3 properties per month.  

It has been an incredible year for us and this month marks the one year anniversary of my first purchase (a duplex, where I lived in one side and rented out the other).  At the end of this month my partners and I will have acquired 53 rental units in 12 months.  We have several units that we need to get rented out and stabilized, but by my calculations in a month or two when the dust settles, I will be very close to my freedom number shortly after the 1 year mark.  Something that seemed impossible to me a year ago.  I'm going to put in a disclaimer that  about half of those units were acquired through the strategy outlined above, but we also had some extraordinary good luck on two large multi-unit purchases that we were able to put together with investor funds. I will save that story for another time.

- Ian Reeves