- Hey guys, Toby Mathis here
one of the founding partners
of Anderson Business Advisors.
And I wanted to talk today
about the BRRRR method of investment
that goes for B-R-R-R-R.
Now it stands for buying a property,
rehabbing that property,
putting a renter in that property,
refinancing that property,
and then repeating that
process with another property.
So you're pulling the
equity out of that property
once you get it performing.
And something really
critical to this methodology
is understanding the different
way to value real estate.
Most of us are used to
what we've always heard
which is you buy a
house and after 30 years
it's gonna be so much more valuable,
you can sell it or you can refinance it,
you can send your kids to
college on it, all that stuff.
They're basing that on appreciation,
and they're basing on something
called comp valuations,
which means they're looking
at the neighborhood itself
and determining what that house is worth
based off of what the
average square footage
or price per square foot
is in that community.
You're doing everything
from proximity to schools,
et cetera, yada, yada, yada.
When you're an investor you
tend to look at cash flow,
which means we're valuing
off of what it pays us.
And in commercial real estate,
that's almost exclusively how it's done
and they're using something
called a cap rate.
And a cap rate is a fancy way of saying
what's the percentage return
based on the value of that property.
So if I have a property
that's worth $100,000
and it's returning $10,000
into my pocket every year.
Net not gross.
Net, meaning that I'm actually getting
to put $10,000 in my pocket.
Then that is a 10 cap.
So the easiest way to know this formula
is you just take the net
operating income, the net income.
So they call it net operating income.
So it's not your gross rents.
It's what you actually get to keep
after your management fees, your repairs,
your insurance, property taxes, et cetera.
And you get down to that bottom line
and you divide it by the fair
market value of that property,
and that's gonna get you a cap rate.
So this is where it
gets really, really fun
when you're doing the BRRRR method.
And one of the great
things about real estate,
anybody who's been doing it a long time
knows that the Holy Grail
of real estate is cash flow
and not having a bunch
of debt on a property,
but sometimes you lever up that property
and to continue to grab more property
and to gain more equity.
So that's not necessarily a bad thing,
but negative cash flow is fatal.
Owning real estate is awesome,
but owning real estate with
too much debt can topple you.
So using the BRRRR method you
could avoid having that happen
if you know your numbers.
So the first part of that equation
is buying a piece of property.
And I'm just gonna tell
you from my experience
I've been doing this
for 20 something years,
I've over 200 properties
and I can tell you that
what you end up looking for
is usually a property where you can buy it
and improve it for about 75% or less
of it's fair market value
what we call an after approved
value or improved value.
So you're looking at
something that you buy.
Let's say you buy it for $40,000
and you know you're gonna
put $50,000 into it.
In other words you're buying
something that's pretty beat up
but it has a lot of potential,
it's in an area where the
rents are really strong
and you believe that you're
gonna buy a project, fix it up,
and that it's gonna be worth,
let's say $120,000 after it.
Using simple math we could say 75% of 120
is 3/4 of it or $90,000.
So we would be right on that line.
We could buy it for 40, put 50 into it,
then we would be maxed
out right around $90,000
if the fair market value
was worth that 120,000.
Now that's if you're just going in
and traditionally financing it.
If we're looking at it from
an investor standpoint,
you're gonna use the cap rate
and what it's actually returning.
And then we really care about those rents.
So a simple way of looking at this is,
if I am going to get
rents on that property,
let's say that I buy it
for 40,000, put 50 into it,
it's worth 120,000, but I can
get $1,500 a month in rent.
And $1,500 a month in rent
is really gonna return to me
somewhere between 750 and
$1,000 dollars a month
after all my fees and
expenses and everything else,
which is gonna put me somewhere
in the 9,000 to $12,000 a year range.
That's a pretty good return on that.
Then you refinance it and let's say,
we're gonna take whatever
we built out of that
and we're gonna refinance that.
We're gonna take that 90,000
and we're gonna refinance it.
That puts us somewhere in the neighborhood
on a refinance on that would
probably be around six, 700,
somewhere around six,
between six and 650 a month,
somewhere in the 4% range
if we're doing a traditional financing
and that's what rates are right now.
They can go up and down.
But if you did a 30-year fixed 4%,
1% property tax is probably $1,000 a year
and insurance you're gonna be
somewhere in the $600 range
on a monthly basis,
that tells me that we can
actually positively
cash flow that property.
If we are doing a refinance,
then we have to determine
whether we're gonna use
a comp rate refinance,
which is a traditional way
of handling refinances.
So if you're buying it in your name,
you can do about 10
properties max in your name
under a traditional financing.
If you go above that amount,
you have to go the commercial route
and you have to be very
aware of your cap rate.
We'll use those same
numbers I threw out there.
So if you're making around,
somewhere from 750 to 1,000,
you're making 9,000 to
$12,000 per year cash flow,
that's if you're renting it for $1,500.
So I'll walk you through this again,
$1,500 I'm probably gonna
get to put in my pocket
somewhere in the neighborhood
of $750 on the low end
to 1,000 dollars a month
on the high end in cash.
That's what's gonna go in my pocket,
which means my range is
gonna be between 9,000
and 12,000 a year,
which means if I have 90,000 into it,
my cap rate on my $90,000
investment is about 10%.
So my cap rate is 10.
If it's worth 120,
and I'm using that as
my basis to get my loan,
I'm still between a 7.5 and
a 10 if I use those numbers.
So between 90,000 and 12,000,
or excuse me, 9,000 and
12,000 a year cash flow,
obviously 12,000 divided
by 120 is gonna be 10%.
You're gonna probably
get that loan like that,
shouldn't be a big problem.
Most of you guys if you're
just getting started,
you are going to use
traditional financing.
Now here's how this is powerful.
I bought something for
40, I put $50,000 into it.
I am now $90,000 into this property.
I refinance it based off
of its fair market value,
which is 120.
In other words, I improve this property,
I have now earned 25% of
that property as equity.
And so I refinance out the 90,000
and I go and do that same thing again.
I now have $30,000 of equity
and I have positive cash flow
somewhere in the neighborhood of 150,000
to probably closer to what would that be
on a monthly basis 12,000, 1,000.
So 250, so about $400.
So I'm gonna have positive cash flow
of about $150 to $400 a
month, that's fantastic.
And I go and do the same thing again,
and I get the same result.
$30,000 in equity, positive cash flow.
And if I do that repeatedly,
let's just say I did that 10 times.
Now I have 1500 to
$4,000 a month coming on,
and I've got $300,000 of
equity in that property.
And what's gonna end up happening
is over the years as that
property appreciates,
the fair market value
is going to increase.
Historically, these properties
grow at around what range?
Right around 4%.
Let's just say that five
or six years from now,
your $300,000 of equity
should be substantially more.
Let's say it's 400.
You can pull even more out
and start doing the same process again.
The most critical component
of buying, rehab, rent,
refi and repeat to me is how you identify
and purchase that property.
It's all in the very beginning.
Making sure you know your numbers,
making sure you have good financing,
cause that refi part
really becomes critical.
You gotta have your financing lined up
before you walk through the door.
There's places that will actually finance
even the purchased and the rehab
all the way up to 100% of the rehab costs,
but it would be hard money,
which means it's really expensive.
You need to have an exit
so you can pull the money,
take those people out,
and then just keep repeating the process.
And if you caught that last
part about having the hard money
there's people that'll loan
you 100% of the purchase.
100% of the improvement,
so the 40,000 we buy it for,
the $50,000 we put in it,
there are people that
will give you that 90,000,
but they're gonna charge
you probably nine or $10,000
for that money for the year or six months
or whatever it takes to do the refi.
It might be a little less,
but it's gonna be pretty darn close.
This is critical.
You got to do the math
then on that purchase.
So again, rule of thumb for me,
75% after repair value
I'm gonna be pretty safe.
It means that I'm gonna be
able to refi that property
at 75% of its after repair value
and repeat the process
over and over again.
At the end of the day,
it's all about accumulating
and having cash flow.
Cash flow is king, it'll allow
you to continue to expand.
And there's nothing better than having
a whole bunch of passive
assets like real estate
that are just kicking off income,
whether you're in Fajita
whether or if Fiji, or
whether you're in Hawaii
or just chilling out at your house,
it just takes so much pressure off knowing
that you have that income in,
coming in month after
month, year after year,
decade after decade, it just
takes so much pressure off.
So good luck on your BRRRR strategy.
(upbeat music)
