BRRRR - Buy - Renovate - Rent - Refinance - Repeat

Dated: January 5 2021

Views: 1251

Despite the cold name, BRRRR is a hot strategy in the current real estate market. 

It combines the strategies of buy and hold real estate, with flipping for profit. 

Rather than exposing yourself to 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 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 renovation skills to good use and create sweat equity in their properties. 

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. 

Why? -  With 20% down, and assuming a 3% interest rate and a 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 it's after repair value. 

This is very important that you adhere to this rule before buying. Lot’s of homes need cosmetic help, but not every home will give you the lift in value you need to make this 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, or have a longer time horizon. 

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 the safest to buy a property that the masses can afford. The sweet spot for affordability is between $550,000 and $850,000 here in the Okanagan. 

Here is how the math works on the example above of buying a distressed property for $560,000 that you feel you can drastically improve the property with around $50,000.

Warning: you must spend $50,000 on the low hanging fruit; floors, paint, trim, fixtures, landscaping refresh, bathroom refresh, etc. Many times 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, no-obligation, 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.

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Derek Weatherhead

Derek Weatherhead, as you know, is a Realtor in the beautiful Okanagan valley. He was born and raised not far from here in Kamloops B.C, and decided to develop his roots in Kelowna B.C where he now ca....

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