So in today's video, we're going to talk about not only what a BRRRR
strategy is, but how you can f up a br.
There are a lot of really good YouTube videos on BRRRR
Some of them I like, some of them I don't like.
One of the best ones was done by Brandon Turner of BiggerPockets.
So if you don't know BRRRR stands for by Rehab, Rent, Refinance, and repeat.
So the very first strategy you have a BRRRR is to buy.
Now that's finding a property that's undervalued
and then can be rehabbed and sold for more.
The best way to do a BRRRR is OPM or other people's money, all cash.
But in some cases you might have to do financing
and only use 20% of your own money and 80% of someone else.
What's really important here is that the math works.
As you guys know, I always talk about it's always about the math.
What you buy has to sell for a lot more than what you put into it.
The second part of a strategy is rehab.
And you better know what these costs are before you buy it.
This strategy can vary widely from one investor to another.
One investor might put $1,000 into a property and another might put in
50,000.
Oftentimes, the rehab can be a big, big piece of your profit.
You guys know right now
we have massive labor issues and massive supply chain issues.
So these rehab costs are going up as we speak.
The biggest issue here is time.
So it could be one month, two months, six months, a year.
And a lot of it's going to depend on your level of experience
and your relationships with these subcontractors.
The third R in BRRRR is rent
and obviously you want to rent out the property to get cash flow.
And again, the math has to work.
You need to know what the rents are in this area before you buy it.
All boils down to the math,
and you should not wait to find out what the rents are until after you buy.
The third R is refinance.
Now, this can be tricky and you must have this figured out before you buy.
You want to make sure that your lender knows what you're doing, knows
that there is some equity that you're creating.
And you also need to know that most lenders are going to lend only 70% to you.
So you have to calculate that in the math.
Now, there are some rules here, especially with lenders.
Some will let you refinance for up to six months to a year.
So you better make sure that you figure this out before you buy.
And as you guys know, through all the videos we do,
you should always try to fix your loan long term.
The fourth and final R of course, is repeat.
And this is financial freedom.
This is where you get infinite returns this is where you want to be infinite.
And this is when you pull your cash back out and do it again
and repeat this process until you are financially.
Now we're going to tell you how to mess up a BRRRR
And that is what most people do as they cut out this piece right here.
What a lot of people do here is they sell and they don't consider
all the costs that are associated with this strategy.
Let's take a look at a real life example that I personally bought a flipper
or someone with a short term strategy bought a place for 380,000
in a neighborhood where the prices were 500.
It looked really good.
They went and got a hard money loan for 320,000.
The reason I know this is because I bought it and I saw what the loan was.
I also saw what he paid and I know that he had 60,000 down
and he also did about $20,000 in rehab.
Now let's fast forward to me as the buyer, more of a long term strategy.
As you guys know, I'm a cashflow guy, short term cashflow long term
cashflow, I negotiated a price to 480,000.
Let's do some simple math.
It's in escrow for four 80,
he pays off the three 20 which in this case is a hard money loan.
He has the 60 grand of either his cash or someone else's
cash in the deal plus another 20 on the rehab.
High math suggests that they're going to get around 80 grand on this one deal.
So here's a summary of the deal.
Here's a summary of my deal.
Short term versus long term, his loan is $320,000.
It's at an interest rate of 9%.
Now these hard money lenders typically have about a six month minimum,
but it could be as long as one year on that money.
So a six month minimum on 320 grand is 14,400.
That's a cost to the deal.
There's also loan point.
Now, I put it in there at 1% or 30 $200, but
it could be negotiated lower, especially if you're doing this for a living.
And the third thing, of course, are real estate commissions.
In this particular case,
my realtor found the deal and I know that she got 3% as a commission.
These three things can, of course, be negotiated but these are numbers
that you need to consider.
And this is what happened on this deal.
Now, as you can see her the math, there's $46,400
of expenses associated with this deal that we haven't seen yet.
So let's break this down.
80,000 net -46,400
in costs that we just cover brings you to a net of 33,600.
But wait, there's also tax.
What I did is I just took 20% up 33,600, which of course is not perfectly accurate.
But there is going to be a capital gain tax for this.
I use 60 $720 that the IRS is going to take their piece
that gives us a net of 26,008 80.
And guess what folks.
That's very different from the 80,000 that you're looking at
from the very beginning.
Well the flaw in this BRRRR method was the rent versus the sale.
So a lot of your flippers out there are going to say,
hey, that's a 33% return and it is nothing wrong with that.
But guess what he's got to do.
Got to go out and do it again.
Now let's look at a long term method, one that's going to create you
infinite return and cash flow, passive income that's what we all want.
So I bought this property for 80 cash
and then I was able to put $330,000 on it after I purchased it.
So now I got 150 grand into this deal.
The best thing is, is that this guy rehabbed it for me.
So all I had to do was move in a tenant I knew the rents in
this area were about three grand.
I loan costs were about 1500, about $500,
and other costs nets me about $1,000 a month on the average,
that's about 12 grand.
So if you take 12 grand a year into the 150,
you have about an 8% cash on cash return, which is what I'm looking for.
So let's talk about the strategy.
One, I was able to take cash.
Put it into a hard asset during this very inflationary time. Too.
I was able to use other people's money in the form of debt
on a cash out refinance to get my 330,000 back and I ended up
with 150,000 in the deal, which by the way does not have to be just your money.
So as you guys know, I'm a long term investor,
so I was able to use my own cash at 484 quick close on a deal
that was already rehabbed and I knew I could get $3,000 a month.
The next step is I use other people's money in the form of debt
to get 330,000 of that back,
which left me with $150,000 in the deal of cash.
So in my younger years and I might be a little flashier to have
the short term gains and short term wins to be able to buy
things that's over here.
But quickly, you realize that the slow and steady wins
the race and building a net cash flow and financial freedom for you in the long
term, you eventually can complete lutely, not do this at all.
You'll eventually see the wisdom in this strategy
and the short term mentality in this strategy.
So please hit the like, share, subscribe buttons.
They really help and they motivate me to do more videos like this for you.
We'll see you guys in the next video.