The Basics of B-R-R-R-R - Buy : Rehab : Rent : Refi : Repeat

Buy : Rehab : Rent : Refi : Repeat

From Andrew Syrios

Investing in real estate, particularly holding real estate, is the best method available for a person of modest means to become wealthy in my opinion. That doesn’t make it easy to do, however. Buying and holding real estate requires a lot of very different tasks be done right in order for it to be successful. When put simply, there are five major components:

1. Acquisition2. Financing3. Rehab4. Property Management5. Maintenance

The BRRRR method stands for Buy, Rehab, Rent, Refinance, Repeat. However, there are two financing stages; up front when you purchase (using either cash, a private loan, bank loan or hard money loan) and then on the back end. The idea behind the strategy is to “flip” the property to yourself. Basically, you buy the property with at least 25 percent equity, so when you refinance, you can refinance at appraised value and pull out all of the money you put into the property up front (or payoff the loan). When done right, you effectively get a property for free.

But let’s return to the five key aspects of buy and hold and go over each briefly:

In real estate, you make your money when you buy. Unfortunately, there’s a tendency for buy and hold investors to get lazy. Flipping creates discipline by quickly showing whether a deal was good or bad based on how much money you made or lost on the sale. This doesn’t happen with buy and hold. While there is an appraisal, it’s very tempting to write it off as a “bad appraisal” if it doesn’t come in where you think it should. Thus, it can be easier to justify lower quality deals.

Don’t fall for this trap.

Bad deals on the acquisition side will hurt buy and hold investors just as bad as flippers in the long run. More money will be tossed away, cash flow will be lower, and refinances won’t pull all the money you put into the property out.

2. Financing

Financing is often the most difficult part for buy and hold investing. There is, fortunately, an assortment of different ways to finance properties to hold. The first is to save money from a job and use that money to buy real estate. FHA loans are also great as you can buy any property up to a fourplex, live in one unit and rent out the others.

It should also be emphasized that you can hold and flip at the same time. For example, you could flip one property to provide money to live off, flip the next to provide a down payment for the third which you hold. Or you could use creative financing to buy a property for no or little money down. This includes things like “subject to” and seller financing.

And of course, there’s the BRRR method. We use this method with private lenders on the front end (usually we pay 8 to 9 percent interest only) and then refinance out with a bank once the property is rehabbed and rented.

Rehab

If there were ever a thing that Murphy’s Law applied to, it would be rehab. It always costs more and takes longer than you think. Contractors and employees are notorious for overcharging, taking too long or doing poor quality work. And underbudgeting is all but par for the course for investors.

Therefore, it’s critical to add a contingency to your rehab budget (10 to 20 percent) for unforeseen expenses. And make sure to do your due diligence with contractors. Ask for referrals from people you trust whenever you can. Local groups such as MAREI provide a great venue to meet potential contractors

and get referrals from other investors. Finally, never pay for an entire job up front! And don’t pay out the final bill until the job is completely done.

4. Property Management

The first question you’ll have to answer is whether to hire a property management company or manage yourself. The advantage to hiring a management company is that it frees up your time to look for other properties (or just have a life). The drawback is that management companies obviously charge a fee and some aren’t exactly good at what they do. Furthermore, no one will ever care as much about your properties as you do.

If you do hire a management company, just as with contractors, vet them thoroughly. You should ask them for referrals from people they manage for. And if you do hire one, don’t be afraid to fire them as well. A management company can make or break your investments and bad ones will break yours quicker than you could imagine.

If you decide to manage your properties on your own, you must make it a priority. No property, no matter how good a deal you got on it, can work without quality management. Make sure to learn the law and consult an attorney to make sure you’re in compliance. You will also need to learn to take a few bruises to your ego. Some tenants will push you very hard, but you need to stick firmly to your rules and policies (and yes, make sure to create rules and policies as well).

5. Maintenance

Unless you are very handy, if you decide to manage yourself, you should make sure to find a roving handyman you can call for maintenance issues. When you have enough properties, you can hire someone full time. But even with just one property, you need someone to do the work there. You will

also need to find a plumber, HVAC technician and electrician for such issues when they arise.

If you use a property management company, it’s critical to keep a close eye on the maintenance and turnover expenses. If you’re going to be overcharged, it will probably be there. If maintenance expenses are too high, demand an explanation. If the explanation doesn’t make sense or the situation doesn’t improve, change companies. You should also watch for prolonged vacancies and treat those the same way.

Of course, this is just scratching the surface of what is needed for buy and hold real estate investment. But these are the key aspects of a buy and hold business you will need to master in order to become a successful real estate investor.

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Andrew Syrios is a Kansas City area real estate investor, who with is brother Phillip own and manage Stewardship Properties. Andrew will be sharing how their family business has been building wealth with buy and hold properties through the BRRRR method at the March 12th MAREI Meeting.

On Saturday, March 16th, Andrew and Phillip will be digging into the Property Management piece as that is the key to doing this over and over again so you build wealth.

Learn more about both events online at www.MAREI.org

Find out more about the Syrios Brothers and their business on their 3 web sites:

• www.StewardshipProperties.com

• www.333Rent.com

• www.AndrewSyrios.com