Updated: Dec 30, 2020
If you've ever watched or listened to a Bigger Pockets podcast before you're probably extremely familiar with the BRRRR strategy. And if you're like me, you've probably mixed up the R's a time or two. You know what the best part is?
It still works!!!
The principle of the BRRRR strategy is, as David Greene says, all about increasing the velocity of your money and putting it to work for you. You send dollars out, the come back with friends, and you send them right back out there. If you're not incredibly familiar or need a refresher, the typical steps are as follows:
Notice I said typically...the beauty of the strategy is that it still works, even if you change the order a bit! That's what I did, so let me tell you the story! I'll give you a spoiler...here are the results:
Buy - $160,000
Rehab - $45,000
Rent - $3,100/mo
Refinance - $235,000 appraised value
Repeat - Pulled out $53,000, cash flowing $850/mo after all expenses & reserves
STEP 1 - BUY
Purchase Price: $160,000
My fourplex in Gastonia, NC, also affectionately known as the #toiletladyrental, was the first investment property in my portfolio. Found on the MLS, it was fully occupied with 4 lovely inherited tenants and as it turns out, the extreme pains of the acquisition process were simply foreshadowing of the difficulties to come (read all about it in the acquisition story).
The sellers had the property listed for $210,000, and after a few rounds of negotiation, 4 appraisals, 3 lenders, and 3 closing dates, I finally closed on the property for $160,000 on September 13, 2019!
STEP 2 - REHAB
Rehab Cost: $45,000
Rehab Timeframe: 11 months
I'll be honest...when I bought this property it was a disaster. The units hadn't been taken care of, previous owners hadn't updated them in decades, tenants ran roughshod all over the landlord, and rent collection was sporadic at best. Being a new investor, and listening to my property manager (who made suggestions out of a sense of laziness), I chose to go the route of keeping tenants in place and turning one unit at a time.
(December 2019) The rehab process started with Unit 1 and ironically a lost eviction, where I did a minimal/partial rehab over the course of 2 weekends while the tenant was at work (which you can read all about). I updated floors in the kitchen and bathroom, painted the trim throughout the unit, and painted the stairwell. Total cost: $2,250
(January 2020) As if I didn't learn my lesson the first time around, while waiting for the tenants in Units 2 & 3 to get out I again did a partial update in Unit 4 while the tenant was in place. In this one I redid most of the bathroom, painted the kitchen, replaced the appliances, and did a few other small touchups. Total cost: $3,900
(April - August 2020) Finally, I successfully evicted the tenant in Unit 3. Unfortunately, that eviction landed me on the radar of the city thanks to a tenant complaint and resulted in the creation of the #toiletladyrental. Thanks to complaints of code violations, and receipt of the notice after already completing demo, the rehab for Unit 3 turned into a nightmare at the start of Covid (again, you can read all about what happened as well as how the rehab went). I wound up doing a complete rehab - kitchen, bathroom, fixtures, floors, windows, paint, and even some structural and electrical. Total cost: $22,550
(April - August 2020) As that project was underway I also wrapped up the eviction for Unit 2. While less eventful, it was still a real pain to work through as I chose to do a bunch of work myself. Much like Unit 3 I did a full rehab (minus most of the structural and electrical), and it took way longer than it should have. Total cost: $10,750
After adding in the costs of some exterior repairs & updates, legal fees for evictions, and management fees for tenant placement, the total rehab from start to finish came out around $45,000.
STEP 3 - RENT
Original Rent: $1,400/mo
Final Rent: $3,100/mo
One of the first mistakes I made was overvaluing inherited tenants. At $350 per door, and with me responsible for the water bill every month, it didn't get me very far compared to the 11 months of headache it gave me. That said, the partial rehabs I did to Units 1 and 4 while the tenants were in place allowed me to increase rent and when everyone paid (and prior to evictions), rent increased from $1,400/mo to $2,100. That plummeted to no more than $700/mo once the evictions happened and then Covid hit (Unit 1 stopped paying rent April 1 and never paid again).
At the time of my refinance, rent ended up as follows:
Unit 1: $650 (which he did not pay, more on that in the next section)
Unit 2: $795 (brand new 12mo lease)
Unit 3: $870 (brand new 12mo lease)
Unit 4: $700 (solid inherited tenant, unit partially updated, lease through January 2021)
If you're a math whiz, you may be wondering why that doesn't add up to the $3,100 I said for final rent. Great question! The tenant in Unit 1 got evicted, and the new tenant will be paying at least $750. Don't worry, we're getting there.
STEP 4 - REFINANCE
Appraised Value: $235,000
Here's where my BRRRR happened a little out of order. Due to the pending eviction in Unit 1, I was unable to fully update the unit as I had intended. While this a negative for a time due to the fact that I dealt with an eviction and almost $4,500 in uncollected rent, it paid off in the long run on the refinance appraisal.
The tenant was under a lease for $650, which allowed me to still show strong cash flow
At the time of the appraisal, the tenant was pending eviction and was fully uncooperative. As a result, the appraiser could not access the unit
Unable to access the unit, he had to make assumptions based on the other units he saw (2/3 of which were fully updated)
This resulted in an appraisal that accounted for 4 updated units and came back at $235,000! So instead of paying for the rehab for Unit 1 up front and getting reimbursed with my refinance, it's now included in the funds I receive from the cash out refinance and I can use that to pay for the rehab after I close!
I wound up going with a commercial lender who offered a very competitive loan:
5 year fixed term, amortized over 25 years
STEP 5 - REPEAT
Cash Out: ~$53,000
Cash Flow: $850/mo
My original loan balance from my mortgage I used to purchase the property was around $118,000 at the time of closing. My refinance at 75% LTV paid off the original loan and put around $53,000 in my pocket after closing costs, allowing me to recoup the entirety of my rehab cost as well as about 20% of my down payment. This was a huge boost to my business!
In addition to the cash I was able to pull out, I will also receive cash flow of $850 every month. This is after accounting for all expenses as well as 24% of my gross rent going towards reserves. When you factor in the ~$30,000 I've left in the deal, that leaves me with a cash on cash return (COCROI) of ~30%!! Additionally, due to the 25% equity left in the deal, my return on equity is ~17%. That means my equity is making me 17% every year, which is far more than the average return in the stock market! And to top it all off, I not only pulled out a bunch of cash and make great cash flow, but this asset will continue to appreciate while the tenants will continue to pay down my loan! I couldn't be happier.
As you can see, this wasn't your picturesque and "perfect" BRRRR. It took way longer than I expected to, I did the steps out of order, I went way over budget, and I left money in the deal. And I'm going to be perfectly honest...there were many points where this process absolutely SUCKED! Dealing with all of the frustrations and shoveling money out the door every month while seeing no end in sight was infuriating and extremely difficult at times.
But at the end of the day, this is a massive success in my book! And I hope you use it as a lesson for your deals as well. The BRRRR strategy is a framework that you can utilize and follow, and it is extremely powerful. But it is not a rigidly structured process with specific success criteria...you do what works for you! Don't feel like you have to hold yourself to the standard of the perfect BRRRR that was completed by an investor who has years more experience than you, and then get discouraged when you don't meet that unrealistic standard. Take a step forward now and get to work!!!