The problem with most investments is you can only use the money once. You invest the capital into a stock, bond or whatever your flavor is and it sits their earning you X percentage return.
Real estate can act this way too, but not if you use the BRRRR strategy:
BRRRR stands for Buy, Renovate, Rent, Refinance, Repeat.
It’s a strategy that allows you to use an initial investment over and over again to create wealth and build retirement income.
BRRRR’ing My Way to Retirement
Let’s say you have 30k in capital to work with. You find a property for 65k that needs work and has an after repair value (ARV) of 125K.
In order to acquire the property you will need to borrow the remaining purchase price. You get a fix and flip loan from a hard money lender. If you are not familiar with hard money lenders they provide short-term loans, usually with a 1 year maximum duration. They will lend on property that traditional banks will not due to condition, etc.
Thus, you borrow 50K hard money, giving you the 35k for purchase and another 15k for renovation.
So between purchase price, loan, closing costs and interest you are in for 90k
- 30k capital
- 50k loan
- 4k hard money interest and fees (6 month payoff)
- 6k total closing costs (purchase and refinance)
Time to Renovate!
At this point it is a matter of getting the property renovated and move in ready. Once that is completed then you find a tenant and begin the refinance process with a lender.
Private lenders have much more relaxed requirements than traditional banks so that is certainly an option to look at. Be cognizant of “seasoning periods” if any are required.
Regardless of who you use the loan will likely be 75% loan-to-value (LTV).
Assuming the appraisal comes in near your estimated ARV then you are looking at a loan amount of $93,750.
On closing the lender will be paid out, closing costs deducted and money for taxes and insurance will be escrowed (2.5k in this example). You then receive the rest.
You likely had some carrying costs (utilities, taxes, etc) while renovating so deduct that too (1k in this example)
The figure we come to after all that is roughly 30K! Yep, your starting capital has been returned and you now can use it to hunt for the next property.
Best part is you now own a cash flowing rental property with 25% equity in it!
That seems like a pretty sweet deal and if you do it over and over then you’ll have a cash flowing portfolio providing retirement income – all from that one initial investment.
It is possible because that example I gave is based on a deal I did for a small two bedroom house recently.
The only difference is I had the capital needed allowing me to bypass the hard money lender and keep more money in my pocket. Either way I would have done the deal though. The numbers worked and that is all that matters.