5 Steps (and Tips!) For Your First BRRRR

B: BUYING 

When you BRRRR, the goal is to have the property cash flowing with as little of your own money left in the deal when you are done. In order to do that, when you are done with step 2 (rehab), you need to have created approximately 25% equity in the property.

For simplicity’s sake, let’s say you buy a property for $50k and you spend $25k fixing it up. When you're done, you'll want that property to be worth around $100K.

Here’s the simple equation in reverse for a bit more clarity:

Finished value of property (ARV)= $100k

Cost to purchase: $50k

Rehab expenses: $25k

Profit (Equity): $25k

Take a few minutes and look at some properties in your local market and practice applying these ratios to see if there are any properties that fit this equation. 

NOTE: You might be thinking, "sure, this all sounds great, but I don’t have the $75k that this scenario would require." Well, we have good news: there are many ways to invest in real estate, and one of those ways is through funding these types of deals. Many people and companies out there solely provide cash to investors who do these types of deals. Search our blog for more information on private money loans (PML), hard money loans (HML) and portfolio lenders. You might even have friends or family members who want to lend you a few bucks and get in on the fun too!

R: Rehab 

When most people see a house in poor condition, full of trash and with so many pets that feathers are fluttering out the window, they think “what a mess!” Investors see a house like that and think, “what an opportunity!"

In order to get to that opportunity, you’ll have to do some dirty work. There are two ways to go about it: hire a general contractor (GC) to come in and take care of everything OR do big chunks of the work yourself. If there’s room in the deal for you to hire a contractor and still end up with that 25% equity that we discussed above, that might be a good way to go about it. If you have the time and willingness to work, there’s no better way to learn than jumping in and doing what you can on your own. It'll teach you how difficult or time consuming each task in a rehab might be, which will help you negotiate more effectively with contractors in the future. You’ll learn where to push back and where to be reasonable- and you should always be reasonable. Remember, everyone you work with is on your team. 

Finding the RIGHT contractor is your biggest challenge, especially on your first job. Do you hire a GC or do you hire and supervise the individual contractors on your own? If you supervise the job- in what order should the contractors be hired? How should they be compensated? Should you pay them a deposit up front? Do you trust them with your money?

The best way to start is ask your friends and family for referrals- do they know someone trustworthy and reliable, who is reasonably priced? Will they let you shadow them and learn a bit?

Finally, know that some sort of surprise is coming and don’t beat yourself up- that’s how we all learn.

Boise Turnkey partners with several local, honest contractors in all fields. We are happy to refer you to a trusted partner or manage a rehab on your behalf. Let us know how we can help!

R: Rent 

Step three? Renting out your newly beautiful place! 

The MOST expensive mistake most new investors make? Not thoroughly and properly screening their tenants. You think your rehab was expensive and stressful? Wait until you have a disrespectful tenant who won't pay rent for months on end. Your rehab bill could be a walk in the park in comparison. 

But there is good news- it’s actually pretty easy to find yourself reliable and responsible tenants. Screen them. Screen them properly, thoroughly and in accordance with all fair housing laws. It’s really that simple. 

You’ll need to develop screening criteria that have nothing to do with the protected classes. You can screen based on income, credit scores, whether they have pets, if they have good references and any other criteria you feel strongly about, as long as they aren’t related to those protected classes. You need to publish your criteria- either on your website, your ads for the property or on your application.

Insider tip- If you own the property and your tenant knows this, every interaction now becomes a negotiation.

If you need help, our property management division has never had a formal eviction. Of course anything is possible, but having an experienced team behind you goes a long way.

R: Refinance 

Befriend an investor. 

At the top of this post, we recommended a simple formula as a guideline for the math of a BRRRR deal. The actual numbers are imaginary, but understanding the ratios is essential to the process.  If you can achieve those ratios on any deal, you can “repeat” the process infinitely, using the same down payment over and over. That’s it!

There are challenges to this and compounding factors; debt to income ratios, required reserves, banks discounting your rents, etc. But here’s the key to remember. A bank is going to require that you have approximately 25% down for every property you own. That 25% can be equity, and you can create that equity through improving the value of the house. If you can improve the value of the property by 25%, the bank will give you your down payment back. 

Now you have your pile of cash to repeat the process, which leads us to step 5....

R: Repeat 

This is the easy one: just do it all over again! You’ve done the work and you have your initial investment back in your pocket, now go out and repeat!

By now, you have some experience. You’ve worked with a few contractors and you’ve treated them fairly, they’ve treated you fairly, you have the basics of a team built now.

Where do you find your next deal? You might be surprised- now that you’ve got some contacts, sometimes those deals come to you. At Boise TurnKey, we’ve had contractors bring us deals, past clients bring us deals, realtors, tenants, etc. Once you get your name out there and people trust you and you do business fairly and honestly, people will hear about it. Success begets success.

Finally- don’t write off the MLS. People like to assume that deals cannot be had on the MLS, but 95% of the property sales happen there. Keep your eyes peeled and know when to act.

Get out there and build that portfolio!

Want a partner as you work your way through these 5 steps? Boise TurnKey works with any investor at ANY point in their journey. Give us a call at 208-957-087 and we'd love to see how we can help you.