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Hey, welcome back to my channel! I’m Karin Carr and I am a Realtor® with Keller Williams Coastal Area Partners in the beautiful Savannah, Georgia. If this is your first time here and you are interested in all things real estate, you really should go ahead and hit that subscribe button because I put out new videos every Monday and I know you don’t want to miss one.
New investors always want to know how to buy their first investment property and there are two schools of thought:
- You can Flip; or
- You can Buy and Hold.
Buy and Hold means you’re going to buy it and you’re going to hang on to it long-term, usually by putting a renter in it.
Let’s talk about the Buy and Hold strategy…
From there, there are still two more different methods. The most common one is that you save up the money for your down payment, usually 20% because it’s an investment property. Since you’re not going to be living in it, they require a larger down payment.
You save up your money for your 20%, you go out and buy a house – usually one that’s already in move-in condition. It’s all fixed up and it’s fabulous. The minute you close on the property, you can rent it out. Sometimes, you get to buy a property that already has a tenant living in it, so the day you close, you’re immediately receiving income.
Now, let’s say that between your monthly expenses – which would be the mortgage payment, property taxes, homeowners insurance, perhaps paying a property manager, setting aside a little bit of money just in case anything breaks because stuff breaks and the tenants are going to call you need to have that fixed － let’s say that all of your expenses came to $1,000 a month. If you can rent it for $1,200 a month, that $200 profit is called cash flow. That’s the difference between how much we can rent it for and what our monthly expenses are. Obviously, the more cash flow, the better!
So, you’re holding onto this property long term and even though the real estate market goes up and down; in the long haul, it goes up. You are gaining equity in the property just by the sheer passage of time as the property values go up. You’re paying down the mortgage － actually, your tenant is paying down the mortgage for you － you are making your mortgage payments with the money coming from your tenants. The property value is increasing over time because the principal balance goes down, the equity goes up, and you have cash flow every month.
Sounds like a great plan, right? The only problem with that is you’ve bought the property. Awesome! . . . Now, what?! You want to buy another property? You got to save up your 20% to go buy the next property.
A lot of people will buy an investment property or even two, but that’s kind of where they stop because they have to save up the money to be able to have the down payment to buy the next property.
Well, that is where the BRRRR method comes in. BRRRR stands for:
I’m going to explain what this BRRRR strategy is.
Number one, BUY. Ideally, you want to buy a property that is listed below market value. The cheaper you can get the property, the better. You’re going to buy something that needs a little bit of work, not something that’s in move-in condition and I’ll explain a little bit later why that is.
Then REHAB. Now, how much work it needs is really what you are comfortable with. As a first-time investor, I would recommend that you buy things that just need cosmetic repairs. Does it need paint? Does it need new carpeting? Does it need a new dishwasher? A refrigerator? Perhaps the front door looks hammered and we’re going to replace the front door.
We’re looking for things that are mainly cosmetic in nature, not major improvements. It doesn’t need a complete kitchen remodel. It doesn’t need the entire HVAC system replaced. It doesn’t need all of the electrical to be updated. It just needs cosmetic repairs.
Then, we’re going to find a RENTER for this property. You can either do this yourself or you can hire a property management company but they’re going to figure out now that the house is fixed up, what would it rent for? We’re going to find a tenant that has good credit history, a history of paying their bills on time, and hopefully somebody that’s going to take care of your property. Put the tenant in place!
The third one is REFINANCE. Now, we go to the bank. In this example, let’s say you bought the house for $100,000 and you put $20,000 down. You go to the bank and say, “Hey, I fixed this house all up. I have a tenant in place who has signed a 12-month lease. I want to refinance this property.”
Let’s say that it now appraises for $120,000. The house is now worth more than you paid because you’ve done all of these improvements to it. You refinance it and you pull your initial investment back out of the house. You’re going to get your twenty thousand dollars back cash out by doing this refinance. Now, you are making cash flow each month － the difference between the monthly expenses the income is bringing in from the tenant, but you also got your down payment back. So, now you can go and REPEAT. You can buy another property.
This is the strategy that seems to be the key for becoming a very serious real estate investor and building long-term wealth. With the original method, you bought one house and then maybe a year or two later, you buy another house, but most people kind of stop there.
With the BRRRR method, let’s say that you bought four houses a year. Let’s also say that you bought one every quarter. You buy it, you fix it up, you rent it out, you refinance, you get your money back, and you could buy another one. Over the course of 5 years, that’s 20 properties. If you own 20 properties that are going to appreciate in value because you’re hanging on to them for the long-term. Your mortgage balance is going down, the equity is going up, and you can raise the rent every year － let’s say that it’s typical three to five percent increase year over year, you are hanging on to this property which is bringing you money long-term. The cash flow on 20 different properties is what allows people to then quit their full-time job and do this as their primary source of income without having to work a nine-to-five job. You can take as much vacation as you want, you can travel, you can spend time with your family, you can take up lots of hobbies, you can do whatever you like with all of the free time that you have. Yes, it takes time to manage the investment properties, but you can even hire somebody to do that for you if that’s not really your thing.
The BRRRR method allows you to acquire more properties more frequently and basically take the money that you would be profiting with the traditional method and accelerate it. It’s happening a lot faster and a lot more frequently.
I learned a ton about the BRRRR method by reading this book called, “Buy, Rehab, Rent, Refinance, Repeat – the BRRRR Rental Property Investment Strategy Made Simple” by David Greene. If you want to learn more about the BRRRR method, I highly recommend this. Check out this Amazon link where you can get a copy of it if you’re interested.
Now you know how to buy an investment property. But the thing that stops everyone is where to come up with the down payment, right? Well, I’ve got a cheat sheet for you. Just click this link and you can go download my free cheat sheet called, How To Buy Rental Property With No Money Down－ 10 creative ways that you could come up with money for the down payment that would allow you to get started on building wealth through real estate.
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