I started out by putting down $500 of earnest money to get my first $6,000 wholesale deal.
Today, I have a portfolio worth $1.3 million. All from using the BRRRR method.
Now I'm pulling back the curtain on exactly what the BRRRR method is and how I used it to go from a complete beginner to getting a $63,000 check.
What's up, guys? If you're new here, my name is Lili.
So, I completed what is called a "perfect BRRRR" deal and got a $63,000 check. It was one of the moments in my real estate investing journey where I'm like, man, my life has completely changed. So I'm excited to share that with you.
Today, I'm going to break down what the BRRRR method is, what a perfect BRRRR actually looks like, and then we're going to walk through the details of my perfect BRRRR, meaning:
We're going to go through the rehab and I'm going to break it down for you room by room. Labor, material, as well as some of the things that people don't think about, like:
I'm going to break it down line by line for you guys and show you how everything culminated in a $63,000 check.
So right now, I want to make you a promise that I'm going to break this down like nobody has ever broken it down before. Now let's get into what the heck is the BRRRR method?
So as you may know, BRRRR is an acronym that stands for:
buy, renovate, refinance, rent, and repeat.
It's a type of investing that is meant for a buy and hold investor, meaning someone that's going to buy a property and hold it as a rental to generate passive income, versus somebody who is a house flipper who's gonna buy a property, renovate it, and sell it to generate active lump sum income.
Okay, so BRRRR is for the buy and hold side of things, but it's very different from the traditional buy and hold method of putting 20% down to buy a property and then renting it out to slowly make back that 20% investment in the form of monthly cash flow.
Instead, the BRRRR method does things very differently to really supercharge your returns and supercharge your cash flow.
The first step in the process is to buy a distressed property. So let's imagine you could buy a distressed property for $150,000.
That may seem like a lot or a little for whatever market you're in, but it's just an example property. The numbers work no matter how large they are or how small they are.
So you buy distressed property for $150,000. What does distressed mean?
It means that it may be super outdated. It may mean that there's some damage, that it's not in a livable condition.
But at the core, this property is less expensive because work needs to be done to get it up to the standard or the market value. These types of properties are usually not ones that you can buy with traditional financing, like going to the bank and getting an FHA loan or a conventional loan.
So you're usually going to need one of three types of loans:
Or the fourth option is you could have the cash yourself but I know that wasn't a realistic option for me and probably not for a lot of people out there watching.
So you're going to need some type of short term loan.
A very typical setup with a hard money lender is that they will give you 80% of the purchase price and 100% of the rehab budget.
So for a $150,000 purchase you would need to put up $30,000 or 20% and the hard money lender would give you the rest of the money you needed for the purchase, as well as 100% for the rehab.
Where do you get that $30,000?
If you've followed my journey, you know that I started it out by wholesaling to generate capital.
My average deal was somewhere between $8,000-$10,000. So that would be about three months of wholesaling, one deal per month to get the $30,000 that you would need to put down and the hard money lender giving you the rest.
Now, the thing about hard money loans is that these are short term loans, usually coming with a six month period, which at the end of that you would have to pay the loan back, which means you've got to get to work on the second step of the BRRRR method, which is to renovate.
Remember in the typical setup, a hard money lender gives you 80% of the purchase and 100% of the rehab and let's say that this property needs $50,000 of work.
One of the big things I'm learning about this process is how important it is that your rehab stay on time and on budget.
Of course everybody's going to say that but when you are the person in charge and making all the decisions, that is really the first thing at the top of your mind.
There's a certain amount of money that the hard money lender is going to give you for the rehab and there's a time period in which they're going to want to get paid back. So the renovate portion has to stay on budget, and has to stay on your timeline.
Once you're done, you move on to the next step of the BRRRR method, which sometimes people put rent first, sometimes people put refinance first but so that all of this makes sense, we're going to go with refinance as the next step.
So up until now, we've been doing everything the same as you might see on HDTV that a house flipper would do. We bought the property, we renovated it, and typically a house flipper would sell it but instead we're going to do something called a cash out refinance. For this we need a little bit of a review.
We bought the property for $150,000, we rehabbed it for $50,000 and so we are all in for $200,000.
At this point we tell the bank that we are ready to do a cash out refinance.
So they're going to send out an appraiser to the property to see what improvements you made. They know that you bought it for $150,000. They know that you put $50,000 into it. They want to see what it's now worth.
This is one of the golden eggs or golden nuggets of real estate investing appreciation.
Although we are into the property for $200,000, we have done something called forced appreciation.
We've made the property better so, because it is so nice, freshly renovated, its market value, what somebody is willing to pay for it, is actually more than that and that's what the appraiser is there to figure out.
Let's say the appraiser goes out and they see the granite countertops you put in, they see the nice appliances, whatever, whatever and they say this house is now worth $250,000.
The beautiful thing about that is that the bank who you want to do the cash out refinance with, will give you typically 80% of that appraised value in cash. Well, actually not cash. They'll write you a check, but you get what I'm saying. So what's $250,000, your appraised value, times that 80%?
Anybody see where I'm going with this?
You're at the end of your project and the bank is willing to give you a check for $200,000.
There's a few things you've got to do with that money.
First, your hard money lender lent you $50,000 to complete that rehab. So you give them back their $50,000.
They also lent you $120,000, 80% of your $150,000 purchase so you give them back their $120,000.
But you also put $30,000 into the deal yourself, so you give yourself back that $30,000, right?
You're all in for $200,000 between the purchase and the rehab, and the cash out gives you $200,000. So you pay your lender off and you pay yourself back for the money you put in. That is a perfect BRRRR at this point.
You have an asset that you own worth $200,000 and you technically got it for free because you don't have any of your own money or your hard money lenders money left in the deal, but that's not where it stops, because the bank gave you $200,000 as that cash out refinance.
That $200,000 now becomes the mortgage that you have to pay back and that's when we move on to the next step of the process, rent.
So now you own this property.
You've paid back your lender, you've paid back yourself, and now you're going to have a monthly mortgage to pay back the bank for, or the $200,000 check they gave you.
$200,000 at about 4.5% is going to put your monthly payment at about $1,300.
So let's say this freshly renovated property, you can rent it out for $1,800.
That puts your monthly cash flow, your monthly passive income at about $500, of course, before you account for things like vacancies and repairs.
But the great thing about the BRRRR method is that the house is freshly renovated, so for one, it's not going to be very hard to rent out, because who doesn't want to live in a freshly renovated house?
For two, there's not going to be a lot of repairs because everything you put into it is new, and when you go to calculate your return on something like cash flow and passive income, generally what you do is take the amount of money that you make in a year and divide it by the amount of money you have into the deal.
So let's think about two scenarios here.
Remember how I said the BRRRR method is very different from the traditional buy and hold by putting 20% down?
If you had put 20% down to purchase this property, it would have been the same $30,000 that you put into the deal but when you do that, put that 20% or $30,000 in, you're going to slowly make that back over time through your cash flow but with the BRRRR method, you put that $30,000 in, but you're able to pay yourself back for it just a few months later when you refinance, financed after your renovation.
So how does that change the type of return you get? With the traditional method, let's say you still make $500 a month, which is $6,000 a year. You would take that and divide it by the $30,000 you put into the property.
To keep things simple, let's assume that with the traditional method, you're still going to make $500 a month but if you didn't renovate the property right, you just put in that $30,000 it might be hard to get the same level of rent as if you had completely renovated the property.
But to keep things even, we're gonna go ahead and say you can still make $500 of cash flow. That would be $6,000 a year, you divide it by the amount of money that you have in the deal, which is the $30,000 you put up as a down payment. $6000 divided by $30,000, multiply that by 100 to turn it into a percentage, and you have a 20% return.
Nothing to laugh at like 20% return, awesome, all day long. Stock market does like 7%.
20% is great.
But with the BRRRR method, you make $500 a month, $6,000 a year. You divide it by the amount of money you have left into the deal, which is nothing. Whether or not you enjoyed algebra in middle or high school, you probably remember that you can't divide by zero. All of the money that you put into the deal, you were able to take back out. And so that $6,000 that you make a year, divide it by zero.
You can't do that. It's an infinite return, and here's what infinite return means to me.
In the first case, I put down $30,000 to get this property, and I'm going to make $6,000 back a year. I'm slowly going to recoup my investment at that point, it's going to take me five years making $6,000 per year to make my money back and in year six, I'll have made $36,000 and continue to gain from there.
But in the BRRRR method, I've made my $30,000 back with my cash out refinance, so I actually start making profit in year one. That's $6,000 pure profit.
It's not going to take me five years to recoup my initial investment and to top it all off, of why the BRRRR method is so powerful is that last R, repeat.
I just paid my hard money lender back with interest in just a couple of months. So I can go back to them and say, hey, let's do this again.
They're in the game of lending money. You're in the game of renovating properties. It's a perfect marriage for them to continue to loan to you. And that $30,000 that you made from just a couple of wholesale deals or that you saved up, it's not stuck in the property. You got it back, so you can put it into the renovation of the next one.
So a question you might be asking is, Lili, what about interest? What about closing costs and all of that stuff?
Because I made this example really nice round numbers for you, what we're going to do is walk through the exact numbers of my latest BRRRR deal, the perfect BRRRR, that got me that $63,000 check.
So I got this deal a few months ago when an agent who I had wholesaled on market deals with texted me and said she knew of an owner who wanted to sell some of his properties, but they were in pretty bad shape, and so she didn't want to put them on the market. Would I come see them?
Of course, I said yes.
I was actually filming a day in the life vlog that day.
The house was in a great area of town, but it was in pretty bad shape. You could tell it hadn't been lived in for at least a decade.
Later on, once we started the job, we found that the furnace had actually never been used and was eight years old, so nobody had lived in the house for at least that long.
It was halfway through the renovation, but the contractor that the seller had hired had just kind of taken some of his money and dipped out halfway through the job.
We ended up finding out that he didn't do a great job, so a lot of things that he did, we had to undo before we could actually get to work on doing them correctly. But all in all, it was a really, really good deal and I ended up offering the seller $90,000 and he accepted.
Actually, it wasn't that simple. He thought $90,000 was a little bit low, but one negotiating tip that we worked in was that I would pay the real estate agent's commission. Typically the seller pays the commission, but in real estate everything is negotiable.
So I agreed to pay the real estate agent a commission of $4,000.
The seller was really trying to get up into the $100,000 range with his counter offer, so for me this was a win because I'm technically paying $94,000 for the property which is still lower than his $100,000 counter offer.
But it makes him feel like I gave in to something because I said, yes, I'll pay the agent's commission. Just something to think about as you start negotiating deals.
Now, I didn't have enough money from wholesaling to do the $90,000 purchase and to do all of the renovation that this property was going to need but at this point in my wholesaling career I had met a millionaire who was doing some private lending.
We came to an agreement that he would lend me $90,000 for the purchase and I would fund the rehab myself.
There’s a lot of different agreements you can have when you're borrowing money from someone. It might be the 80% purchase, 100% rehab with the hard money lender. It might be all the purchase, none of the rehab. Or, none of the purchase all of the rehab.
It just depends on what you and the person lending the money agree to.
So now that I have the money for the buy, we're on to the second step of the process which was to renovate and man, this was a tough renovation.
If I had known how tough it was going to be when I was going into it, I might have felt a little bit intimidated. It was only my second or third BRRRR deal.
I don't know exactly how to deal with this but something my mom always says, is when you're thrown into the fire, you're going to get ready, and that's what happened.
The property had been vacant for so long that the backyard was 100% overgrown. There's a detached garage apartment in the backyard, but you could barely even get to it, let alone see it, because of how long the backyard had been overgrown.
Of course, the utilities weren't on because it's been vacant for so long so we weren't able to do the type of due diligence that we would have done if we could have tested the sewer lines and the electrical service and all that good stuff, but I felt like I'd gotten it for such a good price that it was worth taking on the job.
So here's how the rehab went, dollar by dollar.
I start off with the exterior first, the backyard.
Not only was it so overgrown, but this was the best place to start with the rehab because we couldn't fix anything on the roofs or on the siding because it was so hard to get to the back of the house and there were so many animals living back there and so many bugs that it was attracting that this was the first order of business for the renovation.
It cost me $1500 to have a landscaping crew come through and just completely clear out everything and haul it off.
$1500 well spent.
Also, don't forget, I'm going to be including some of those rarely thought about expenses, like the interest payment, utilities, holding fees, all that good stuff at the end of the breakdown.
And I'm going to do my best to break it down between labor and materials when I did have to pay for those things separately.
So once the backyard was cleared, it was time to work on the exterior of both the main house and the detached garage, which we were going to turn into a studio apartment.
For that studio, we needed new siding and a new roof. The materials for the siding cost $1,214.77, and the materials for the roofing cost $568.93.
And the labor to have someone come out, tear off the old siding and roofing, and put on new ones cost $4,000.
For the main house, the previous owner had actually just put on a new roof, so we didn't have to put a roof on there, but we did need to do all new vinyl siding, and that cost $8,750 as a combination of the labor and the materials, that was just an all in one package deal.
We also needed a new AC condenser for the front house, as well as a mini split system, which is kind of like a wall unit that does your cooling and your heating for a very small space, so altogether, the condenser and the mini split cost $2,575.
Another thing that I didn't actually think of, but that one of my contractors recommended, was that we get a cage around the AC, like a steel cage around that condenser, because people do steal them.
I know in some places with apartment buildings, they put them on the roof but of course we couldn't put it on the roof of our house because roofs like this are not flat.
So I had to pay another $350 to get a welder to come out and create an AC cage for me. I did get a good price on that because I had him go to a couple of my rental properties and do it all at once so he gave me a discount on each of them.
There was also an old rusty falling apart fence that was at this property so we wanted to get a new privacy fence because there's such a big backyard and because the studio apartment is going to have someone living back there so we had to take out that old fence.
The problem was that the fence wasn't just like the fence posts poured into a little batch of concrete and then in between you have the actual fencing. No, there was concrete poured the entire way, almost like a house foundation, and then the fence posts were put into that.
So it cost me a little bit of extra money because we had to get all of that concrete ripped out, which is really hard work in the heat of the summer in the south.
The labor to get the fencing ripped out, as well as the new privacy fencing installed, cost me about $3,250 and the new privacy fence materials themselves cost me about $1200.
There was also a deck in the back that was pretty beat up. I thought we might have to tear it down, but instead we just replaced all of the wood that was rotten, power washed it and stained it, and that cost $675 for labor and materials.
And the person who did that also put a nice post and railing on the front porch for me as well.
The last thing that we did on the exterior was pour a concrete pad around the studio apartment, both to help with water intrusion so that we weren't going to have any foundation issues back there, and also so that the person living back there could have a nice little concrete deck to sit in and enjoy the backyard. That concrete, labor, and materials cost about $1,700.
Alright, moving to the interior.
I had a lot of fun DIYing some of the work for the garage apartment but there was a good portion of it that I left up to the professionals.
A lot of the framing and the studs in that garage apartment were rotten so I did have someone come in to repair the studs and make sure that everything was structurally sound, as well as hang the hardy board, which is like a moisture resistant drywall, and do the tiling in the bathroom.
I don't want to have any problems with molds or anything like that so they did that work for me for $2,650.
Just about everything else I did myself, and that included laying the luxury vinyl plank flooring, so the labor on that was free because I did it myself and made my friends and my parents help me but the flooring itself cost me $1,114.
We also put in a little mini kitchen and the cabinets, the countertops and the backsplash, although we put them in ourselves the material for that stuff cost about $550.
Between the studio apartment and the main house, we did have to make sure that the electrical and the plumbing were up to code so for the electrical, I paid my electrician the labor separate from the materials.
The materials came out to about $738, and the labor for him was $575.
For the plumber, everything was put together in labor and materials, and I paid him $3,450 to do all of the plumbing work that was needed moving inside the main house.
The biggest cost here was the granite countertops, but I think they were 100% worth it. They cost $5,471.
We also had fresh paint throughout, so it was $510 in paint itself and about $1,350 in painting labor. Some of the paint that was purchased for the main house I did use to paint the back house myself.
Continuing on to appliances, we supplied the stove as well as the dishwasher, and the tenant will be supplying their own fridge.
The stove and dishwasher cost $493.
I got them from the outlet, which sells some of the ones that got dinged while they were, you know, being transported or that were overstocked. They're only open on the weekends but that is a pro tip to get your appliances for a little bit cheaper.
In the kitchen and dining room area, we put down some nice white and gray tile, and the labor for that was about $2,150 and the tile and the grout and the materials themselves were about $1,060.
The wood floor that was already in the property was partially complete, and so we also had to finish that out. It cost only $405 for both the labor and the material, but the wood floor that they had already started putting down in like 90% of the property was sold out, except for one place that was two and a half hours away from where I live.
So I did have to drive all the way there just to get three boxes of flooring.
After that, we had to get the bathrooms completely redone.
The previous contractor had already put up some of the tile and drywall, but he did a horrible job, and it was going to be a moldy mess in like, six months. So we tore everything that he did out. I tore some of it out myself.
Taking everything out and putting it back in correctly, using the right type of water resistant drywall, using the right type of hardy board, putting in the tile, the materials and the labor for that cost about $4,000 for both bathrooms.
After that, we were almost done.
All of the light fixtures and the plumbing fixtures, like the faucets and the toilets, all of that came out to about $1,700 and the price to install those things was included in the price I gave you earlier for the plumber and the electrician.
The last thing that was technically included in the rehab was that we needed new water heaters for both the front property and the studio apartment. Those cost about $500 each.
So add another thousand dollars to the budget, and now we were on to the hidden costs.
For one, when you're doing a big renovation like this, it creates a lot of trash so I ended up getting a really huge dumpster for $335 and then I also had somebody come back at the very end with a dump truck to take everything else that had accumulated that couldn't fit in the dumpster. They hauled that off and that cost about $250.
Then after the renovation was done, before showing the property to prospective tenants, we had to get it cleaned. Getting the front and the back thoroughly cleaned from all the construction dust and all of that cost $160.
This project took about two and a half months so I had to pay the utilities on the property during that time, water and trash cost about $65. The gas bill was about $20, and the electric bill was about $63.
Then we still have to talk about the loan cost, the closing cost, the interest fees, all that good stuff.
So that $90,000 loan I got from the private lender was at a 10% interest rate so the way that you calculate the monthly payment on that is, you take that $90,000 times 10%, which equals $9,000.
That is 10% yearly if you took the loan for an entire year, you'd pay $9,000 in interest but this was a two month loan with the option to extend to a three month loan.
So that $90,000 was at a 10% interest rate but that is the amount you would pay if you kept the loan for an entire year. So I take that $9,000 and divide it by twelve months in a year, which means you pay $750 per month.
This was a three month loan with the option to extend to four months if I needed to so $750 times three months would be $2,250 in total interest.
Although this project only took about two and a half months, one thing I learned is that appraisers are really, really backed up so it took a while for the appraiser to get out there for him to get the report in, and then for us to get the refinance actually done.
So we just squeaked over our deadline. But that's okay, because in our contract with the private money lender, if we needed an extra month, we would pay $500 extra. So we paid $500 and I paid the hard money lender a total of $2,750 for giving me the $90,000 loan.
When I purchased the deal, I also had closing costs of about $2,000. Remember I said that I paid the real estate agent's commission? So that was another $4,000.
Then whenever you're doing a job like this, you can't get normal homeowner's insurance, you have to get something called a builder's risk policy so that cost me $250 to make sure that everything was covered during the time when I had the renovation going. Now it'll just transition into a normal homeowner's policy.
So now you see how the renovation costs me about $63,300 something dollars. These numbers aren't 100% exact because like, it didn't go down to the penny, but you get the idea of how much the renovation cost me.
Plus, I also showed you some of the closing costs and things like that, which technically aren't part of the renovation, but it's still something that you have to consider because that's money that's going to come out of your pocket.
So here's how the entire BRRRR deal worked from start to finish.
Bought it for $90,000, renovated it for about $60,000 before the fees and things like that. Then when we went to get the refinance the property appraised for $205,000.
It's crazy to think that the work that we put into this property made it go from being worth $90,000 and being a complete dump, not close to livable condition, to being a freshly renovated, brand new, basically property worth $205,000 and if you remember what I said at the beginning, the bank will give you 80% of your appraised value.
So 80% of $205,000 is $164,000. Out of that, I paid back my hard money lender his $90,000, which left me with about $74,000, which is how I paid myself back that $63,369.76 check.
$63,369.76 is what I took out of that $74,000 that was left over. Now, why didn't I take the entire 74,000? There's a few reasons. One, I could have, right? I can go up to taking out 80%, but I didn't actually need to. That would have been making $11,000, right?
Taking out about $11,000 extra than what I needed to to pay back my lender and pay back myself for everything that I put in. Now, if I took out that extra money, remember, every dollar that you take out in that cash out refinance has to be paid back in the form of the mortgage so the larger the amount that you take back, the larger your mortgage, the larger your monthly payment.
But I want cash flow. I want passive income that's going to cover for my living expenses. So I only took out as much as I needed, kept my monthly payment as low as possible so that I have as much passive income as possible and that moves us on to the next step.
That money that I took out in the cash out refinance means that my monthly payment for my mortgage is going to be about $1,000 on this property every month and the front property rents out for $1,400 and the rear unit rents out for $600.
Which means I have $2,000 of monthly income, $1,000 of expense for my mortgage, which means I cash flow about $1,000 per month, completely infinite return because I have nothing left in the deal and my expenses and my vacancy are going to be very low because both of the units are completely brand new, completely renovated, and rented out to great tenants who are excited to live in such a nice place.
So I think I did it right.
I pulled back the curtain on exactly how the BRRRR method works, both in theory and in real life.
So, now that you've gotten an intro to the BRRR Method, are you ready to start?
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