The BRRRR Strategy (DIY)

Justin Kivel
A free video tutorial from Justin Kivel
Real Estate Investing & Financial Modeling
4.7 instructor rating • 19 courses • 42,825 students

Learn more from the full course

The Complete Guide To Analyzing Single Family Rental Houses

How To Use Professional Real Estate Investment Analysis To Find Profitable, Cash-Flowing Single Family Rental Properties

04:43:26 of on-demand video • Updated June 2021

  • How to analyze returns for single family rental house purchases
  • How to compare rental houses to stocks, bonds, and other investment vehicles
  • How to turn an initial equity investment into multiple rental house purchases using the BRRRR method
  • The three key investment metrics you need to know to correctly analyze single family rental homes
  • How to quickly and easily find accurate, trustworthy historical data online (for free) to accurately project future cash flows and investment returns
English [Auto] All right. So next up we have the bird strategy. So we have buy renovate rent refinance. Repeat. So this is really that. Do it yourself strategy where you buy a property that might need some work but you can actually create value and add that intrinsic value by renovating the deal. Then when you renovate it and get it rent ready. You can rent it out to tenants. Now after a period of six nine 12 months maybe more in some cases the property is going to be considered seasoned by a lender. And that means that the lender will look at the property and say the rental income is stable and more willing to lend on that property. So at that point you can refinance the property at that newer greater value and get more loan proceeds and be able to do this over and over again and repeat the process. So just by talking about it it's not all that clear exactly how this works from a financial perspective. So let's jump into Excel and walk through an example of what this might look like. All right. So we're back in the SFR Excel resources file and we're on the BR strategy simplified tab and on the bird strategy simplified tab. We have four deals here. So what we're gonna do is we're gonna start with deal 1 and we'll walk through how all of this is being calculated. So let's start with deal 1 and in deal 1 we assume that we buy a property for one hundred thousand dollars and we have some closing costs here so we have closing costs of say five thousand dollars and our renovation costs are twenty five thousand dollars. So all in our cost of our project is about one hundred and thirty thousand dollars and our renovated value will assume is two hundred thousand dollars. So that's our intrinsic value. We've added a ton of value there. Now in order to do all this in order to pay for all of this really that one hundred and thirty thousand dollars total will assume that we took out an acquisition loan. Now many of these acquisition loans when you're looking to do an initial renovation are going to be based off of a loan to cost ratio. So the loan to cost ratio isn't necessarily just based on your purchase price but it's going to be based on your purchase price. Your closing costs in your renovation costs your total cost of the project. So in this case we're assuming we get 80 percent of the total cost of the project in loan proceeds. So about one hundred four thousand dollars is just 80 percent of that. One hundred and thirty thousand dollars. So that's that one hundred and four thousand dollars. And then the equity invested in this deal is twenty six thousand dollars. And again that's just taking that one hundred thirty thousand dollars and subtracting our loan proceeds. So that's our equity invested. So we've put twenty six thousand dollars into the deal. We've renovated the property and now it's worth two hundred thousand dollars. So then we assume that we rent the property out and we refinance the property. So we refinance the property we get it appraised and it's appraised at two hundred thousand dollars. So then the lender tells us that since this is a stabilized property we have a tenant in the property. We're not going to be doing any sort of renovations we're going to base this on your loan to value ratio and that's going to be based off of the total value of your property. So we'll give you 75 percent of the overall value of your property in the loan proceeds. So with that we'll assume our loan proceeds are one hundred and fifty thousand dollars which is just that 75 percent times two hundred thousand. So then with those loan proceeds we can actually pay off our first loan. So our loan proceeds for our first loan one hundred and four thousand dollars. Now we may have paid down some of that but we'll just assume for basic math that we haven't. So we'll assume that we pay off that one hundred and four thousand and we pull out cash we pull out forty six thousand dollars. So we initially invested twenty six thousand dollars and we pulled out forty six thousand dollars. So essentially the cash remaining that we have in the deal is zero. We put in twenty six thousand and we got back forty six thousand. So we still own the property we still own what is hopefully a cash flowing property but now that initial twenty six thousand dollars that we had turns into forty six thousand dollars. So then what you can do is you can go on to another deal. So you still own deal one but now you can move on to deal two. So deal two we can afford a one hundred seventy five thousand dollars purchase price because we have forty six thousand dollars of equity. So if we do all of this math here we assume that our closing costs are 5 percent of our purchase price similar to what we did for our closing costs on deal 1 the renovation costs are 25 percent of the purchase price the same as we did in deal 1 and our renovated value is twice what the purchase price is again the same as we did in deal 1. We can assume that if we have a loan to cost ratio of 80 percent that our loan proceeds will be one hundred eighty two thousand dollars at a one hundred seventy five thousand dollar purchase price and our equity in vested is going to be forty five thousand five hundred dollars so that uses that cash flow pulled out we can again do that same process again once we've rented out the property seized the property we can refinance this and now we have our loan proceeds at 75 percent loan to value of two hundred sixty two thousand five hundred dollars and the loan payoff is one hundred eighty two thousand dollars to get our total cash pulled out of eighty thousand five hundred dollars this time. So now with our equity metrics again you can see initial equity invested forty five five and cash pulled out his eighty thousand five hundred dollars. So now you own two properties and you've turned that initial twenty six thousand other equity investment into eighty thousand dollars. You still own two deals and you can go out and buy a third and you can continue to buy bigger properties as you go assuming these renovations work well and you're continuing to add value. So eighty thousand dollars cash pulled out the equity invested in this case for three hundred thousand other house with the same metrics is going to give you seventy eight thousand dollars of equity invested which uses up your cash flow pulled out you can refinance the property and this time we're pulling out one hundred and thirty eight thousand dollars of cash and then we can move on to deal four of one hundred and thirty six thousand dollars of equity invested and pulling out two hundred and forty one thousand dollars after the refinance. And with this method you can continue to do it over and over again. Again as long as you're consistently adding value that is the our strategy. Now you don't have to keep going. You don't have to continue to reinvest that cash. But many investors decide to do that. It's totally up to you. So now we're ready to move on to the next strategy which is going to be our debt snowball strategy.