Updated: Oct 18, 2019
No, this blog post isn’t anything to do with shivering or being cold as the name might suggest :) Rather it’s a popular real estate investment strategy that myself as well as many other successful investors have been following for years. I’ve briefly mentioned it in previous blog posts but the more I talk to first-time or newbie investors the more I realize that the BRRRR method is not as common knowledge as I previously thought. And it should be! It’s a great way to recycle your cash over and over again to buy multiple investment properties.
The #1 question I get whenever Dave and I buy another house is “But how can you afford it?”. Simplest answer - we can’t, well, not really. We don’t have endless amounts of money for down-payments like some people assume. Rather we try our best to recycle the same money into down-payment after down-payment.
Curious about the BRRRR method yet? Let me break the acronym down for you:
Find a single family house/duplex/multiplex in a decent location that needs some work. This ‘work' does not have to be substantial (it can just be some paint and new light fixtures sometimes!) but it needs to be enough where you have the opportunity to create value. Many times this is a property that other buyers have overlooked because it’s not “move-in ready” quality. You may have heard the expression “Buy the ugliest house on the nicest street”. Well that’s essentially what you want to do because the nicer houses around you will pull up the value of your house. So when you do find that gem of a house that is undervalued because it’s the sad ugly swan - jump on it.
This is where the fun begins because this is where you get to add your value. Again, the renovations do not have to be over the top. I’ve often found that the most impactful or best 'bang for your buck' renovations are: fresh paint, ripping up old carpet and putting down decent laminate flooring, new updated light fixtures, new kitchen countertop, and if you can afford it - stainless steel appliances. I’ve recently discovered a discount appliance store that takes brand new appliances that have small dents or scratches in them and resells them at a fraction of the cost. This is a good way to get those new nice appliances without paying full sticker price.
Once the renovations are complete, take some pretty photos, throw an ad up on Kijiji or whatever your local rental site is and get that baby rented! Since you have just completed work to make the property more appealing you can likely increase rent from whatever it was before you bought it. Look online to compare rent prices or ask your neighbours what they might be getting in rent in order to determine fair market value. Once you’ve decided on this value and found new tenants, put your tenants into 1-year leases (this comes in handy with the next step) and start collecting those cheques!
Without this very important step you would continuously spend your own money on each property and eventually run out of steam. However refinancing is the step that many people don’t understand when it comes to investing. I will try to keep it as simple as possible but it is always best to talk to your mortgage broker about this essential step as different banks have slightly different practices when it comes to refinancing, and each one will have their own hoops to jump through. Essentially though, a refinance is this: Once your renovations are complete (and ideally before the tenants have moved in) you get your mortgage broker to send an appraiser over. The appraiser will view your property (when it’s looking it’s best!) and decide on a number this property is worth. So let’s say you bought your house for $200,000; put $15,000 into renovations and then got it appraised for $260,000 post-renovations. That means through your 15k you actually created 60k worth of value. The bank will then give you 80% of the new value (260K) less your outstanding mortgage by paying out the old mortgage and putting the new 260k mortgage on. This means your monthly mortgage payments will increase slightly but ideally your monthly cash flow from the tenants will cover this increase of mortgage anyway. And then the bank will give you that equity you’ve created as cash for you to put right into the next property!
**An important caveat to note here is that in order to refinance (without penalty!) before the standard 5-year fixed term is up you should request to be in an open mortgage. Open mortgages may have a higher interest rate but will be worth it if you plan to refinance and don’t want to pay thousands in mortgage penalty fees. If you are in a closed mortgage then you'll likely have to pay these penalty fees, though sometimes it is still worth paying the penalty to pull your money out and move onto the next investment.
Rinse and repeat the top 4 steps with your same down-payment recycled cash! No need to dig into your own pockets for this dough as that isn’t a sustainable business model anyway. At some point you will always run dry. But if you are finding the right “gem” properties (read: slightly rundown) and following these same steps you should be able to keep investing infinitely! At some point (read: number of properties) the bank will likely force you to switch from residential to commercial lending and the refinance step will look a bit different. However you just adjust your investing strategy slightly and keep on going!
Stay tuned for next week’s post where I break down the numbers of a recent BRRRR I helped my out-of-town investor clients achieve.
Which leads me to my next point - you don’t need to live in the city you’re investing in to carry out a successful BRRRR! My clients did all the above steps in about 6 weeks time and now own a cash-flowing property for $0 of their own money. And we are already looking for the next one!
Let me know if you have any questions about the BRRR method - I always love helping people carry this investment strategy out successfully!