I want to share with you one of my favorite strategies for acquiring rental properties. I have detailed many times the benefits of owning rental properties as well as passive income to help you quit your job.
In 2006, I bought my very first rental property and next four properties with this strategy. I am actually in the middle of this strategy on my property in Houston that I just bought. It is a very simple process but does take knowledge and skill in order to implement it well.
Are you ready for this strategy?
Increase Your Passive Income with:
Before I tell you what the acronym stands for, let me explain how it works.
In 2006, I bought my first property for $17,000 cash in Youngstown Ohio. Even though I lived in California I knew I could run my business remotely without my actual living in the area that I invest in. The best thing about Youngstown was the price to rent ratio. A $17,000 house would rent for $550 a month!
So I bought my first property for $17,000 cash and owned the property free and clear.
Once it was in my possession, my property manager and contractors got to work rehabbing and fixing up the property. After about a month or so, the property was rented for $550 a month.
After owning the property for about three months and having it rented, I contacted a local bank and started the process of refinancing the property so I could pull my cash out of the property. My goal was to pull out as much money as possible from the property by taking on a mortgage which the monthly rents would pay for.
I would then use that money to purchase another rental property and do it all over again!
Once the refinance process was done, I was able to pull out $13,000 to buy my next rental property. The monthly payment for borrowing $13,000 was only $115 a month. Since the property was already renting for $550, I was still making a positive cash flow of almost $400 a month after the mortgage payment!
I took that $13,000 and bought another property starting the whole process over again. From beginning to end on the second property took about three months to finish. The property was rented for $500 a month and I pulled out $20,000 of equity from the property when I refinanced this property as I did the first.
The second mortgage payment was only $220 a month so I still made a cash flow positive of $2800 a month after the mortgage payment.
With $20,000 cash, I bought two more properties that brought in $500 each per month. Remember, these properties are in a depressed market where prices of homes are really cheap but rents are fairly high compared to the price of the home.
So at this point, I now have a total of four properties that bring in a total of $2000 a month with two mortgage payments that total $335 a month. That is a positive cash flow of almost $1700 a month!
So here’s what the acronym means:
B.R.R.R.R. = Buy, Rehab, Rent, Refinance, Repeat.
The Benefits Using the B.R.R.R.R. Strategy
- You can buy properties cheaper if you’re paying cash. I have bought properties that needed work done on them and a conventional mortgage would not have approved because the repairs were to extensive.
- When you buy a rental property with conventional financing, you need to put 20% of the purchase price down to buy the property. For a $100,000 property, you would have to spend $20,000 to get the mortgage on the property.
- You can potentially have none of your own money in the property and receive cash flow every single month.
- You can repeat this process until you get 10 properties which are the max amount of mortgages you can have in one person’s name.
- Start all over again by acquiring properties in your spouses’ name or a partner.
- Increase your passive income dramatically over a very short period of time.
Let’s break down each step one at a time.
Step One: Buy a Rental Property
It doesn’t really matter how you acquire the property. If you pay cash, take out a hard money loan, or get a regular mortgage on the property, you can use this strategy. The main thing is that you need to own the property and have it in your name.
Recently I used a variation of the strategy on my primary residence where I live. After living here for five years, I have built up equity in the property from appreciation and also paying down the original note. After remodeling my kitchen, I refinanced the property because the value of the home was worth much more than what I owed.
I was able to take out almost $50,000 of which I am using to purchase my new rental property in Houston.
With the cash that I currently had and this new $50,000, I was able to purchase the Houston property for cash and got a significant discount. The property is worth about $220,000 that I paid $151,000 because I paid in cash.
I initiated the refinance of this Houston property that they after I close escrow and the property was in my name. Currently, I am in the rehab part of the strategy with this property and will hopefully be rented out within a couple weeks. Once that’s done, I will have a lease showing the income and be able to refinance it and pull all of my cash out of the property.
No matter how you acquire the property, the first step is to actually have a properties title in your name so you can start this process.
Step Two: Rehab the property to get it rented ready
During the due diligence phase before I actually bought the property, I got all the inspections, quotes, plans ready for the rehab. The longer that my money is tied up in a property, the longer it takes for me to buy another one so I try to make this rehab process as quick as possible.
In three days I had all the costs for the rehab accounted for and the contractors ready to move once I closed and have the property in my name.
There are many things you can do to the property to rehab it to make it rent ready. Rent ready means to have the property in as good enough shape as you can to get the highest amount of rent for the property from the tenant.
Try not to think of yourself as a homeowner but as an investor. You want the most bang for your buck and the most money back from your property. Most homeowners would remodel their entire kitchen with top-notch appliances, granite counter tops, hardwood floors, etc. but that is not what you should do.
Your main goal should be to do all the repairs necessary to get the highest amount of rent possible. Once you have done that, you are ready to rent the property.
Step Three: Rent the Property and Acquire a Signed Lease
Depending on the condition of the property and where the property is located, you may be able to start showing your property before you leave even finished the rehab.
For my Houston property, I need to replace the entire septic system and that would take 3 to 4 weeks. Knowing that the ground is torn up and the yard will not look 100%, I am still showing the property now because the property shows well enough and I will let people know that a new septic system is in the process of things installed.
Showing the property before it’s ready to be rented is a way to cut down the time the properties not rented.
There can be a negative effect though if the property is in not the best condition to show and the area where the property is has clientele who move very often.
For example, the market in Youngstown has a more transient type of clientele that moves from house to house in a short time-frame. So there’s a higher turnover of tenants and tenants are not willing to wait for a property when they need to move immediately.
You need to gauge both the property in the area to see if it is a good idea to list the property for rent before it’s actually ready. Also, if you are employing a listing agent, listen to him on his opinion if it is wise to list it sooner or later.
Step Four: Refinance the Property and Cash Out 75% of the Appraised Value
Using leverage is the fastest way to grow your rental business because you were using other people’s money. Leverage can be in the form of a mortgage from a bank, hard money loans, money from friends and family, etc.
Once you have the property rented you are now ready to close on your refinance of the property. You can start the refinance process before you actually have the property rented because there is time needed for the lender to put the package together.
It usually takes about 30 to 45 days for the loan to be processed completed. I personally want my money tied up in a property for as little time as possible so I start the refinance process as soon as I close on the property.
Depending on the condition of the property it can take 30 to 90 days to get rented. You want to make sure that you have the property rented before you close on the refinance because you can use that rent as income which will help offset your debt to income ratio.
The Banker basically wants to make sure that you have enough income coming in that will cover this mortgage if you are now getting as well as any other outstanding debts. They are trying to make sure that all of their bases are covered in they will have their loan paid off.
You can refinance the property for 75% of the appraised value not to exceed 100% of the purchase price plus your closing costs. The way this is done is an appraiser will appraise the value of your property and give the bank their appraised value. The bank then uses that number as the value for the property and will lend you 75% of that total and will give you cash out.
Step five: Repeat the process
This last step is as simple as doing it all over again. Not much more to explain than that.
Once you have mastered this process, you would have an army of rentals making money for you every day. Since the laws state that I can only have a max of 10 mortgages in my name, once I have 10 in my name (currently 4) I will buy 10 more in my wife’s name.
Just get started with your first rental property so you can get on the B.R.R.R.R. strategy. Take my FREE investing course to get a jump-start on your investing business with rental properties.
If you want to get a full education on the process of starting a real estate rental business, you can pick up a copy of my book “How to Quit Your Job with Rental Properties” here.