The BRRRR Strategy
A real estate strategy to recycle your capital while growing your portfolio
If you talk to any real estate investor that has a sizeable portfolio, odds are they are aware of the BRRRR strategy and its advantages — so this is really for anyone that doesn’t know and wants to learn.
When every property requires a significant amount of capital to purchase, often people question if it is even possible to buy enough real estate to retire with.
This is where mastering the BRRRR comes in to play. The BRRRR strategy allows you to buy property while preserving capital to buy more and more properties one after the other.
So, what is the BRRRR?
Let’s start with what BRRRR stands for: Buy, Renovate (Rehab), Rent, Refinance and Repeat.
This strategy is based entirely on your ability to buy in the wedge. Make sure you check out my last article discussing exactly that!
I decided I would walk you through the very first BRRRR I did back in early 2019. The figures in the example below might be a little outdated just based on how fast the market has been moving, but here is an example (picture, numbers and all) of a property I BRRRR’d last summer in Toronto. It is NOT a perfect BRRRR, and the amount of money I left invested in the property is the sole reason I stopped investing in Toronto. Read on to see…
(Disclaimer — the Toronto market is HOT right now, so it goes without saying I’ve moved on from Toronto for the time being, but I know a few individuals that are still able to do a BRRRR in the GTA)
Step 1 — The Buy
I connected with an investor who is especially talented at buying off market properties, and assigning on market properties in the GTA, and who helps other investors find similar properties.
As a result, I was able to purchase the below property for $660K in the west end of Scarborough last summer. For everyone that’s saying it isn’t possible in today’s market, you may very well be correct. However, people are still finding ways to make it work — but you may not able to refinance as much out as you would like.
The previous sellers had purchased another home and as a result, needed a guaranteed sale. They were willing to sell for less than what the market demanded in exchange for a clean offer and guaranteed close. At the time of purchase, there were strong comparables indicating that the value of the property was around $700 — $710K, so I essentially made $40K on the buy.
I figured if I could get about $850K for the property on refinance, my net investment would be minimal, and I could keep growing my portfolio. Read on to see how I was able to do that.
Total Investment: Down Payment + Closing Costs = about $150K
Step 2 — Renovate (Rehab)
This is where there is a lot of judgement and various scenarios are available. If you want to see exactly what you can do, check out this article I wrote.
Target After Repair Value
I started off by setting a target After Repair Value (“ARV”). As I mentioned above, this target for me was $850K ARV, so I looked at properties that had sold in the last 3 months for more than $850K. By examining the comparables, you can quickly gauge the required renovations to achieve your target ARV. You can then run your numbers to see what your net investment would be if you were to BRRRR based on the renovation costs required.
The comparables at $950K were 3+3 bedrooms with a fully renovated main floor and fully renovated basement. This was the most capital-intensive option available to me and given the uncertainty on the ARV I did not want to risk putting in so much capital.
The lowest comparable in my range was for a 3-bedroom 1 washroom main floor (partially renovated) + 1 ‘rec room’ in the basement. This looked like it would be very minimal renovation cost for me — but would not optimize rental income.
As such I decided I would target building a 3+3, with the main floor having minimal work, and the basement being brand new — the house would be worth somewhere around $850K. Appraisers very often value it below what the end consumer would purchase it — as you will see below.
Main Floor Renovation: $6K
While I knew if I renovated the main floor, I would be able to get top dollar and top rent for the property, I chose to keep the renovation minimal as the main floor was in decent condition to be a rental.
All that was required was:
- Drywall to make a third bedroom out of the dated dining space you can see below.
2. Flooring — Replaced some dated tiles in the kitchen and washroom with vinyl, and varnished the existing hardwood.
3. Removed an odd closet between two bedrooms to increase the square footage of each bedroom
4. Paint — you will almost always need to paint.
The above only cost me about $6K for the renovation, so it was a cost efficient main floor TLC.
Basement: $34K
I spent most of my capital renovating the unused basement to optimize the amount of rent I could collect, while keeping the ARV in mind.
I turned the basement into a three-bedroom accessory suite with 1.5 washrooms. I wanted to keep my costs low which meant only one kitchen, but I wanted to maximize the amount of rent and ARV I could collect. Therefore, I put in a three bedroom.
Total cost of the renovation: $40K ($34K basement, $6K upstairs).
The final house: 3-bedroom 1 washroom main floor, 3-bedroom 1.5 washroom basement.
Step 3 — Rent
I chose not to wait for the entire house to be done to start the rental process.
I rented the main floor within 1.5 months of closing on the house as there was very little work required. I chose a family of three for this and I likely went a bit under market rent at the time.
The total rent for the main floor 3 bedroom 1 washroom was $2100.
The basement renovation was completed within 2 months and was rented out within 3 months.
For the basement I went with a group of friends — a mix of students working part time and mid 20’s individuals working full time. It is almost definite that your tenant quality for the basement will not be as good as your main floor.
The basement was in high demand. As a result of it being a brand-new finished unit, I was able to collect $1850 a month in rent.
The total rent for the basement was $1850.
Step 4 — Refinance
This is where you will be happy that you did your research on comparable early on. Since I did my renovation to optimize the number of bedrooms and washrooms, I knew I had lifted the overall value of the house.
As a few months had passed, the comparable’s had changed a bit, which is rather common. The comparable’s indicated:
$950K — Fully renovated 3-bedroom main floor and fully renovated 3-bedroom basement.
$910K — Fully renovated 3-bedroom main floor, unfinished basement (this one was an odd outlier).
$875K — Early 2000’s renovated 3-bedroom main floor, 2 bedroom outdated basement.
The bank will (in most cases) require an appraisal to be performed to assess the value of the house. Appraisers almost never value the house as high as what the market would provide.
When appraisers come out they look at quite a few things such as the lot size, size of the house, what is new/renovated vs old and dated, what comparable properties have sold for and numerous other factors. These appraisers are often over worked doing multiple appraisals a day. If you are a real estate investor, you should consider putting together a package (no matter how rough) and pulling all this information together for the appraiser. You can then ‘control’ the information the appraiser receives (although they may still go do their own research and you can’t do anything about that).
Ultimately this is what I did, I put together my information, original condition, renovation, rents, and the three-market comparable I indicated above into a neat little package for the appraiser.
The result: My property appraised at $840K. While this wasn’t quite the $850K I wanted, I was able to stomach the $10K shortfall on the ARV and did not bother to shop around with the other banks. If you don’t get the appraised value you want, you always have the option of shopping around to different lenders (it is unlikely to change too significantly) or waiting 6 months to try again.
Here’s a quick summary of my numbers below. Note — this is very high level. Obvious things like holding costs, fees to discharge the mortgage etc., have been omitted for simplicity, so I put a 10K buffer instead.
Repeat:
As a result of getting the ARV I was targeting, I was able to walk out of that investment with a $60K net investment. Not bad for my first BRRRR and a cash flowing house in Toronto, but just not perfect.
If anyone wants to know how I arrived at that number — feel free to DM me on Instagram @mayut25, always happy to chat.
The importance of minimizing your net investment, is you are then able to take those funds and move on to the next property.
In this case, I was able to take that $144,000 — pay down some of my financing (money I borrowed to do the transaction) and use the remainder to continue BRRRR’ing.
Some properties like this one you end up leaving money in. Some properties you end up walking with more money than you put in. Either way, leaving $60K in a property seems like a much more reasonable way to grow a real estate portfolio than leaving $200K (my initial investment).
For everyone thats wondering, no, I did not have $200K sitting around to make the investment. Creative financing can take care of that problem :)
BRRRR’ing Today:
Soon after, I did stop looking at the Toronto rental market. I realized things were picking up and that for the growth I was aiming to have, leaving $60K in each property felt a little bit rich. In addition, I am a cash flow guy rather than a ‘price appreciation’ investor. I wanted to chase the cash flow and there are a lot of secondary markets out there with much better cash flows.
Stay tuned — one of my next few articles will definitely be a market assessment on at least one or two of those cash flow markets.
Also — if you like these sort of articles (with real examples that I’ve actually done ) shoot me a message or leave a comment and I’ll try to do this more often! Too often we withhold our own successes and failures and prevent others from learning. In addition, if you are a REI — I’d love to connect and hear what you are doing, so shoot me a message!
