There are many different business models and methods to grow your portfolio and “build the empire”. One of the more common ones that (if worked properly) are used is called the “BRRRR method”. Today we are going to take a closer look at it and try to iron out some of the pitfalls that can occur when using it.
The BRRRR method is an acronym for:
So we will of course start off with…
BUY - This is where a proper and sound evaluation of the property and it potential will have to be assessed. We are looking for things such as strong odors, lack of updates, damage, badly done projects, is there potential to add a suite or an additional bedroom amongst other things.
There is a theory that you want to look for the worst home in the best neighbourhood as you will not be able to change the property’s location but you can change the property itself. When looking for your project to start, you will have to change you mindset from “OH MY GOD THIS STINKS LIKE SMOKE AND CAT URINE!” to “Oh, yes, this smells like there is profit to be made”.
You will have to be very real and err on the side of conservative when you are analyzing your numbers here. Be sure to factor in the holding costs such as (but not limited to): the electrical bills, vacancy time while you are doing the renovations and if it is a strata unit that you are looking at, be sure to factor in strata fees… Of course don’t forget to factor in the cost of the Rehab/Renovation; which brings us to…
REHAB/RENOVATE – This is where a lot of the money is made, BUT people also get carried away and end up eating up their profit margins. You will want to have a concise plan, set up your team and plan your actions. What trades do you need? What are you doing for your renovation? What are you upgrading? Remember the idea here is that we are looking to make things attractive and functional in as short time as possible, with the down time, this is eating your profits. A simple example for this is that you will likely be doing flooring and painting for the unit. Paint the unit first before installing the flooring so that you are not concerned with taping things off and this will also allow you to use a sprayer for the painted surfaces. If you are going the route with using a professional painter, this will also save labour hours, which will save you money as well.
There is an old adage that kitchens and bathrooms are what sell homes. This is generally a truth, so if you are wondering what to focus your efforts on those are the rooms that you will want to focus on. There are many ways to upgrade that will do the job. Some examples are, instead of tearing out the bathtub in the bathroom for replacement, consider re-spraying it (provided that the tub is in reasonable condition of course) or in the kitchen consider either used appliances or buying them as a set as you can get them discounted this way. A potential tenant or purchaser is usually taken back more by the appearance of stainless steel appliances than figuring out if the model you have is 2 years old.
You will want to be careful and honest with what you are taking on. There may be some amazing deals out there on the surface, but if you end up handling such major problems such as cracked foundations or mould issues, you may be biting off more that you can or want to chew.
Remember the idea here is that we want to improve the property but not go nuts doing so. Even items such as upgrading the light switches, cabinet hardware and lighting fixtures will go a long way in conjunction with paint. All of these upgrades will help you charge the top market rate for your rent and help attract a great and happy tenant; which brings us to…
RENT – The renovations have been completed. The final cleanup is done. You have a great property that is updated in a good location. You should be able to find a great tenant! Do keep in mind that being a landlord is not always a walk in the park so make sure to do proper background checks on who you will be accepting for your tenant. You will have to respond to any maintenance requests that may arise and it is like having a part-time job sometimes. You may want to consider hiring a licensed property manager for this as well so that you know it is always being handled by the book.
In our current market conditions here in Greater Vancouver, having a positive or even cash flow is VERY difficult and this is where we will be deviating from the usual BRRRR articles that tend to make this method seem like a quick rich scheme. The reality is that making money in real estate is not an overnight thing and needs to be nurtured to grow. Having a tenant will help you build equity in your property and will eventually move to cash flow; if you keep it longer as well will help you to purchase more properties and thus make it easier to grow your empire.
With a property that is not cash flowing, you need to consider that if you are behind $200 a month ($2400 a year) that you will be getting that back when you sell further down the road. Do you think that your property will go up in value by at least $2400 a year? That is a fairly safe bet.
REFINANCE – Now here is where we are trying to get and how to leverage your single property to become multiple properties. Having equity sitting in your investment is not really that valuable. You can use this equity though to refinance and use that money that you have generated to invest in another property. Most lenders will require an appraisal of a home for refinancing it; this is part of the reason that we do the Rehab/Renovate part above. This is also another reason to make sure to stay on top of your maintenance with your tenanted unit (plus it will make for a happier tenant that will want to stay long term and will take care of the unit as if it was their own). It is common for a lender be willing to lend up to 80% of the appraised value of the home minus what you owe on the first mortgage.
This is how you can use the current home(s) that you own to help build more over time. You will be able to take $100,000 or $200,000 from some of your others, use that as a down payment on a third and so on; otherwise known as…
REPEAT – If you have been successful in refinancing your investment property, you can use this method over and over again for your next investments. This method is a great way to advance your real estate portfolio. There are of course some risks involved as there are with any investment.
You must be sure to slow down and analyze your numbers and projections. If the numbers are not lining up for you and there is too much risk for the next project. DO NOT DO IT. There will be another one that will come up later and besides, you are still building equity on your first investment home. Make sure you speak with your team, such as your accountant, mortgage broker, realtor, property manager and any trades that you figure you will need so you can make the most educated decision!
If you have any questions about the items we have covered please feel free to get a hold of me either on my cell phone at 604-522-4777 or via email at firstname.lastname@example.org we are always here to help!