Previously, I have defined and explained the BRRRR method of investing in rental real estate. To recap that article, here the steps of this sequential method, and the summarized importance of each:
Buy – a smart buy doesn’t guarantee your profits at the end of the rainbow, but a bad buy can certainly lock in losses, so “put yourself in a position to succeed.”
Rehab – this is the step where you typically get to force the most Appreciation into your property, by choosing the right elements to physically improve upon, in order to optimize your rental income.
Rent – the rents you get, and how you structure your leases, will define your cash flow and further shape the value of your project.
Refinance – if the previous steps were executed well, this step allows you to both pull out most/all of your initial cash investment, and drop the asset into long-term, low-interest financing to help generate cash flow.
Repeat – we now take our learnings and go back and repeat the steps with another asset, using the efficiencies and expertise we gained to replicate and build upon our cash flow portfolio.
Each of the above steps can be a project in and of itself, taking months to complete before officially moving to the next step. However, the key is becoming efficient at the steps, and even taking clever short-cuts, when the opportunity arises. It’s one thing to read and understand what each of the 5 steps of BRRRR means but it’s entirely another thing to take action and become proficient at each of them.
And let’s face it – most of us don’t start in real estate with Millions of Dollars to buy whatever properties we want and build a cash flowing portfolio all at once. The overwhelming majority of us start with more modest means, so we need to use our cash wisely, which often involves debt/leverage, so we can stretch our cash further, and get it back to reuse it again. This article is designed to help you reuse your cash and take action on the path to what can be a fantastic, kick-butt rental portfolio in ‘only’ five years.
Action Steps for Building a Winning Portfolio
Here are the key action steps for building a cash flowing portfolio in 5 years by reusing cash/capital:
- Corral your Cash/Capital
- Take Stock of your Human Resources
- Choose your Asset Class
- Kick-start BRRRR
- Optimize your Performance with Shortcuts
Action Step #1: Corral Your Cash/Capital
The first action step you should take is to gather up the cash that you will be able to use for your first purchase. Likely, this will include the cash you will need for the earnest money deposit, the down payment (rest of the funds needed to purchase the property), some or all of the rehab funds (depending on whether your lender is providing rehab capital), and carrying costs to take you to the point of refinancing or where the property is cash flowing.
Your cash may be sitting in your checking or savings account already, but just as likely, it may not be. At this point, the purpose of the action step isn’t necessarily to liquidate everything and put all the cash into a briefcase. Rather, you’ll want to identify what sources of cash are available to you, and have a plan to make sure the funds will be readily available when needed for the purchase. For instance, money tied up in the stock market, or a CD, will take longer to get out than money laying around in your savings account (earning almost nothing) or your checking account (earning even less). Below are some of the sources of cash or capital that you may want to consider. Next to each item, add the amount of funds that could apply to you, as well as a rough timeline of how long it would take to get the cash available for closing on your purchase (i.e., 3 days, 2 weeks, and so on).
Here is the list – – some of these sources of cash might surprise you!
- Cold Hard Cash (cash on hand, or in savings or checking accounts)
- Stocks, Bonds, Mutual Funds, CDs
- Secured Lines of Credit (backed by money you have in the bank)
- Unsecured Lines of Credit (aka “signature loans”)
- HELOC (Home Equity Line Of Credit) or Equity Mortgage against other real estate
- Borrow against Vehicles or Business Equipment
- Borrow against Life Insurance Policy
- Sell off Collectibles or personal property
- Credit Cards (especially those offering introductory 0% interest for the next 12 months)
- Friends & Family
Clearly, some of these sources are better/safer than others, but I have seen each of these be successfully invested when responsibly deployed. Based on your needs and risk tolerance, you may want to eliminate some of these, even if you have them, which is entirely fine and up to you. The intent is to make smart financial decisions to improve your quality of life, not leverage everything you have access to, which could create stress and negative energy, as opposed to productive and positive energy.
Corral the cash sources above, and focus on those sources where you can get to the cash within about two weeks. Tally up those amounts, and that’s what you have to work with for now. If this amount provides enough money to be able to cover the cash needs above (earnest money, down payment, rehab, carrying costs), then you are ready to move on. If not, work in parallel to start freeing up your longer-term cash (sources not available within two weeks), or start the processes to make them available (initiate HELOC paperwork with the bank, talk to more Friends/Family, etc.).
Action Step #2: Take Stock of Your Human Resources
When I say ‘human resources’, I’m not referring to the prototypical meaning in the corporate world – an HR Department that does the hiring, firing, benefits administration, and such forth for the employees. Instead, in this step, I want you to take an inventory of the people resources that you know, who can assist you in performing these action steps.
You may have already tapped into a few of these human resources in the previous step, by talking to friends and family members about potentially loaning you money, or investing side by side with you. Or you might have spoken with your banker about a HELOC, refinance, or a second mortgage on your primary residence. In addition to them, there are many other folks you’ll want to talk with, some of whom you likely already know, and others that you will want to find/meet and build a professional relationship with. Here are some examples of additional people resources that you may need to help you optimize your success:
- Real Estate Mentor or Coach, to guide you through it all
- Wholesalers & investor-minded Realtors, for finding good deals
- Private/Hard Money Lender for the Purchase (and possibly rehab) Loan
- Contractors and Tradesmen to perform the Rehab work
- Property Management Company or Realtor to help you Rent the property
- Mortgage Broker or Banker for Refinancing the property
- Bookkeeping, Project Management, Tax Accountant, and other Professionals
Use the list above, or make your own list of the key people resources that you need on your team, and actively make a point of locating them and getting them on board with you and your business plan.
Action Step #3: Choose Your Asset Class
By now, hopefully you have a good idea of the sources, amount, and timing of the cash that is available to you; and you have sought the counsel of a real estate coach or mentor that can guide you through the process and help you avoid the many mine-fields out there. One of the things a good coach or mentor will do is steer you towards the types of investment that you are best suited for, based on your knowledge, risk tolerance, amount of funds, market dynamics, etc. Even within the area of Rental Real Estate, there are a number of choices to make, with perhaps the biggest one being the asset class that you will start investing in.
By far, the most common asset class for most investors getting started in rentals, is the single-family residence (SFR), on a long-term rental. Think of a house or condominium, where a family will typically sign a 6-24 month lease. But there are other asset classes, and sub-classes, which can also generate solid cash flow. A partial list is below:
- SFR – Long-term Rental
- SFR – Short-term Rental (vacation rentals)
- Multi-Family – 2-4 Units
- Multi-Family – 5+ Units
- Office Buildings
- Retail Plazas
As you see, there are plenty of asset classes to work with, which can actually add confusion to the beginning investor. My advice would be to stick with one of the first three bulleted options above. At the time of this writing, my companies own rentals in the first six bulleted options, and we are in escrow to buy an Industrial building with a built-in tenant (which would fall into the last bullet point above). But unless you already have unique knowledge in these lower bullet point classes, I would stay with the top three bullets for a least your first several projects.
Most people can envision the typical long-term rental of a house, condo or tri-plex. So let me digress for a moment to show you a sub-asset class of SFR that you might not have thought about – Short-term rentals.
Short versus Long-Term Rentals with the BRRRR Method
As we’ve already mentioned, when many people think of buying, rehabbing, and renting a property to generate a passive income and build wealth, they usually think of the situation they’re most familiar with; long-term rentals of 6-24 months. And yet the short-term version of this asset class has become a very popular model in recent years. Think Airbnb and vacation rental properties, where typical guest lengths of stay are a few days or possibly weeks.
You might think that such a rental situation would be more hectic and costly. After all, with so many people moving in and out of your property on a daily or weekly basis, it must be more difficult to manage, right?
Yes, it is.
However, there is good news here. Vacation rental management companies specialize in helping you in this exact situation. They advertise your property on various websites that cater to people looking to rent a home-away-from-home, schedule the bookings, collect the money, clean up afterward, handle basic maintenance concerns, and essentially operate as an all-around concierge for your guests while they’re staying at your place.
And what’s the up-side to all this? In my video, I mention an example in Sedona, Arizona. We have a 2,000 square-foot home that we could probably rent for about $3,000 per month with a standard long-term rental strategy. But with the short-term rental strategy we’re using?
$9,000 gross per month.
Of course, to achieve that much higher rental amount, we had to tweak the BRRRR method as previously explained. In addition to hiring a vacation rental management company to handle the advertising and bookings, we did more than just rehab the home during the “rehab” step. We added fun and luxurious features such as a fire pit and a hot tub to make it that much more appealing to individuals and families looking to getaway. It’s also fully furnished, as you’d expect for a vacation rental home. So, in addition to a typical rehab, we also added a washer and dryer, all furniture, bunk beds in one bedroom so that room alone could sleep 5 people, household supplies, and a digital front door lock to control and monitor access. As I mentioned in the video, the only thing our guests need upon arriving is their toothbrush.
If you choose the right location and make these relatively easy enhancements to your rehab, you can turn your properties from modest cash flows, into true cash-generating machines!
Your action step in Step 3 is to select the asset class that you will be targeting for your next investment.
Action Step #4: Kick-Start Your BRRRR
Now you are ready to get your first property and truly start building your kick-butt portfolio. You will want to step through the five sequential steps of the BRRRR method; and if you need a refresher on any of the first four steps (BRRR…), you can find that article here.
Now let’s focus on the key to building your kick-butt portfolio in 5 years – the repeatability of this method. This is particularly important if you, like us, don’t have unlimited funds to spend, and need to reuse your capital to build your portfolio, as we described earlier.
Building a Formidable Portfolio in 5 Years
What if you could create an amazing portfolio of properties that are all generating cash-flow, while at the same time appreciating in value, and you could do it all within five years?
Here’s the scenario. Let’s say you only work one deal at a time, based on the funds and time that you have. You buy, rehab, rent, and then refinance one property before you move on to the next one. Let’s also target the time-frame to go through the entire cycle at 6 months.
Why 6 months? Well, let’s see if this sounds reasonable to you . . .
Starting from scratch, let’s assume it takes you one month to find and close on a property with the price, terms or potential that make it a smart purchase. Your local wholesaler or investor-minded realtor can assist you with this in Step 2 above. Then it takes three months to rehab and an additional two months to start seeing rental income, while you work on the refinancing at the same time.
Does that seem doable? We think it is for most SFR and Multi-Family assets up to 4 units. And we have done it, completing our latest vacation rental in just 3.5 months total. That timeframe included identifying the property, buying it, remodeling it, and renting it out. We already had low-interest, long-term financing on it, so we were able to use a short-cut on the refinancing portion. More about the power of short-cuts in a moment.\
So, using 6 months as the goal to complete each BRRRR cycle, you would have ten cash machines working for you in five years. And if you’ve executed each project well, you will have retrieved your cash out after each deal, via the refinance loan, which is usually 70-75% of the appraisal value of the property. Therefore, even with modest appreciation over that time frame, you would have 10 properties that are generating cash flow, and each property would also have at least 25-30% equity in them!
Now THAT is Kick-Butt!!!
Action Step #5: Optimize Your Performance with Shortcuts
Here’s more good news; it doesn’t always HAVE TO take as long as six months to go through the BRRRR cycle. As you get more experienced, you may be able to shave time off of the various steps. But even more interestingly, what if you can find shortcuts to allow you to ‘skip’ one or more BRRRR steps??
Believe it or not, you can find properties with at least one of the “R”s already completed for you.
Here’s the importance of what I just said: In order to speed up the process of building your mini-empire of cash-generating machines, you can look for properties that already have one or more of the “R”s in place.
Some examples of this might be that there is a property that needs no rehab at all. It’s already more or less rental ready. Imagine finding such a property; that feature alone would take three months off that six-month cycle in our example above. There is a value associated with each “R”, and you can choose to either do that “R” yourself or take a shortcut, if you can find a property with it already done for you.
For instance, on one of our Scottsdale, Arizona short-term rental properties, we recently experimented by providing a turn-key BRRRR property for our buyers. We bought the property with good seller financing already in place, and it had been recently updated in many areas. We did a quick remodel on the remaining areas, including re-plastering the pool, and furnished it for a vacation rental. We hired a property management company and had guest bookings on the property with 6 months of traction before we advertised it to our list of buyers.
Since we had taken the time, money, and expertise to handle the first 3 “R”s, the buyer gets a property that is already rehabbed, has advertising in place and rentals ongoing, and already comes with low-interest financing, so all the buyer really needs to do is close on it and start the “Repeat” step of BRRRR. Oh, and because we had added this value and provided our buyers with an opportunity to take 3 significant shortcuts on the BRRRR process, we had multiple offers on the property.
If the concept of building a kick-butt rental portfolio interests you, hit us up. Shortcuts or not, we can help you with those “R”s along the way or we can point you in the right direction for resources you may need. We’d love to help you reach your real estate investing goals.