5 Steps To Turn Debt Into Wealth | EP. 76

Hi, guys. Welcome back to another episode on Real Talk and our Freedom Vlog. Today I am here with cj. He is primarily in the fci, which is Freedom Capital Investments Company, but he also dabbles in some other real estate personally himself. And today we're going to be talking about the BRRRR method, which he actually just told me he just finished a couple. So this is perfect timing to be doing this.

Yeah. Excited.

Do you want to start with what is the BRRRR method and what does it stand for?

Yeah. So this has gotten really popular, you know, within the last couple years within the biggerpockets community as a way to kind of recycle cash and be able to acquire a large amount of properties with. With that little amount of cash. So it really is just stands for buy, rehab, rent, refinance, and then repeat the process. So what that means is you're going to buy a deal, typically cash, whether that's with your own or private money, hard money, you are going to buy that at a significant discount or something that has a high value add component. So you're then going to go in and do the rehab for that property, then you're going to get it rented to tenants, whether that's long term tenants or Airbnb short term tenants, and then you are going to go and do a refinance. So you're hoping that at that refinance point, they're typically going to do a 75% loan to value and going to be able to give you most of your capital back because hopefully you've forced enough equity to get the majority of your capital back and they will get a loan on that property and you'll have no money left in the deal. And then you're going to go repeat the process into another property.

Perfect. So now when you're buying, you kind of touched on this a little bit. You typically want to buy, you know, a distressed home or a home or property that just generally needs a lot of work.

Yep.

And the reason for that is so you can do that rehab. Now, one of the things, another thing is renting. You know, why. Why do you want to rent it before you refinance it?

Yeah. So typically, from an appraiser's perspective, like one of the methods that they will be using to value the property is going to be from the amount of income, like the income approach, and how much capital is being brought in by that property now.

Okay. And then so you were also talking about, you know, how you can kind of get started in this and you Already mentioned cash. What are some of the other ways that you can get started in this method?

Yeah, so you know, I would say for some people this is intimidating because typically in order to make this work, it doesn't have to be that, but people will buy the property cash on the front end because maybe it's in such a distressed manner that it's hard to get a traditional loan on it. But also there's less closing costs when you're closing cash and hopefully you're going to be refinancing six months later once the seasoning period is done. But to answer your question, the other ways is you can borrow capital by any means necessary. So that could be private money, that could be hard money, or that could be a equity loan against maybe a heloc, like against your primary residence or another property. I just finished a brrrr and actually used a securities backed loan. So I took a loan against my stock portfolio to fund the purchase of the property cash. So that's another way you can kind of go however that is some people will use life ins policy. There's a lot of different ways you get creative with pulling capital.

Okay. And so finances is kind of like your guru, right? Like that's what you love. So for those who might be new to this, what is the difference between private money lending and hard money lending?

Yeah, so private money lending can be your could be a family friend, a family member, a friend member who they're just going to charge you a certain percentage and you're going to be able to pay them back. Hard money are people who are in the, I would say more in the business of lending for real estate transactions. So they're probably going to be a little more sophisticated and typically a little more expensive because they're really going to take the time to analyze the deal. But also they're going to be more flexible on what they're lending on. So they're going to typically charge points on the front end. So a couple of points potentially, or maybe just one and then maybe a higher interest rate than you'd be able to secure with just traditional private money lending.

Okay, so now this is a question that I thought of whenever you brought up the point of it could be a little more difficult to get a traditional loan to start with. So now they have like real estate investing loans that you can get. How is that kind of like similar? It's going to be a little more difficult at the front end because property is in could be in such distress or are they a little more lenient yeah.

So the reason that a lot of people won't get a. There are like construction type loans, but they may be a little in, they may be a little more stringent on how you can pull the funds to fund the rehab, but really it needs to potentially appraise. Right. So if you're buying a hoarder house or something that's been vacant for a certain number of years or whatever that is, it just may be difficult going through a traditional bank and then an appraiser appraising at a high enough point for you to be able to get a certain amount of funds to go do this.

Yeah, perfect. So now when you are renting, what kind of, you know, information do you look for? Like how do you set the rents and how do you determine, you know, those kinds of things?

Yeah, so this, you know, comes a little bit to market knowledge, but if you don't have that, you know, there are definitely estimators out there. A lot of people use Rentometer. You can go on to things like apartments.com or Zillow and see what the rentals are being listed at. Just to get a better sense, you can contact property managers local to the area and you know, just to confirm what you're, what you're thinking you're going to be able to get for rent for those, you know, once you've repaired the property.

Perfect.

Yeah.

Okay, jumping back to kind of like the refinancing portion a little bit. Sorry, I'm kind of all over the place a little bit along with everyone. So I knew the gist of it. But in regards to refinancing, I know you said one of the metrics that they're going to look at is the rent and the incoming rent and all that. What other metrics do they look for that you could think of?

Yeah, so the other main for residential property is going to be the sales comparable. So if you purchased a three bed, one bath home and you added a bath during your renovation to get a higher sales comparable, they're going to bring that into consideration with all the other three bed, two bath homes that have recently sold within a certain mile radius within the last 6 months to 12 months of depending on how many sales are being generated in the area that are comparable to your property. So it comes down, you know, they're going to look at the square footage of the property in addition to like the high level metrics of how many baths and beds to determine what, you know, what your property is going to be valued at.

Okay. And then in doing that, you know, you talk, you touched point on appraisals a little bit. Now that is also kind of like a similar thing. Mark and I actually just did a podcast on this, I believe last week maybe about, you know, typically they will find, you know, apples to apples where you know, like a similar kind of renovation or something like that. Like they're not going to find a property that is still maybe vacant or abandoned and still needs a lot of work. They're going to find something that's similar to the renovation that is.

Yeah, they're going to look for as close of comparables as they can. And if they can't find exactly that, like maybe a. There's not a lot of four bed, two bath homes being sold. They'll have a certain value of an additional bathroom or, or a certain bedroom of what that price, you know, what that additional bedroom is worth and add that to whatever the appraised price is for the home.

Okay, so now why is this becoming such a popular trend lately?

Yeah, so I think I kind of said it's because you can acquire a lot of properties with a little amount of cash out of your pocket. So I think the best way is maybe to just explain a real life example. I'm happy to go through like my last property that I did. I think it would help, you know, listeners kind of understand what the process kind of looks like. So I bought a distressed three unit off of a wholesaler for $91,000. And one of the units was in a, had been completely left abandoned and needed to have everything, you know, removed from the property and completely renovated because it hadn't been touched in a number, you know, dozens of years. So it took. So I bought it for 91. I put $8,000 into the renovation of that unit and the exterior. So I was all in for $99,000. And then I went and got the whole property rented up to $1,700 per month. And then when I went to the refinance, the bank said, well, because this is a multi unit property, we are willing to give you 70% loan to value for the property. And the property actually appraised at $140,000. So I was all in for, for 99,000, but it appraised at 140,000. So the bank said, we will give you a loan for $100,000 and you'll get a loan on this property. Right. To pay. And that payment is now $800 a month. But I'm bringing in $1,700 a month. I got the initial $100,000 back that I had into the property. So right Now I have $0 of my own capital left in this deal and it's cash flowing, five, six hundred dollars a month. And now I can take that $100,000 that I used and go put it to the next property. And that's the power of the brrrr is because I have a cash flowing asset that has none of my own capital left in it and I'm able to go repeat the process with another property.

Perfect. That's an amazing turnaround. So one of the things with the method is, you know, upfront it's going to cost you, you know, up until you're refinancing and once you refinance and everything, you're going to get that cash flow like you were just talking about. So but up front, you know, it's going to seem like a lot because you're putting time and money into it, but you're going to get all that back fairly quick. But now, so. And you know, once you started, you know, how long did that take you to do all that?

Yeah. So a typical bank actually requires what's called a seasoning period, but basically that you have held the property and stabilized it for a certain period of time. And this is going to vary a little bit, bank to bank or maybe with a credit union or if it's residential versus commercial. But the typical is six months. So you're not going to be able to refinance that property. Even if you rehab the property and it's stabilized three months later, you're not going to be able to get a traditional loan on that property for six months after you purchased it. So you need to account for that in your holding costs. Right. However much your interest you're paying to your private money lender or whatever interest you're paying, you got to take that into account that you're not going to be able to really refinance for at least six to seven months after you've purchased the property originally.

Okay. And then, you know, what are some other like financial benefits that go along with it? Maybe any like kind of tax benefits or anything like that?

Yeah. So I think, you know, the advantage is that if, you know, in that example that I brought out that I got that additional 100k back, I have 40k of equity in that property that will just continue to, you know, that was forced equity that I won't necessarily be tax taxed on. But let's say if that property had appraised for I don't know, 160. Right. And I was getting an additional $20,000 or $15,000 back. That money would be not like tax free because I'm getting a loan. That money is coming back in the form of a loan. So I am not having to pay taxes. And it's not a capital gains event because I'm getting debt technically. So it's kind of a weird concept. But that's a huge financial benefit to this from a tax perspective. But I think it's just people really like it because a lot of people don't necessarily have a ton of capital and it allows them, you know, traditional real estate investing is 25% down. 25% down. Right. Like, and even if you're only buying 100k properties, you know, if you have 30k sunk into four deals, if you only had 100k, you're done. Right. You know, until it may take a long time period to build the cash to go purchase another. Right. So this allows people to accelerate how quickly they're able to, you know, acquire a portfolio.

Yeah. One of the notes that I had on here was a high return on your investment and a fat and fast cash back compared to most. And you know, this isn't, this isn't the same thing as a flip because a flip, you know, you're acquiring it, rehabbing it and with an end goal of selling back retail. This is, you're, you're keeping it for your portfolio.

Yeah. And I think that's a big factor. Right. It's, are you willing to, you know, I could have sold that property and made $40,000, you know, quick, but I would have had a taxable event. Right. Unless I was going to 1031 that into a different property. But I am, you know, for better or worse, I'm trying to do more long term and build the portfolio out. And so I'm going to, I would rather have this slow drip monthly of however many hundred dollars a month, but know that I have that equity. Right. Eventually and the property is just going to appreciate, start paying down the loan and I'll, you know, make more of that delta in five, 10 years down the road. So it's just a different, different way of going about it.

Yeah. And something else too that you just said that is important to know, I think is, you know, you said that the home value or property value is going to continue to increase year over year. Rents also increase year over year, which means you're going to your cash flow every year or every other year pending how you Your rent is also going to increase with that and you're going to generate more cash flow over a steady period of time. And then whereas selling, you know, if you were doing the buy and flip process, you would not, like you said, with taxes, but you also then have to pay, you know, the agents, if there's realtors or real estate agents involved that you also have to pay.

Yeah, yeah. It just depends where you're at, I think, along your financial journey and what you're trying to accomplish. Right. A lot of people get into wholesaling and flipping early on because they're trying to build that cash nest egg so that they can go do burrs or long term holds, but they need to build that cash quickly. And that's how people do it. Right. With flipping properties. But it's a very active approach. Right. You have to be in the business to be making more money. Whereas once you kind of graduate to brrrrs or long term rentals, it's more about wealth creation and it's a little bit more passive, but it takes more capital to build that out. Right. So it just depends where you're along your financial journey.

Yeah. And also what your financial goals are too.

Yeah. Yep.

Okay. Is there anything else that you can think of in regards to the BRRRR method and how, you know, you can turn your debt into wealth through this process that we maybe haven't touched on?

Yeah. I would just say I think a lot of people don't think that it is a possibility to do a BRRRR because they don't have the capital. Right. They don't have $100,000 or $200,000, whatever that may be, in order to purchase the cash on the front end. But I would say everyone has that ability. You just haven't necessarily met that opportunity yet. So whether that's talking with a private money lender, a hard money lender, or a specific credit union that has a program, whatever that may be, or you know, a family friend, people have money sitting on the sidelines and if you're willing to give them a certain return and that still works for your end goal, you can make it happen. So I think you just have to learn how to get creative with finding that initial capital.

Yeah. I guess two other things that we haven't really touched on yet is that our listeners may be interested in hearing are how did you find or acquire the property or properties that you are wanting to buy for this?

Yeah. So people find them all different ways. Right. There's Facebook groups with wholesalers listed you know, listing properties, wholesalers, some people get as sophisticated as doing their own direct marketing or cold calling campaigns where they are trying to find distressed sellers and purchase their properties off market. Some people also are able to find properties on the MLS that may be able to fit those metrics. It typically is a little bit more difficult to get something at such a discount when it is on the mls, but it is possible. Just depends on the deal. Yeah.

Have you had any experience with going through auctions at all with this?

I haven't. That's another. Yeah. Going to your local county and understanding what things are selling, that's another avenue. Something I haven't done.

Yeah, yeah, I have. Not personally yet, but I know there's another podcast that I believe Aaron and I did on how he acquired his first investment property and it was through an auction. He actually purchased it on accident. So that's a funny podcast and a good listen if you guys are interested in that. Um, I'll link that above. But you know, going back to this. So that's how you can acquire. What about, what would you have to say as far as the rehab portion goes?

What? Oh, how to fund it, how to.

Fund it, or you know, I guess any kind of like advice on how to tackle that portion of the BRRT method.

Yeah. So I think just walking that property when you're in your inspection phase with a property manager or a contractor that is going to be carrying out your rehab is going to help give you rough estimates for everything that you're wanting to do for that property. Right. Like for myself, I'm not good at construction or labor intensive efforts or even estimating what those will be. So bringing someone along that is skilled in that, that's going to be able to help you estimate those costs is crucial to kind of, you know, falling in line with whatever the budget is for that project.

Okay, perfect. I think that's a good note because, you know, you could be thinking, well like, oh, I need to do this or this needs done, that needs done. And maybe if you take an expert contractor or PM with you, they're going to be like, you know, that's not a necessity. That's more, you know, just for like looks or something like that. So not everything always needs to be redone unless, you know, you have the ability or want to do the entire full rehab. That's another thing that we have also discussed in another podcast or, you know, recycling some of the things, if you can, to try to make your rehab budget less, if possible.

Yeah, totally.

All right, well, that is all that I have on the Brrrr method. I know I learned a couple of tidbits from it. It's been very, very beneficial for me. Do you have anything else that you want to add or kind of last notes at all?

No, I say just get involved. Right. Constantly I'm talking with people who want to get involved with real estate. I would say just try for a smaller lower end property that you can't lose too much money on and just get involved because it really does there. You know, I started about two years ago with one and I'm at 11 properties now. It really does snowball and you figure out how to keep acquiring and building that portfolio. So I would just say take action.

Yeah. And it's going to be a learning curve. I don't think that there has ever been one person that has started with one their first property and knew everything right off the bat and they're. Their budget was right, precise and everything. So you know, you are going to learn things with each property as you go through the process and you'll learn what techniques work best for you and you know, kind of what goals you would like to set from there.

Totally. Yeah.

All right. Well, we always like to end these with Invest Smart, Live Happy.

Thanks you guys.

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