Reid Hoffman, one of the founders of Linkedin, once stated “Entrepreneurship is jumping off a cliff and assembling a plane on the way down,” and this is exactly how I felt as I partook in my first real estate deal. After graduating from college in May of 2017 with a Bachelor’s Degree in “Thinking I’m an Expert in Everything,” I decided it was time to make my first deal. I aspired to be like my mentors, each of whom owned dozens of properties and made it look easy. I didn’t really know where to start, and found myself burning the midnight oil on BiggerPockets forums night after night, thinking I was discovering all of the answers to unlocking the universe. However, it is not until you actually do something that you find out what actually all goes into it. As easy as it seemed, the first deal was anything but a cake-walk. The following blog is to serve as a brief outline for your first BRRRR (Buy, Renovate, Rent, Refinance, Repeat) deal, to aid in avoiding the pitfalls that I found myself trapped in each step along the way. (Click on header of any section to be redirected to a more detailed blog on that step).
- Find a mentor, or 2, or 3
Lucky for me, my mentor happened to be my roommate and also the main reason why I was interested in beginning my real estate journey. Each person that is successful in developing a real estate portfolio has gotten there in a little bit of a different way. It is possible these people are already within your personal network as family friends, or you may need to visit a local REI meet-up or website to discover these people.
- Develop a strategy
Each city, region, and even neighborhood presents a unique challenge to the green investor. Beginning your journey using the same methods as your mentors is often your best bet, relying on their expertise for guidance. Develop a cash flow analysis spreadsheet that looks at purchase price, rehab costs, current/potential rents, and monthly expenses (including but not limited to mortgage, taxes, insurance, hoa fees, utilites, capital expenditures, property maintenance, and vacancy)
- Put that strategy into writing
Being gung-ho and going after your goals with ferocity is very important, but developing a plan in writing that you can make changes to as you go is immensely valuable. If you have a plan in writing not only are you able to develop a system for future deals, but also present to potential investors or consult when you are unsure of how to do something.
- Secure Financing
This is often the most difficult step for many new investors. If wishing to use the BRRR method, there are 2 main ways of purchasing your first property: supply your own cash or find an investor. It’s likely that if you are reading this blog you don’t have a Pablo Escobar-sized pile of cash sitting in your basement, so consult my other blogs on how to find and convince a cash investor. Either way, if done correctly, will allow you to grow your real estate portfolio quickly and efficiently.
- Find a realtor (or 10)
Each realtor has their own niche, specialty, and way of doing business. Search for realtors that both work in the area you wish to invest in and work with investors on a regular basis. These people have access to the MLS where properties are listed for sale and generally have a knowledge of the local market, property values, and what constitutes a good deal for investors. A good realtor will not only aid in finding deals, but also evaluate deals that you bring to them.
- Analyze, Analyze, Analyze
Rome wasn’t built overnight. In our scorching hot market, it is often necessary to analyze dozens of deals before you find one that makes sense and fits within the plan you have developed. Each deal that you analyze will give you a better understanding of the market conditions as well as the types of properties that may fit within your plan.
- Reevaluate the Deal
So you think you have found a deal you are interested in. Make sure you do your due diligence and ask the right questions. Look at the condition and age of the foundation, roof, furnace, hot water heater/heaters, electrical, and plumbing. Take these into account when evaluating the deal as these are often the high dollar value repairs that you will need to make over the course of ownership of the rental.
- Make the offer
Money is made on the purchase of a property. Never pay too much. Although you may be itching to secure a deal at this point (as I was) it is important to not overpay for a property as this can have a significant burden when it comes to refinancing the property. With the economy and stock market booming, everybody has cash and prices have been driven sky high. If you are offering the right amount, there is a good chance your first offer wont be accepted. Or your second. Sometimes it takes hundreds of offers before an accepted offer.
- Close the Deal
Congrats! You finally have an accepted offer. You can finally breathe a sigh of relief. Just kidding. Now is when the work starts. Now you have to work with both your realtor, the seller’s agent, the title company, and your investor to make sure that any contingencies written in the offer are satisfied and all of your financing ducks are in a row in time for closing.
- Renovate/Rehab
The keys are now yours, and it is time to get your hands dirty. While some rehab assignments require permits, the best way to make money on a property and gain equity is some elbow grease and hard work. Sweat equity most easily comes through painting walls, removing and replacing flooring, and upgrades to kitchens and bathrooms. Youtube became my best friend at this point in the adventure, as there is an expert that has filmed a tutorial on just about everything you could ever need to do on a renovation.
- Find a Tenant
In my experience, finding a tenant is easy. Finding a quality tenant is not. In addition to screening potential tenants based on your interaction with them, it is of utmost importance to perform background checks. Additionally, check their Facebook. Does this person post things that make you uncomfortable? This is a person that you will be relying on for your investment, it is important that they are someone you can trust, and their background says they are a trustworthy person as well.
- Refinance
Apart from finding an investor, this step can also be very difficult. Finding a bank that will refinance your first deal can be difficult, and nearly impossible if you don’t have a W2 job. In my experience, the closer to the underwriter you can get the better, as they are the people that will be making the decisions. Small credit unions are the best way to achieve this, and I have even talked to the underwriter myself. Your property will be appraised, and you will be able to pull up to 80% of the appraised value out to repay your investor, or invest in your next deal. This is why it is important that you buy at a discount, to make sure that you can maximize the money you are able to pull out of the bank.
Like I said earlier, this is a very basic outline for completing a BRRRR real estate deal to acquire a rental property. Accompanying blogs will go into more detail surrounding the specifics of each step, and will include formulas and spreadsheets that will allow you to plug and play with properties you may come across. Take your time, learn before you jump, ask questions, and use me as a guinea pig in order to avoid major problems as you push forward. Good luck, and become a RAD Investor!