How to Know a BRRRR Real Estate Deal Will Make You MONEY

when you're buying a bur property many times they're not in financeable shape that's how you're getting it so below market value you're buying a property below Market you're increasing the value you're utilizing the bank debt to give back all of your cash and you're creating a 25% Equity position you're not going to have a lot of Maintenance expense cuz it's fully renovated but your potential rent tenants are going to fall in love with it right people want to live in nice places I took my equity and then I traded up and that is the beautiful thing about burs they can hyper explode your portfolio so before we dig into how to underwrite your next bird property what is a bur property anyways a burd property is when you buy a property you renovate it you rent it out then you refinance it with a new income in the property and then you repeat the process the benefit of a bur property for investor especially when you're getting started this is how I got started in my real estate investing career about 18 years ago you can purchase a property increase the value by doing a rehab plan and then utilize B Bank debt and leverage to refinance all of your cash back to you and as an investor that is an essential piece of our puzzle as we're trying to build out our portfolio the more cash that comes back to us allows us to purchase again and keep growing hence the repeat so there's two main components in the burth strategy that are essential for you to execute on the first is you need to make sure that your total basis for the property is below a 75% loan to value that means your purchase price your renovation cost and all of your debt costs need to add up to the 75% loan to value that means that your loan balance or your total cost is at 75% of the new apprais value on occasion investors can go all the way up to 80% but you need to verify that with your local mortgage broker not every borrower can qualify for an 80% loan to value so again talk to your mortgage professional you want to know what the max loan to value that you can get it is really important as you're looking at these properties whether your basis is going to be 75% or 80% the higher the loan to value that you can achieve on your refinance the more buffer you have for the purchase price rehab and soft cost so speak with your mortgage professional get qualified and find out your loan of value the second main component when you're buying a bird property is you want to make sure that it's still cash flows or at least breaks even one of the main benefits to the Bur properties is you're buying a property below Market you're increasing the value you're utilizing the bank debt to give back all of your cash and you're creating a 25% Equity position it's not just about getting your cash back it's about Building Wealth that 25% Equity can go into play for investors across the board you can take a helck out on those properties on occasion you can sell those properties and 1031 exchange them and trade them for more doors that's what I've done over the last 20 years so the bird strategy creates equity and you can use that Equity to expedent your growth but at the same time it's not just about the equity position you want to make sure as you're looking at your bird properties that they can pay for themselves at minimum but you don't want to be stuck with a property that you have to service every month if your rent income doesn't cover your mortgage cost it can be more of a liability than an asset so we're going to dive into the underwriting to make sure that your money doesn't get trapped in the next deal so the first step I take when evaluating a bird property is establishing the new fixed up value the reason I like to start with copying a bird property first is the comparable data is not only going to tell me what the potential value of the property is the fixed up value that I'm able to lever with the bank up to 75% it's also going to tell me what do I need to do to upgrade these houses and dictate the rehab cost the rehab cost is a huge component in your Burr property it's not about just what you're paying for the property again the concept of the bur is to purchase the property reclaim all of your down payment and all your cashback but you have to be below that 75% you could be buying a cheapest property in the world but if the rehab expense is too high you still might have to leave money in the deal so starting backwards with the comps are going to start painting the picture for me as I'm looking at a potential potential investment when comping a bird property I always like to pull three Soul comps and two pending comps so I can evaluate the property correctly I don't like to use less than five comps because appraisers are going to be using the same amount of data if you're using just one or two comparables for your next bur property it can be subject to opinion that appraiser might find three other comparables that might not be as high as yours and it could bring your value down grabbing comparables that are of the same style are also going to help you ensure that value is not going to move now in many neighborhoods there's a mixture of houses there could be Ramblers there could be Tri levels there could be daylight basement appraisers are going to praise those all differently if we can't find comps that are the same style a rambler for a rambler we're going to go for properties that are all above grade on a rambler 2,000 fet that's 2,000 ft above grade we're going to look for two story houses or Tri level houses that have no below grade square footage so that appraiser can count the same finished square footage so if you can't get that model match comp look for the same above ground Square fo footage or below ground square footage splits it will help with the evaluation location when we're comping these properties we try to stay within a quarter to a half mile radius for Metro in City properties we do that because that's what appraisers typically do most appraisers when they're looking at your property if you're in a metro area are going to try to stay within a quarter mile radius now if there isn't a bunch of data points inside that radius then they're going to go out to a half mile and then they're going to expand out from there typically an appraiser is going to go further out than rather than further back in time follow the same rules appraisers do when you're pulling your comps that's going to really help you iron out that value again you don't want to break appraisers rules because they won't do that when they're doing their eval it could substantially throw your values off and use recent sales the only comparables that we use for a bur property are within the last 6 months that's what appraisers use so you want to use the same methodology so when you're evaluating your bur property keep your comparable data tight you don't want it to be loose you don't want it to be far out you don't want to be at outside the ranges of what appraisers do because they're going to have a hard time explaining it to the bank to get you that loan to value and as I'm pulling these comparables I'm documenting what needs to be done and appraiser is not going to give me the same value if I don't have the same upgrades it is essential that as you're pulling these comps you listing out what these subject properties have if the house has new windows you need to install new windows if it has new kitchens install new kitchens if the comp has an additional bath you need to work it into your budget again your rehab cost is a huge component in this burd property it's one of three major cost right purchase price rehab and your debt costs so take the time as you're looking through your comparables to document those upgrades if you are 10 to $220,000 off on your rehab budget and you're maxed out at your 75% loan to value you might have to leave that in the deal which is going to jeopardize getting all your cash back out the rehab amount is essential so then document your upgrades evaluate your rehab cost create your budget and work it into your numbers after you pulled your comparables and established that new future market value you've created cre your scope of work from those comparables and created your budget the last cost that you need to evaluate when underwriting your Burr is what is your soft and debt cost when you're buying a bur property many times they're not in financeable shape that's how you're getting it so below market value if the property's in really good shape it's going to be hard to get it below that 75% loan to value so typically investors purchase these properties with hard money or construction loans these loans can cost anywhere between 10 and 12% and one in two points the great thing about a hard money construction lender is they're able to finance all of your rehab cost into the loan construction lenders are essential when you're purchasing a bur property they help minimize the cash you have to invest in the property UPF front so in a typical investment property you're putting 20% down and then you would have to come up with the rehab cost out of pocket which can almost double the cash needed to purchase that property with the construction lender they're going to take your purchase price add in your rehab cost and then you're going to put 15 to 20% down of the total project and they're going to finance you back all of your rehab costs that's going to reduce the capital in your deal so after I've completed my underwriting of establishing the market value the rehab plan and my debt cost how do you calculate whether you have to leave money in the deal or not so how you calculate whether you're going to have to leave money in the deal or not is you want to take the new future market value that you pull for your comparables times that by 75% that's what your lender will take you up to you then want to sub subract your purchase price subtract your rehab cost subtract all your lending cost and as long as all three of those costs are below the 75% then you have no money left in the deal and if it's even below the 75% you could even get cash back out of the deal that's what I call Mega not only did you buy a property you left no money in the deal it gave you more Capital back to go buy again and if you want to see a mega bir deal go to my YouTube channel and check out my case study so after you've evaluated whether you have have to leave cash in the deal or not the next essential step in a bur is to see if it will pay for itself what is its cash flow position so the first step in evaluating its cash flow position is to pull rent comparables we've already gone through and established what the scope of work is what our bedroom count and bathroom count after our renovation plan is that's what we did in the first step of underwriting that's also going to tell me as I'm looking at my rent comparables how nice is my property going to be one great thing about bur properties is you're buying a property below market value needs a lot of work your putting in a lot of The Upfront cost and upgrades in the property that will get you a premium for your rents you're fully updating this thing to increase the value into lever to the 75% the other major benefit is you're not going to have a lot of Maintenance expense CU it's fully renovated but your potential rent tenants are going to fall in love with it right people want to live in nice places how I pull rent comparables is I use the MLS as a licensed real estate broker I can pull up what has been advertised and rented for typically the MLS is going to kind of show me the upper echelon of the the rent prices because there's more broker cost they're hiring them they get a better dollar that's going to kind of show me the top end the next way I pull rent comparable I talked to my property manager what do they think they can rent it for they know better than me they're boots on the ground they're doing it every day they're going to tell me what will absorb it well and if you don't have a real estate broker they can pull you your rent comps and you don't have a property manager because you self-managed then there is countless amounts of websites out there that will calculate your projected rent cost for free or for paid you want to look at what's going to give you the best data and works best for you once you've pulled your rent comparables to establish your monthly income then you need to figure out will it pay for itself or not the first step call your mortgage broker you need to know what your interest rate is projected to be if you don't know what your interest rate is it's going to throw your cash flow way off don't guess get pre-qualified with a mortgage professional before you buy that bur property huge mistake to just buy it with hard money and then go look for the permanent financing later it can get you in trouble your money can get trapped and it can be detrimental to your investing career so get pre-qualified after I'm pre-qualified and I know what my interest rate is I then can start to calculate my cash flow so remember with a burr property I'm trying to lever it all the way up to that 75% to maximize my cash position I've already pulled the future market value of the properties when I did my comparables I take that market value I times it by 75% that's the maximum loan about that I'm going to be able to achieve I then take that amount put it into a mortgage calculator with the interest rate that was quoted to me for my mortgage professional and that's going to tell me my monthly payment you then need to calculate the rest of it your expenses as a landlord it's not just your mortgage cost you need to calculate your monthly property tax your monthly insurance cost what are your utility bills are you bringing in a property manager vacancy rate typically we add a 2 to 3% in our performa as a cost just for a vacancy rate with our bur properties we actually put a 1% repairs and maintenance with our older apartment buildings we actually put 3 to 5% because they don't have as much money invested them as we did on our bird property so judge your scope of work the more work you do lower your repairs and maintenance the less work you do I would increase it to offset any unexpected items from there you need to calculate your cash flow what is your expected monthly rent you then subtract your mortgage costs and subtract your other expenses we just covered and there is your cash flow for bur properties I highly suggest try to break even right you don't want to buy an asset that you have to pay for every month that's really not an asset it's a liability so my goal is an investor what I'm looking at a burr is to minimum break even get all of my cash back out and then create that 25% Equity position even if the property is not cash flowing that well I got all my money back out and I've creaded this Equity position that I can trade later so for my bir properties that break even or just might cash flow a little bit I'm really just banking Equity typically I sell those property at about a year in a day I don't really want a property that's only going to pay me a couple hundred a month I also don't want to buy a rental properties and have to leave 20% in so the bur property allows it for me to buy a property get all of my cash back out and then take that equity in a year and a day 1031 exchange it as my down payment for the next property and this is going to increase my cash flow by having more cash left in the deal and it's none that came out of my bank account I took my equity and then I traded up and that is the beautiful thing about burst they can hyper explode your portfolio we started with eight properties in 20089 and 10 that's what we grew our rental Pro portfolio to by buying bir properties we have traded those up to nearly a th000 doors utilizing that Equity Building that Equity is a real thing that you can exchange for serious wealth so remember you only have the equity if you evaluated correctly pull your fix up comparables calculate all your cost make sure you're below 75 5% loan to value then you create your position that you can trade for later thank you everyone for watching our video on how to underwrite your next bur property if you enjoyed it please like And subscribe below and for more information on how to underwrite your next deal check me out on Instagram at J danan flips or James danner.com [Music] [Music] oh

Channel: BiggerPockets

Views: 18,115

Keywords: brrrr real estate, brrrr, brrrr method, brrrr real estate investing, brrrr real estate deal, real estate deal, real estate, buy rehab rent refinance repeat, brrr, buy rehab rent refinance, what is a brrrr deal, brrrr biggerpockets, bur rehab rent, how to buy rental property, invest in real estate, real estate investing, real estate investment, how to build wealth, build wealth, get rich, income property, investment property, real estate portfolio, biggerpockets, james dainard

Id: kKQwKmIvCtc

Length: 14min 40sec (880 seconds)

Published: Fri Mar 01 2024