Colorado Springs has given me the opportunity for BRRRR investing, and I have successfully completed 8 BRRRRs locally. I have noticed that over the past few years, BRRRR opportunities have become more of a rarity, as margins have been decreasing due to increased demand in properties here. As a result, I wanted to outline a methodology of a delayed BRRRR that I am beginning to utilize.
- Types of real estate investing:
- Buy and Hold (Rentals)
- Fix and Flips
- Vacation Homes
What is a BRRRR?
BRRRR is a repeatable “Buy and Hold” strategy to acquire rental properties for little to no money down
- Buy: Purchase property in need of repair under current market value
- Renovate: Fix up property to excellent rental condition
- Rent: Rent out property for positive cash flow
- Refinance: Cash-out refinance at a higher appraised value to receive back most or all of your initial down payment and renovation costs.
BRRRR (By the Numbers)
Below is an example that I purchased in the Spring of 2017 and utilized the BRRRR method
- Buy: Purchased for $113,500 (20% down payment of $22,700), loan: $90,800 (HML, purchased early 2017)
- Renovate: Full House Rehab of $25,000 (closing fees, holding costs, repairs)
- All In: $138,500 ($47,700 personal funds)
- Rent: Initially Rented at $1200/mo. Currently Rented at $1300/mo.
- Initial Positive Cashflow of $300/mo (before contingency expenses)
- Refinance: Appraised at $175,000, New Loan at $131,250 (75%)
- Received back $40,450 during cash out refinance
- Total cash in home: $7,250 (4% of appraised home value)
- Compared to putting down $35,000 (20%) to purchase a fully renovated home at $175k
Today, this home is now worth $230,000
- Risk Mitigation: Value of home increases at a greater rate than improvement costs (not dollar for dollar)
- This protects your investment if there is a potential market crash
- Improved Property: Low risk of any unbudgeted short-term or repairs to fix poor workmanship
- More Liquid Funds: Less cash in the property allows for larger reserves or funds for additional investments
- Ultimately, this could result in less cash out than planned
- (e.g., Lower appraisal, increased time and costs of renovation)
- Time to recoup funds:
- Lender-specific loan seasoning timeframes
- Weak appraisals
- Rehab can go over budget
- Expect the unexpected
- Requires more upfront costs
Current State of BRRRR in Colorado Springs
- Previous Experience: From 2016-2018, we BRRRR’d 8 properties in Colorado Springs
- Initially invested as a true BRRRR, pulling out 100% of initial cash
- By the end of 2018, we were only partially BRRRRing (not pulling out all initial cash) due to lower margins between purchase price and ARV because of higher demand
- Currently, the Colorado Springs market is in a severe seller’s market due to increased demand and decreased supply, ultimately leading to increased prices and lower margins between After Repair Value and purchase price
- This all equates to not making it a conducive BRRRR environment.
- As a result, I have adopted my strategy to what I am calling the “Slow-BRRRRn”.
- With the Slow-BRRRR(n), you will do the BRR (Buy, Renovate, Rent) almost immediately, and then you sit and wait for the last two R’s (Refinance and Repeat)
- Over the past several months, we have cash out refinanced three of our existing rental properties, all three of which were originally BRRRRs,
- This resulted in pulling out more cash than during the original BRRRR!
- We did this by slowly, but effectively, managing our rentals and monitoring the market until calculating the best time to pull more equity out.
- In the previous example, we had a $131,250 loan outstanding on the property and it was recently appraised at $230,000. Using 75% LTV requirements, this means we could hypothetically take out another loan of $172,500 utilizing a cash out refinance
- This would result in taking home another $41,250 (excluding loan/title costs).
- Originally, we had pulled $40,450 during the original cash out refinance
- What did we do to the property to increase the value so much?
- Absolutely nothing. We managed the property, kept it in great condition, and simply waited 3 years.
- “Don’t wait to buy real estate. Buy real estate and wait.”
- What am I going to do with the cash out refinance proceeds I mentioned previously? I am simply going to invest 25% down on a couple rent-ready properties, and then just sit and wait.
- I could do the BRRRR strategy on subsequent properties to propel our equity even further, but I am busy and I am tired, and this method is still effective.
- By waiting 5 years with an assumed 5% growth rate each year, my property could be worth ~$320,000 and I could cash out refinance and collect ~$52,000 in cash out proceeds (excluding loan/title costs), and then reinvest those proceeds in another asset.
- Don’t bank on appreciation!
- I realize that any type of appreciation is not guaranteed, and we are not advocating to bet on it. However, in a market such as Colorado Springs, it is safe to reasonably expect some type of moderate growth each year. If appreciation is slower than expected, then your cash outlays will be ‘stuck’ in the property, so you need to be prepared for this. You must make sure you are cash flowing, before and after the BRRRR!!
- Don’t overleverage!
- Even though I mentioned we did multiple cash out refinances recently, we still maintain a 65% LTV rate averaged across our portfolio for safety and risk management. This is in addition to ensuring our properties are cash flowing AND having adequate cash reserves.
- Don’t forget to risk manage!
- I always advocate for maintaining adequate cash reserves for the “unexpected” as well as making sure the property is cash flowing, even after refinancing.
BRRRR vs. Slow-BRRRR(n) Comparison
- There is no question that doing a BRRRR is going to be a better use of cash over buying something and putting 20-25% cash down on an identical property. However, as we previously discussed, the Colorado Springs market is very tight, making these opportunities more difficult to find for a part time investor.
- Capture the highest probability for success!
- It is often mentioned that 20% down on a property is not good investing, and BRRRR is the best real estate strategy. While I do love BRRRR, it is simply not realistic to consistently execute in Colorado Springs currently. In a market like this with consistently strong returns and appreciation, you will hopefully make up for the original down payment in the form of equity growth through appreciation within several years.
- I wanted to put the expected first year returns on the example of the property we are buying with the Slow-BRRRR(n) cash proceeds from the refinance. In just one year, our total ROIQ is set to be 31.4% of the initial cash invested (remember- this is from a cash out refinance, not something we actively saved for), or $21,657. If I waited around until I found something to BRRRR, I could have missed out on $21.6k.