Buy, Rehab, Rent, Refinance, Repeat

David Greene

Overview: 

Rick Carabba
Great book to lay the foundation for real estate investing. If you invest in RE you probably only need 40% of this book. Big message is to pay cash for a property and rehab, then get a loan based on the appraisal after you fix it.
Rating:
8
/10
Read more on Amazon
Updated On: 
Oct 16, 2020
~ X min read
Book Note

Chapter 1: Getting to know BRRRR

Traditional Real Estate Investing

  1. Get a loan (for amount of distressed property - down payment)
  2. Buy distressed property
  3. Rehab property
  4. Rent out
  5. Repeat

*Issue is that you can't access the equity you just created to buy the next deal

The BRRRR Method

  1. Pay cash for distressed  property
  2. Rehab property
  3. Rent out property
  4. Now refinance for the next property

*Key is that you add value BEFORE you finance anything so they will give you more

Chapter 2: Buying Under Market Value

The 1 percent rule

1 months rent should be greater than or equal to 1% of the property value. General rule of thumb to cash flow positive

75 percent of ARV

When assessing a deal, only buy if all expenses/rehab/purchase price add up to 75% of the after repair value (ARV).

***Ask local appraisers what equation they use to value homes, work factors into the rehab

Cash offers are best because they don't come with appraisal or loan contingencies

Types of contingencies:

  1. Inspection Contingency
  2. the period of time to order and perform inspections
  3. buyer decided if he or she wants to move forward, back out, renegotiate
  4. buyer can ask for repairs, a financial credit, or reduction in purchase price.
  5. Appraisal contingency
  6. the period of time to order an appraisal
  7. loan contingency
  8. the buyer can back out of a deal if something goes wrong with the loan
  9. the longest contingency period, because lenders take a long time

Cash can buy more distressed opportunities, Lenders only lend for homes in "livable condition":

  • roof without holes
  • has appliances
  • has flooring
  • has plumbing
  • has electrical
  • has windows

Valuation:

single family properties (less than 5 units) are valued based on comps

multi family properties (more than 4 units) are valued based on NOI and Cap rate

Chapter 4: Rehabbing like a pro

  • *find team members who also invest
  • They know how to think from an investor perspective

Contractor should come up with itemized bids beforehand with timelines as well.

work in 5% bonus for deadlines met, 5% deduction for deadline missed, additional 5% each week late

Value-Add Upgrades

Upgrades in the rehab process that add more value to the property than the cost of putting them in.

Bathrooms

  1. High-end tile in small areas disproportionately adds value and "wow" factor.
  2. High end material in general in smaller areas. Showers also good opportunity.
  3. granite vanity / high end faucet also. Only makes sense if the bathroom needs to be rehabbed anyway.

Kitchen

  1. stainless steel appliances
  2. Granite counter top if original one isn't good
  3. backsplashes add more value than they cost

Miscellaneous

  1. Mulching adds value and appeal
  2. concrete exterior/landscaping over sod
  3. Use very durable and tough laminate flooring over carpet

side note: How can I integrate technology into the rehab process? Is there home tech that can be installed and add a disproportionate amount of value to the sale price/rent?

Chapter 5: Common Rehab Strategies

Adding square footage

  • won't increase value if you already have the biggest property in the area

Adding bedrooms and bathrooms

  • huge value add from 2 bedrooms to 3 bedrooms. Decent value add from 3 to 4. Don't need more than 4.
  • look for underutilized offices/utility rooms/dining rooms etc to convert.
  • going from 1 to 2 bathrooms is solid value jump. 2 to 3 not so much.

Adding value through strategic modeling

  • Top 2 ways to add value is by remodeling kitchens and bathrooms
  • Painting older cabinets and adding new hardware to them
  • If kitchen is smaller consider tiling
  • DONT put in a glass shower door
  • consider replacing standard toilets with low-flow toilets and sink options in rentals if paying for the water.

Miscellaneous common rehab ideas

  • Put in as much laminate flooring as possible. Carpet okay in low traffic areas. Tile best in smaller kitchen and bathrooms.
  • Put ceiling fan in only if there's already a light hardwired into ceiling
  • Always install HVAC systems. Add's same amount to property value in equity and attracts better tenants
  • replace roofs right away before refinance

Chapter 6: Understanding Rent Prices

Rentometer.com

  • shows you average rent of surrounding units as well as other stats.

Factors that determine where to live

  1. employment opportunity
  2. desirability
  3. school district, crime, walkability, parks, malls, etc.
  4. affordability
  5. up and coming areas
  6. climate

Determining Supply

DOM (Days on market)

  • average is somewhere between 30 & 60 days
  • low dom = high demand. high dom = low demand
  • Property manager "turn times"
  • the time it takes to fill vacancies/rentals
  • less than 30 days good, more than 30 days bad

Chapter 7: Tenant Tips

  1. Buy Near Hospitals
  2. Buy in areas where pride of ownership is apparent(basically not rundown)
  3. Buy near great schools
  4. Buy in areas with lower vacancy

Reasons people rent

  1. temporary job or need to move often
  2. cheaper than buying short term
  3. buying requires a loan which requires a health debt to income ratio
  4. getting a loan requires a healthy credit score
  5. getting a loan requires a down payment

Chapter 8: Choosing your Lender

  • Get pre-approval letter for a loan before you start.

Factors need to consider beforehand:

pre-approval amount

  • determined by debt to income ratio
  • get 2 different pre-approvals and compare rates

seasoning period

  • amount of time you need to hold a property before you can get a loan against it
  • shorter is better, don't want a period where you can't access your capital

Loan to value (LTV)

  • percentage of money you can get lent to you based on the value of a home. 75-80% best

Closing Costs

  • lender closing costs specifically
  • ex. origination fees, underwriting fees, points, application fees, credit report costs. Get specifics.
  • Get a "net sheet" that shows all the fees itemized, compare across lenders
  • Rate buy down (paying points)
  • Basically opportunity to pay more in closing costs to buy the rate down by x points. Might be good might not, run the numbers.

Cash out refinance rates

  • The interest rate of the loan you get out of the property you just rehabbed. higher than traditional

Out of state investors

  • make sure they will loan out of state/county if the lender isn't in your hometown

Portfolio Lenders

  • Ask if they are portfolio lenders or if they plan on selling your loan. Higher interest rate usually
  • How many loans can you have with their institution?

Chapter 9: The Value in Financing

LTC vs LTV

  • LTC (loan to cost) is a measure of how much you can get a loan for based on the amount of capital you put in. Not the appraisal of the house.

Exit Strategies:

  • refinance - create cash flow and pull money out of the house, don't pay closing costs/capital gains. roll into next property
  • flip- sell for profit, pay taxes/fees/commissions. Usually not best.

refinance is best 90% of time.

**Chapters 10-13 is just basic business advice about building systems and some FAQs about BRRRR. Not much more value.**

profile image

Rick Carabba is the Author.