They said it couldn't be done, and we found a way!
You may have heard about the BRRRR Method before, but have you heard of the BRRRRnB Method?
This is something that most don't think is possible due to the Refinance step with Airbnb.
Find out how it is, and why we plan to use this method to scale our business faster, and with little capital.
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FULL EPISODE TRANSCRIPT:
0:16
Hey there, welcome to the MORE podcast. My name is Erica Dailyvand along with my co host Dr. Raf, we're going to expand your mind when it comes to the pursuit of wealth and freedom! On this podcast, we're going to share stories, ideas, and examples from our real life in order to help you make more money, have more freedom, so you have even more time to do what you love. Speaking of which, let's jump right into today's episode.
Brrrr It's cold in here. All right, you guys, I am so excited because today we're going to be talking about the BRRRR method. And actually, the method that we are using is the BRRRRnB method. And so if you guys have heard of this method, you're probably really excited. And if you haven't, you should get excited because it is going to blow your mind. Oh, Raf, do you want to explain or even give the backstory on
1:12
you guys? I love Erica's intro. I told her she would not do the whole birther thing. But she did. And I loved it. So it worked out well. Before we jump into the BRRRR method, and talk a bit about what it is and why it's so valuable, I want to take a step backwards. Right now it's the third podcast that we've done with this title of more. And this idea of bringing more value to you guys and helping you guys get more out of life and more on a finances relationships. And this is our third podcast on the topic of real estate. And before we dive into the BRRRR method, which is usually applied to real estate itself, I think it's really important take one step backwards, and figure out why we're so passionate about real estate in the first place. Now, you guys, we don't have all the answers. We haven't done all this stuff before. We're kind of learning through it with you guys. And we're failing forward per se. But when it comes to real estate, one of my big goals has always been to be able to support my lifestyle for myself and my family with a passive income, not having to always work and trade my time for money. Now I love what I do. I love being a chiropractor, I love helping serving people. But how cool would it be to if I wanted to be able to work for free to help people get healthy for free to serve people for free, because I was able to make enough income from the real estate world and from other endeavors. So when we look at investing in real estate, one of the biggest things we're trying to figure out right now is how to keep momentum with our money, how to keep moving things forward, and how to leverage the ability to buy more real estate and not getting stuck in buying one or two houses only. But being able to buy a lot more to the BRRRR method is actually a really cool way that people are able to buy a property renovate. So by renovating, they're forcing appreciation forcing more value into it then rented out. And once it's been rented out and stabilized, then do a cash out refinance for the for usually 75% of the value of the new remodeled property. And if you do that, right, hopefully you're able to take enough money out that covers your initial purchase price and your actual renovation costs too.
3:15
And if you guys were following along, you might have noticed that referral was actually naming off what BRRRR actually stands for. So before we jump into it, I'm just going to go through each letter so that you understand exactly what we're talking about. So traditional BRRRR stands for by then the first R is renovate, the second R is rent. The third R is refinance, and the fourth R is repeat. Now with the BRRRRnB method, if you guys are catching along, we swap out a traditional long term renter for an Airbnb rental. And that's really the difference between a traditional BRRRR and the BRRRRnB method. So now I want to go ahead and break down each step in the BRRRRnB process. So the very first one is by and typically the main thing you want to focus on when you're buying a property for the BRRRR method is that you're buying a house that's undervalued and needs work because you have to be able to force appreciation. And so what you want to do is do your research and make sure that the comps support your ARV, which stands for after renovation value. So let me give you guys some math. Actually rap is the numbers guys, you do want to go over the verb math real quick so people can figure out how to see if their property is good for the BRRRR method.
4:36
Yeah, and you guys will kind of figure this out as we go through these different steps to there. There's an equation to figure it out but there's never a hard and fast rule. So it's an art and a science kind of mixed together. We try to find these properties. So when you're trying to buy something you want to buy something that you can add a lot of value to without costing too much because the more value you can add like adding another bathroom or the bedroom without increasing your cost by Time for the renovation gives you a much better chance at being able to BRRRR out of the deal at the very end of it and recoup all your money. So when we look at it, the ARV which is the after renovation value should be worth what the purchase price and the renovation cost is combined, then you take that purchase price plus renovation costs divide that by point seven five to find what the ARV is because a lot of lenders when you want to refinance will only lend out 75% of what the actual value of the home is in a cash out refinance. So in order to make sure you are pulling as much money out as possible, hopefully all of it if not more, you want to make sure the purchase price plus your renovation cost is less than 75% of the AR.
5:43
And the ARV isn't just based on that. What you're saying is, is your projected after renovation value needs to be what that equation comes out to, if not more, correct? Yes, yeah. Okay, cool. I mean, I know you know that, but just want to make sure that was clear. Okay, step number two is renovate. So again, you want to find a house that generally needs work, that's the best way to force appreciation. And so when you're looking at to renovate your home, like Rafael said, you want to do things that will add the most value for the least cost. So typically, that's things like adding square footage, that's a for sure way to add value to your home. If you can add bedrooms, bathrooms, or even just upgrading bathrooms and kitchens, those are the main things that will really drive up value on your home. Because really, there's not much you can do inside of an already existing bedroom. But if you can add bedrooms, that definitely will bring you in some more value.
6:42
Sure. And adding square footage can be a bit expensive if you're doing addition to a house because you're building a lot more than what you typically want to be on a renovation. But if you have, let's say a two bedroom home, that's 1200 square feet, there's plenty of room in that house to convert on maybe a dining room or an office into a full bedroom. In order for it to be qualified as a bedroom has to have a window in the closet. That's really it. So a lot of times, going from a two to three bedroom home adds massive value, going from a three to four bedroom doesn't add quite as much value. Because most people who are looking for single family homes want three bedroom two bath, it's kind of the ideal. And then if you by chance have a way to add a second bathroom, let's say you have a two one or a three, one, if you can turn a three one into a three to a three bedroom, two bath, that adds massive value. So maybe taking an area that was a laundry room and converting into a second bathroom is plumbing already there. whatever you can do to add value like that without having to completely rework plumbing or electrical or some crazy stuff like that, it's going to add a lot of value for a lower costs and gives you a much better chance of being able to recoup all your money when the project's done.
7:47
Also something to note though, is you don't want to do this at the expense of it making sense. We actually looked at a house, that was the most bizarre layout, they essentially cut a square house down the center diagonally to make two separate spaces. So it was like a duplex. But everything inside the layout was so so bad, that it just wasn't valuable because it's just so funky. But another thing when you're talking about square footage, it made me think of Andrew and Kev when they found this house that essentially had like a second story underneath the story that was currently the house. And so they were able to dig it out at kind of like a less expense than it would have been to add like a second story on So a really unique property that they saw the value and like, Hey, that looks like we could easily dig it out to make this a two storey house. And they did that and it's beautiful.
8:42
Yeah, in San Diego, I mean cost per square foot pretty high. And they found a house that had a garage below the entrance. So they were able to look at it and get a good idea and say, Hey, we could get we could ixnay the garage, we could dig out the basement a little taller and have a whole second story down here and really double the entire square footage of the house, which adds a ton of value, especially here in San Diego where you are paying a premium when it comes to price per square foot.
9:07
Absolutely. Okay, step number three for the BRRRRnB ]method is to Airbnb. So again, with the typical bird, you're going to be getting a long term renter in here, but as you guys know Airbnb has a much higher cash flow. And so for us it makes way more sense to just do what we know and what we're good at and continue to do Airbnb s and these properties. Now something to note is that if you are an investor you might know that you can't count Airbnb revenue towards your income for two years. And generally with an investment property they want to see a long term renter, but I was like I know there's a way to do this with Airbnb. There's got to be and we actually found lenders who are willing to lend and do this whole thing with our long term renter using Airbnb, which is Really, really cool. So that means that we can continue to get more properties with the BRRRRnB method. And if you guys are curious about that lender, shoot me a DM, and I'm happy to talk about it with you guys.
10:10
Yeah, it's kind of crazy. I mean, I guess you could say I've been in this real estate game for a bit longer than you, Erica. But really not that long. And I was more in the long term, buy and hold long term renters your long leases, if not longer. And that's still a very lucrative and very smart place to park your money, because house values on the whole tend to go up over time. But one of the challenges that I kept seeing, and I was thinking, I was like, babe, there's no way we can do this, it doesn't make sense. All lenders want to see a stable long term tenant in there. And that's why in the traditional BRRRR method, you want to stabilize the property once you have it fully renovated, and get renters in there. And usually banks or any kind of lender, one to see at least six months of time since you first bought the property with a stable long term renter on the lease for a year, if not longer. So that whole world makes a lot of sense to me, because we can keep moving money forward, pulling money out and doing it again and again. But you're really sacrificing cash flow, you really don't get much, much when it comes to cash flow on the monthly basis. And with Airbnb, we're able to bring in a lot more cash flow on a monthly basis. But we couldn't figure out how do we keep leveraging our money to go forward and keep doing this at a faster rate. Because one of my big things is growth, not just cash flow, but I want to actually build wealth buy properties go to equity going forward. So they can set our family up for the future in general. So our kids can have income, they can be smart about their finances, they can have ways to grow their wealth to and passes down from generation to generation. So when you said this, I thought there was no way in hell and then all of a sudden we found ways.
11:44
Yeah, I am like the, I don't know, what do you call it
11:48
like you're all figure it out later.
11:51
Stupid optimistic, I'm like, there has to be a way there's always a way. And sure enough, we found a way. Okay, which leads us into step number four, which is refinance. And this is where the magic happens, you guys. So what you're going to do at this point is you're going to refinance your house, which by the way, typically, you can do that no sooner then about six months in. So as you're waiting, you're bringing in that cash flow from the Airbnb, which is really cool. But you're going to go ahead and refinance your house with the new appraised value, and you should be able to pull out 75%. And this is where you also should be able to pull out all or most of your investment if you did it right. And honestly, even if you don't hit the 100% cash out refinance, or the 100% BRRRR you're still gonna be able to pull out so much of your money. And even if you have money sitting in there, it's not like it's wasted. It's in your What do you call it equity to for savings account? Yeah. Which is great. Anything to say on refinance? No, I
12:49
think we kind of covered that earlier with the whole the whole Airbnb rent versus long term renter, that, you know, these refinances these banks who do want to see usually a stable renter in there for a long period of time. And these new companies are seeing how lucrative Airbnb really is, how lucrative the short term rental game really is. And they're now able to actually lend on that either from six months or 12 months of your actual Airbnb or short term rental income, or be able to look at it and look at what the projections are from a website like air DNA, or from beyond pricing or from mashvisor and get rental estimates from what that property can make or should make in that area on Airbnb and use that to offset the cost. And they can actually rent off of that too, or loan off about two.
13:37
Yeah. And I think something else that they probably realized, and something that we look at when we're looking at a property is, of course, does it make sense for an Airbnb property, but I think you know, to avoid something bad happening, does this also make sense numbers wise as a long term rental because you know, if anything happened, and we could an Airbnb, let's make sure we can still be cashflow positive with a long term renter, I'm sure they look at that as well to make sure like they have their butts covered. So I mean, there's really it's a win win for everyone. I don't see why. Yeah, every bank doesn't lend on this.
14:08
Yeah, and most banks don't, right. small private lenders and I talked to one recently, and they do want to make sure that the house mortgage and the cost and the the PI RPI, Tia some cases which the property and insurance and taxes, all that stuff is covered by what the projected long term monthly rent would be. So they want to make sure you have that but they aren't requiring a long term lease on file and they're actually able to use short term rental as well to make sure the property works out. They have a ratio usually like 1.1 to one they said so that's at least 110% of the monthly expenses coming in on a projected amount. And then on top of that, I think it's really important to realize that when things change in the world, those who are able to change quickest tend to profit and win the most. And when it comes to this kind of game, I only think we're gonna see more and more of this stuff going forward at a faster rate with short term rentals. But just to protect you guys a strategy for life always have an exit strategy in mind. Always right we look at properties and we're trying to buy or or attain them and realize that we want to make sure the numbers work out even with a long term renter, because if you're running an Airbnb, well, it doesn't take a ton of time or a ton of effort once up and going, it still takes some time and some effort, if you ever want to get out of that, or regulations change or laws change, you want to make sure that you have an exit strategy in mind. And that could be selling a property, it could be also putting in long term renter in there. And still obtaining all the equity as time goes on and appreciates. You still paying down the mortgage and getting some kind of monthly cash flow. So whatever your exit strategy is, just make sure you have one as you go into the purchase of a property.
15:40
Yes, great tips. And step number five is repeat. This is also another one of my favorite steps in the process. And this is really why the BRRRRnB method is so amazing, because now that you have your initial investment back from the refinance, you can literally do it all over again, and you own a home that is cash flowing, it's an appreciating asset, and you now have 25% equity built in. So I think what we should do now is actually give people a real life example, which by the way, you guys know this, I have infographics for every single episode on my Instagram. So you guys can head over there and actually see a few infographics for this one. But let's go over an example. First step on by is we're buying a house for $500,000. So we're negative $500,000. And this could literally be your money, or you can have it financed. But keep in mind, if you finance it, there is interest and fees. So the best way to do a bird is to buy it in cash if you can. So maybe you start small and build your way up. But that is step number one. So we're negative 500,000.
16:45
I think a big thing to point out here to you guys, if you don't have 500,000 in cash, which a lot of us maybe don't right now, you can raise private money, you can get money from family from friends and and pay them interest on a monthly basis until you get their money back. Now, if you are thinking about doing that, I recommend that you do not make that your first real estate purchase. I think it's important to know what you're doing before you ever take anyone's money, just because they've worked so hard for that money, and they've saved up and they've built that over time. So you can't just take that and not know what you're doing. But you can also get hard money loans if you want to go that route. Or you can just look at other ways to finance that deal. But most of the time, when you're buying a property needs a lot of rehab, a lot of renovation done to it, which is what you're looking for, you can't get traditional lending for that most banks won't lend on that. They want you to come in as an all cash buyer or something along those lines. That way, it doesn't have to pass inspections or appraisals at that beat down value. So you got to be careful with that too. So you got to find a way to get creative, but what I've learned in my life, is that where there's a will there's a way
17:54
Absolutely. Okay, step number two is renovate. So for this example, let's say we're putting $100,000 in for renovations, because that's going to give us an ARV which again is after renovation value of 800,000. So if you plug that into the borough math, you'll see that that's the ARV that we need. And so we've done our research on this, we know that if we put that 100,000 in and do X, Y and Z to the house, that it will appraise for 800,000. indefinitely. I mean, bring if you have a real estate friend or an appraiser bring them in to help you with this, if you don't know because odds are you're probably not an expert, but they are in your market. So
18:36
yeah, you guys, I've spent so much time looking at comps in the neighborhood and finding out value for square foot for fully renovated a home of selling within the last three months at a geographical location that's close to where the house we're buying is I've done all that over and over I've a spreadsheet of probably over 100 properties analyzed. But I don't know jack when it comes to this kind of stuff. So I always ask my friends who are in the real estate game. I'm a very intelligent person, I can figure a lot of things out. But why not lean on your friends or people who you know who are great at this too and realize this you guys, when you're asking your real estate friend for help on this, they're helping you purchase a property, they're making a commission. So don't be afraid to ask for help. Because they're there. And that's their job, and they get paid for that kind of thing too. What you don't want to do is ask a bunch of real estate friends for help and then not use them to buy the property. That's called being a bad friend. Don't do that.
19:27
I mean, but what if you have 10 friends? I would say ask them all, and then tell them hey, next deal. It's
19:33
you make sure to all 10 of them all 10 of them. Yeah, make sure make sure you clarify what your intentions are before you start asking everyone questions because their time is valuable, too.
19:42
Yeah. Or I mean, you could pay them if you want or say hey, I'm going to take you out to lunch or here's a gift card. Thank you so much for your expertise, but definitely lean on the experts for that, especially when you're first getting started and do it rafted he literally was like I'm just going to practice and I'm going to look at 100 deals and just see and that's the The best way to obviously get better at anything. Alright, step number three is Airbnb. And for this example, you know, like we said, it's six months, typically till you can refinance. And we figured For this example, it's gonna take two months for renovation. So once renovations are done, we can Airbnb. And in this example, our property's making $8,000 per month, and so four months of revenue is a positive $36,000.
20:26
I mean, I think looking at this now, the 8000 per month is not a stretch, to be honest from the houses that we have so far and what they're doing the two months or renovation may be a bit of a stretch. But in this scenario, we use two months renovation and four months of positive revenue in reality, and maybe more like four months of renovation and two months of positive revenue, but it still puts you out on top.
20:46
Yeah, absolutely. Okay, step number four is re finance. So we are refinancing and pulling out 75% of that $800,000 ARV, and we are able to recover 100% of our investment, which is plus $600,000. So let me just go through the numbers. Again, we bought it for 500,000, we put $100,000 in so we're negative $600,000, we were able to refinance and pull out 600,000. So we recovered 100% of our investment. But we're positive $36,000 over that, because we did Airbnb, which is so cool. So fifth step is repeat. And I just have notes on this one. So we get all of our investment back, which I pretty much just said this, you guys, but I'm reading off of this infographic plus, we earned $36,000 from Airbnb in four months, we built in $200,000 in equity, which is crazy. And we own a property that's bringing in great cash flow that's also going to appreciate and we can sell down the future and make a lot of money. And we get to do this again, repeat on repeat on repeat with this same investment money.
22:00
No. So you guys don't have 600,000 on hand. Now a lot of us do. That doesn't mean you can't do this. That means you start small. Let's say instead of a $500,000 property, you buy a three bedroom, two bath back in my home state of Michigan for 50,000 bucks. Let's say it's dated, and it's old, but structure is strong, and it looks fine. But you put new pan in the walls and change the flooring out and redo the countertops in the kitchen and now you sunk 15,000 into the renovation, maybe 20,000 and re appraises at 100,000. You just crushed it with a much smaller model. But guess what you can do it again. And again and again. And if by chance, you're able to get an ARV of say $150,000, and you only put 70 into it, you can pull out way more than you put into it. And now you have more capital for the next deal. grow it one house at a time, one deal at a time and get up to the level that you want that you feel comfortable with, to keep providing for your future.
22:55
Yeah, and something else. That's important to note, say you don't have the money, and maybe you have a family member who's like, Hey, I believe in you, I'm gonna give you this money when you refinance, you can pay them back plus whatever interest you may have agreed upon. And if they're smart, because it worked the first time, they're willing to just keep reinvesting that money with you. Because they're making an interest which if their money was sitting in their bank, they're losing money because of inflation. So the best thing you can do in this case is find someone that has some cash that's sitting in the bank and see if they'd be willing to do this with you. Well, I
23:27
think that just taps into our next episode, that'd be a great idea. The idea and the fact the myth, really, that money in your bank is a good place to be like you never want too much money in your bank, we've always been taught to have a big savings and all this kind of stuff. And I understand the feeling and the need, I kind of have this problem too. But when you have money in the bank, you're getting what half a percent of interest. And maybe I forget how much it is is not much at all. I mean, it takes a long time for you to make money on your money. And with the way the world's changing right now, with the way inflation goes on average, the world has been inflating cost wise at about 3% per year. Lately, it's even more closer to 5%. The more we print money, the less valuable your dollar become because it becomes one of a bigger number. So if you have a lot of money in the bank, don't keep it there, invest it into something that grows that at least 3% if not 5%, hopefully eight or 10% because that way you're outpacing the market. Think about this. If you have a cash investor, and we don't have this yet, we're trying to figure this out right now. If you know someone let us know. But if you have a cash investor, and you're able to make them 8% on their money, deal after deal after deal, that's nothing for doing nothing. They give you money, you guarantee it as a personal guarantor, and they do nothing. You do all the work and you pay them back interest and their lump sum once it's all done, you're helping them grow their wealth to these combinations. These these partnerships can't be one sided. It has to be a win win. And if you're able to help them make more money for doing nothing, you're doing them a huge favor and they're doing you a favor to that's what's called a win win. And once again, you guys just so we know this right here is a prime example of what could be, we've had things that have not looked anywhere near this good come across our table and things that look better. So when you run those numbers, make sure you're looking at all the details, all the ins and outs in realize that if you come anywhere near to being able to pull all your money out of this house, when it's all said and done, you are doing a phenomenal job a plus Pat in the back all those pro Dibs, because that's a job well done. And if you can't quite pull all the money out, you're still doing great. Think about this, if you're only able to pull all button, say 15 or 20, or even 30,000 of the deal out, you still have built so much equity, you guys realize if banks are only lending at 75% of the value of the newly appraised home, you are building 25% in equity automatic.
25:53
Also, because you're doing Airbnb, even if you had like 30,000, you couldn't pull out with this example of 8000 you'll make that back in what four months, three and a half, three and a half. So that's the great thing about Airbnb and the cash flow. It's so much bigger than a long term rental, which is why we prefer the BRRRRnB method over a traditional BRRRR
26:15
copy written by us now.
26:17
All right, you guys. And by the way, if you want to look more into the BRRRR method, and really dive deep into the subject, we have a great book for you. It's written by the guys who do the BiggerPockets podcast, and they're very experienced in this method. And I think it's just called BRRRR.
26:35
It's called the BRRRR method written by David Greene. He is a phenomenal communicator, a phenomenal teacher educator, he is a real estate agent. He is a police officer who's now retired, he owns a ton of property. And he is kind of one of the experts in this field per se when it comes to the BRRRR method in general. So if you guys want to hear more, learn more, read more, grab that book. It is amazing. I'll make sure Erica links that in the show notes. And then you guys can get down with that too. Yeah. And
27:03
while we're at it, I will make sure to link the links for the infographics that are on my Instagram, as well as any other resources in the description. So make sure you guys check there. And we'll see you guys next time.
27:15
That's it. And remember, guys, when you think things can't be done, always find a way just like Erica, I find my own way Daily.
27:25
Thank you so much for listening. If you liked what you heard, it goes a long way if you could take just 30 seconds and leave us a five star review. And if you have friends who also want more out of life, make sure to share this podcast with them. And don't forget to follow along on social media to see what we are currently up to. I'm probably renovating a house as we speak on my stories and sharing that with you guys. And until next time, keep striving for MORE!