Have you wondered how investors are retiring on properties? Let me share with you the BRRRR Strategy (aka B4R Strategy) that I have been applying myself when it comes to property investing, in this video:
For those who prefer to read, here’s a summary:
What is the BRRRR Method in Real Estate Investing?
- Buy. You want to buy a property that is preferably below market value.
- Refurbish. This is done to force capital appreciation. The best way to do this is to extend the house.
- Rent. This is where you see the cash flow in. Here’s a trick – renting individual bedrooms to different tenants usually gives you about 25-50% more rental income than renting the whole house to one family.
- Refinance. Aim to get the highest loan to value ratio (LTV) possible to ensure that you will always have 25% net cash flow in all events.
- Recycle. Once you are familiar with the whole process and you are able to extract cash from your current property, repeat the cycle and start your own property portfolio!
Here’re some lessons I’d picked up as I implemented the BRRRR method, I hope it helps you become a better property investor!
BUY
There are a few key factors that you should look out for when it comes to buying a property.
- Country Selection
I tend to choose countries that allow me to get a mortgage with a 50% loan to value ratio (LTV) and allows me to buy an existing property.
For example, New Zealand allows Singaporeans and Australians to buy resale properties with no additional tax.
Secondly, choosing a country with a strong rule of law. This is to ensure that your ownership will not be disregarded and that the lawyers can handle and evict tenants in bad situations.
Thirdly, check the population growth rate. It should be growing at least 0.5% a year.
After determining all these factors, you might be considering whether to choose the city or suburb.
- City
You should be looking for cities with one or more growing industries. It could be tourism or education. Avoid small towns where there is only one industry like mining or those that rely on a single university town.
Having good accessibility is important as well.
- Suburb
Look for suburbs with falling crime rates.
In terms of price per square foot, find one that is cheaper than the surrounding. As such, I usually go for the 2nd most popular suburb as there is usually flow over from the popular suburb.
Other than that, go for the cheapest house on the best street as it then to allows the valuer to uplift the valuation. And make sure that you do not overpay for the house.
- Rental Analysis
You should compare the rental yields of the surrounding, and make sure your ideal rent is achievable. Oftentimes, a higher rent could be promised, I’ve noticed a difference of 20-30%, so always do your own homework!
REFURBISH
Refurbishment is how you add value to the property.
For example, terraces or semi-detached houses are a lot easier to add or splitting the big house into 2 flats. It can also be extending the back of the house, adding more rooms, or even converting it to ensuite rooms. This generally adds about 50-200% of its value.
Build your own Power Team!
However, this cannot be done without a power team who can help you manage such projects. Key roles in a power team include:
- Project Manager
This could be a person or an external team who charges about 10% of the project cost.
- Planning Consultant
They will help you get the planning that your property needs
- Lettings manager
I prefer to hire a local lettings manager who specializes in the area and is not associated with a large scale agency. This is because if I have any problems with the house, I will then be able to contact the owner of the lettings firm directly and solve problems quickly.
Beginners should not attempt to manage a project on their own because you’ll need the network to ensure a smooth process.
One thing to keep in mind
It is important to make sure that the refurbishment you do for the property will potentially help in capital appreciation. Every dollar that you put in should try to generate more than $1 worth of valuation. So if you have spent $100,000 on your refurbishment, it should ideally lift your value by at least 2 to 3 times.
RENT
This is where you see the income come in, but could also be where you get the most headaches if not managed properly.
Profile your tenants
Personally, I prefer renting to white-collared workers as they are less likely to lose their job and usually get promotions of pay rise faster. Also, areas with rental properties that appeal to this group tend to fetch a better resale price.
Of course, there are also landlords who prefer renting to blue-collared as this group tend to be more senior and generally have a good stable income.
Background checks on the tenants help you to determine if a tenant is reliable. This is to reduce the chances of eviction.
Make sure you have direct contact with your tenants for better, faster communication.
How to estimate rents?
Here’re two ways:
- Check websites that list rental units
- Call an agent twice, first time as a landlord, second time as someone looking to rent.
REFINANCE
You’ll need to deal with loans when you’re investing in property.
Joint Ventures
If you are thinking of a joint venture with more than one person, it is often better to put it under a limited company as it protects you against death, bankruptcy and disputes between partners.
Find a suitable mortgage broker
You’ll need someone with the expertise and can help you:
- manage your mortgage as a foreign investor
- manage your loans under a limited company
- understand how to run deals and get loans for you.
RECYCLE
After you’ve successfully invested in your first property, you can repeat the cycle and start collecting more properties under your property portfolio.
Aim to achieve 10 properties in 10 years by extracting as much money from the properties, maintaining positive cash flow and take the money to buy the next property.
Try to diversify your portfolio by getting properties in different cities. Start with neighbouring cities and ensure that your power team understands the cities that you are vested in.
When do you stop?
The aim of BRRRR will be to achieve 10 properties. Thereafter the world is your oyster and it’s really up to you.
You might consider your knowledge good enough to be a joint venture leader and help others to get their 10 properties.
Or, you might decide to start selling your properties one by one after 10 years of holding, some of these properties may already double in value.
How BRRRR property investing works?
Many people have the misconception that owning one or two properties is enough to retire.
But as you can see, after 10 years of holding, a property might have gone up by 7% a year, leaving you with barely $860k each.
In this case, you need to sell with one property to pay down the loan of the other. You’ll be left with one property (that you’re likely to be living in) and no additional income. The exercise would have been a waste of time.
It is ideal to apply the BRRRR strategy, where you start with one property, enjoy the capital gains and positive cash flow and use that to buy the next property.
Repeat the process every few years by refinancing to buy more. And at the end of 10 years, you have an expanded property portfolio.
All these can be done safely if you make sure your properties have a capital appreciation and positive cashflows throughout.
