How to Buy Cheap Rental Houses like The Stealthy Rich in 5 Simple Steps (BRRRR)

-Spoiler Alert. Our houses are now free, well, basically free. Every property after House #26 has zero money out of our own pockets in the long term. This method is how you create wealth. You might have heard of the BRRRR method, which stood for Buy, Rehab, Rent, Refinance, Repeat. We are close to that here, but we like to think of it as BRRRR on steroids or BRRFR. Buy, Rehab, Rent, Finance, Repeat.  Here are the simple steps (not easy necessarily) take some notes!

 1. Find a Property Under Market Value

That sounds easy, but it is the hardest step in this process by far. Especially in 2019, when we are near the top of this crazy bull market, we’ve ridden hard for the last ten years. (Oh, so hard.) HOWEVER, The deals are still out there. Use yellow letters, wholesalers, friends, bandit signs, “driving for dollars” to find your deals. You have to out-hustle the next guy, and soon enough, you’ll find a deal. Once you find an interested party, you have to figure out what their “pain” is and ease it. Did they just become an accidental landlord? Did they have a tenant move out? Do they need quick cash? Find out what they want and see how you can give it to them. In our experience, if you can do that, most of the time, you’ll end up with the property.

2. Purchase Said Property From Step #1 With Cash or Very Short-term Money

When we approach these sellers, part of the reason we can get them to sell at a discount is that we pay cash and we close fast. Our title companies can close in 10 days, usually, if we are using our own dollars or other short-term sources. Superfast, super easy. We are solving a problem for the seller. They have a home that they no longer want and want it gone, or they need the money more than a house. The faster, the better.

3. Do Minimal Rehab on the Property to Get It Rent Ready 

Usually, we buy our houses at a discount because they are tired and a little older, and they have some deferred maintenance. No problem. We buy them and quickly deploy our contractors and do a bit of drywall repair/painting, possibly new floors, some new light and plumbing fixtures, spruce up the yard, and then it’s good as new for the next renter! Usually, we spend $3,000 to $12,000 to get a house to this state.

4. Rent the House

Next, we take dynamite pictures and list it on the Multiple Listing Service (MLS), which is the biggest rental marketplace in Houston. We are licensed agents as well, which allows us to list here. We choose a price near the top of our market but not the top. We then field the calls and send people over to view the house. Once we have some interested parties, we send them an application and vet them by checking income, rental history, and creditworthiness.

5. Get All Our Money Back Out

This step is where the magic happens; it’s like the movie The Prestige. After about three weeks of owning the property, we send an email to our banker and tell her we want to “finance” a new house, on which we’ve never had a loan. She orders an appraisal and gives us 80% of the appraised value (that is the key here) on a 20-year note for around 5-6% interest. Notice it’s not 80% of what we paid for it, but what it’s actually worth. Booyah. The best part of these loans, besides getting all our money back, is that our banks can do it quickly. AND for less than $1,500 in fees typically. SO GOOD. The only downside is that the rate is only valid for five years. It will then reset to whatever the current rate is at the time. (We just went through this exercise on our first loans, and the percentage went down thanks to The Fed.)

Example Deal – 123 Maple

1. Find a house from yellow letters, 123 Maple. It’s a three-bedroom, two-bath house with 1600 square feet. The owner bought it ten years ago and has good equity in it. It needs some love. Things like paint, new floors, and the yard is a mess. Plus, the appliances have seen better days. You negotiate a price of $90,000. The owner is so happy to be done with the boat anchor, as he had no energy to get it rent-ready or to list it with a realtor.
2.   You borrow $100,000 from a friend who has it just sitting in a savings account, making 1% (Maybe it’s two different friends’ money along with 20k of your own). You guarantee him 10% APR for three months minimum. This cost will be about $2,500 in the end. He is ecstatic to be making a little money finally.  You sign on the house. You are nervous now because you have borrowed a ton of money and have this empty house to show for it. Don’t fret; it’s about to get awesome.
3. The house takes $8,000 to get ready. 3k in floors, $2,500 to paint. $1,200 in new appliances. $1,000 in odds and ends. $300 for the yard. AC was a goner, too, $3,000. Bummer, but surprises happen sometimes. No worries, we’ve planned for this.
4. You take some awesome pictures and list the property on whichever site rentals are found in your community. You vet a tenant and get their deposit and first month’s rent of $1300.
5. You contact your new favorite small regional bank and tell them you need a loan on your property, 123 Maple. They start the process and conduct an appraisal. House appraises for $140,000. Jackpot. 80% of $140,000 is $112,000. Guess what, you only need about $103,000 to be made whole. You’ve made it. Welcome to the gift that keeps giving, cash-flowing real estate.
6. Now, these numbers might not apply to your local area, but the ratios still apply. You should find under market deals anywhere and apply these concepts to scale your holdings and maximize wealth. You can do this!

If this seems complicated at first, try buying a house the old-fashioned way first, and once you get in a groove, you can try the BRRR method.

Takeaways

Unlike the movie “The Prestige,” we are sharing all of our secrets here. Why not? There’s plenty of wealth to go around. So get out there and start hustling. Find a small regional bank: the smaller, the better (one branch). Ask for their portfolio lender. In this market (2019), everybody wants to lend money. The banks should be fighting over your business. Also, for step 2, find some wealthy friends who will lend you money in the short term for a fair interest rate for both of you. Then get out there and find some properties that will cash flow and make you wealthy. Your future self will thank you.

Remember also that once you get comfortable, you can do the R’s in a different order. We often will Buy, Rent, Refinance, then Rehab.

Update (2020) With all the crazy stuff going on globally, we still see lending with even lower rates.