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And Repeat to Build a Real Estate Empire

The Step-by-Step Guide

BUY, REHAB, RENT, REFINANCE

“Intro

About Eric Bowlin

I bought my first property when I was in

grad school while working two part time jobs barely above minimum wage.

In 2009 I bought my first property while working two part time jobs barely above minimum wage. I was 24.

I was in a PhD program for Economics and I was set up for a super cushy future, but in 2011 I dropped from the program to pursue real estate full time.

By the time I turned 30 in 2015, I retired from the work force. Read more about me.

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Starting Out

In 2009, I wanted to buy a house. I had saved up a lot of money and figured it was cheaper to own than to rent. So, I started shopping around for houses.

Eventually we realized that we didn’t qualify for very much. My wife and I were both students and all we had was part time income to support us. Lenders didn’t want to touch us because we just weren’t qualified.

One lender made a promise to me – he promised I would never qualify for a loan.

You see, I had about $60,000 in student loan debt and part-time jobs that were barely above minimum wage.

I’m not one to give up, so I kept pushing along. Then I learned I could use rent income to help boost up my income and help my debt to income ratio.

It was game on! It wasn’t long until I moved into a “nice” 3 unit multi-family building.

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I left the grad program in 2011, got my real estate license, then got into real estate full time. I bought my first flip in early 2012…

…and it didn’t go so well. Fortunately I didn’t lose any money, but I spent months working on it and didn’t earn anything. It did give me something quite a bit more valuable though – experience and credibility.

When the flip was coming to an end, I decided to go ahead and purchase a 4 unit multi-family property. I was a bit too ambitious and lined up the purchase of the new property for just a few days after the sale of the flip.

It worked out in the end, but the week before closing I remember having under $200 in the bank, with every credit card maxed out. I never missed a payment in my life, but I did start to get all kinds of junk mail about foreclosure, debt forgiveness etc. Fortunately I did need that.

After the purchase of the multi-family things started looking up. It wasn’t long until those 7 units grew into 10, 15, and now over 470 units.

With each deal I put money in my pocket and paid down my debts. Eventually the income reached 6 figures and we were essentially debt free.

That’s why I felt comfortable to sit back and let my passive income support us and to stop actively earning money.

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Growing My Business

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The BRRR Strategy

As the name suggests, the BRRR strategy stands for “Buy, Rehab, Rent, Refinance” and Repeat.

What Is It?

Why Use It?Buying rental property is a very capital intensive process. Most lenders require 20-25% equity in order to lend against the deal.

Many people don’t always have 25% to put down. Others might have some money but after one or two purchases, all that cash will be gone.

The BRRR strategy is used to preserve capital in order to buy more and more properties over time.

This is the strategy I used to keep buying more property while continuously putting more money in my pocket.

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Step 1 – Buying

3 Ways to Buy

Use Your Own Cash 20-25%

Down

Use Your Own Cash FHA/VA 0-3.5% Down

Use Short Term Loan and

Refi After

You are limited by the amount of cash you have saved.

You can generally only buy 1 or 2 houses with this method.

Short term loans are more risky and have higher interest rates, but there is no limit to what you can purchase.

Least Ideal A Way to Start Long Term Plan

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Step 1 – Buying

The hardest part of the whole process is buying your first property.

Building Experience First

If you can find some way to get that first one, the rest are pretty easy.

Generally, the easiest way to buy your first one is to simply get an FHA or VA loan with a very low down-payment. The key to this is making sure you buy a multi-family.

Even if your wages aren’t great, you can buy a multi with FHA. Part of the rents can be counted toward your income, which easily pushes you past the income requirements.

It’s important you get a multifamily because you need to build “experience”. Remember, part of the BRRR strategy is to ‘refinance’ and get your cash back. So even if you paid all cash, without experience you’d be stuck and unable to grow.

So, buy that first multi-family and start building up that experience.

Read this article if you need more information about qualifying for loans.

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Step 1 – Buying

Now that you have some experience as a landlord and real estate investor, it’s time to move on.

Your First BRRR Property

The goal is to purchase your rental properties and retain your money in order to buy even more multi families.

Obviously, if you put 20-25% down on each property, it won’t take long for all your money to get swallowed up as downpayments.

It’s not bad to have your own money in a deal, except that it’s really hard to keep buying more property when you have no cash!

The BRRR strategy generally requires you to pay cash. Fortunately, you don’t need to use your own cash (though you can use it if you have it). This is where you need to use OPM – Other People’s Money.

The essential piece of this strategy is to use your experience to convince private lenders or hard money lenders to give you short term loans.

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Step 1a – Finding a Deal

There are a ton of ways to find a great deal. This includes:• Knocking on Doors• Yellow Letters• Bandit Signs• MLS• Bird-Dogs

Lots of Ways to Find a Deal

Focus on One Method

You can’t be an expert at everything, so find one method and stick to it. You can expand into other areas once you get good at one.

If you split your time between too many methods, you probably won’t find any deals and you’ll just get discouraged.

I personally have had great success with MLS and I’ll walk through my method to finding deals online.

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Step 1a – Finding a Deal

It’s a pretty straight forward system to find deals. I’ve broken it down into 5 steps.

Use MLS to Find Great Deals

1. Identify the type of property you are targeting. Once you have done this, hone down to the smallest possible target area you can. Get down to the neighborhood or even streets you want if you know the area well enough.

2. Do a search and specify your target area. You can also set up alerts so you get every new property as soon as it lists, or the next day. Remember, don’t limit your search to one type of property. Properties get listed incorrectly all the time!

3. Get to know this area extremely well. Is it full of multis? How many units, how many square feet etc… Drive the neighborhoods and pay attention to what’s going on in them. This doesn’t help you get the deal fast the first time, but it will help you in the next step.

4. Find the property with something out of the ordinary.5. Make an Offer

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Step 1a – Finding a Deal

Use MLS to Find Great Deals

What do you notice about this property I found on MLS?

The property is listed as a 2 family property but it clearly has details listed for 3 units!

This may or may not be a good deal, but it’s the exact type of thing I’d go look at.

These sorts of mistakes are actually very common in MLS. So keep looking!

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You need to look at how it raises your rent. A 10k kitchen might raise the rent $150/month (18%/year return) while a 5k kitchen might raise the rent $100/month (24% return).

With rentals, cheaper upgrades often have a higher return on investment than expensive upgrades. Make sure you consider all options when rehabbing a rental property, not just the most expensive ones.

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Step 2 – Rehab

You don’t want to rehab a rental property the same way you would fix a flip.

Rehabbing Rentals

When you analyze a project for a flip, you look at the cost of the work vs the increase in value. If a kitchen costs 10k and increases the value by 15k, then it has a 50% return.

Flips Focus on ARV

Rent vs ARVThat same kitchen may add value to your rental, but you aren’t selling it so it’s pretty much useless to you.

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Step 3 – Renting

Finding great tenants that will pay market (or higher) rents is key to your strategy. The fundamental steps are to find, screen, and retain.

Fundamentals of Renting

Finding TenantsThere are a lot of ways to go about this, but I personally use Buildium to manage my tenants.

You want to get your listing in front of as many eyes as possible. Buildium helps me put my listing on every good apartment listing site on the web.

Also, you can list for free on Craigslist, which I’ve had great success with.

Make sure you include pictures of the bedrooms, bathroom, kitchen, and exterior. It’s important that it is extremely clean and you don’t have tools or paint laying around in the photo! Also, never take a photo where someone can see you in the reflection of a mirror.

The idea is to get people into the apartment to look. They can decide against renting once they see it, but if they don’t come to see it, they have no chance to say yes.

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Step 3 – Renting

Tenant screening is extremelyimportant. Having bad tenants can put you out of business.

Screening Tenants

At a minimum, you need to do the following:

• Get Social Security Numbers – This is required to do a credit check. Do A Tenant Credit Check -You should ensure that the tenant's debts are not too high.

• Check The Tenant's Background – Check to make sure the application has a good background with no serious criminal behavior.

• Contact Information For Previous 2 Or 3 Landlords – The most recent landlord's information is useless because if this is a bad tenant, the landlord will say anything to get them out.

• Verify The Tenant's Job And Income – Always verify income and never accept under-the-table income toward their numbers.

• Ask If The Applicant Has You Ever Been Brought To Court By A Previous Landlord For A Debt Or Eviction. – Lying automatically disqualifies.

• Have A Written Lease Or Tenancy Agreement – A lot of problems can be resolved easily if the agreement is written instead of verbal. This is especially important if you do end up in court.

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Step 3 – Renting

Turnover is very costly; you want to retain good tenants if you can. Follow some of these tips to keep great tenants:

Retaining Tenants

1. Maintain the property in great condition – Always make sure your property is in better condition than your neighbors.

2. Have a good lease and tenant screening process – Screening tenants keeps everyone happy. Your tenants know their neighbors aren’t criminals or deadbeats who steal.

3. Stay in touch with the tenants in be prompt with maintenance –Nobody likes to put in a simple maintenance request and wait 3 months to see the handyman.

4. Offer a reward to stay at the end of the lease – Turnover costs money. Use some of that turnover cost to incentivize staying. Deep cleaning or carpet cleaning are great examples.

5. Send Christmas cards or small gifts – They’ll remember it.6. Incentivize the tenants to save money for you – If tenants do

something that reduces your costs, share some of that with them.7. Make it easy to pay rent – They don’t want to see you anyhow.8. Provide a move in packet – Makes it easy to adjust.9. Send a welcome letter or post card – First impressions are lasting.

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Step 3 – Refinance

Remember, the goal is to get your money back so you can repeat the process.

Why Refinance?

The requirements to refinance a non-owner occupied property are slightly different than for owner-occupied.

Requirements

• You will need around 2 years of “experience.” This can be rehab experience, landlord experience, or even experience as a realtor if you can convince the bank.

• Most banks require 6+ months of “seasoning” before they will finance it. This means the property has been stable, fixed, and rented for around that period of time. Basically, they need you to justify a higher value with time and work.

• Banks lend 75-80% of appraised value on this sort of deal.

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Step 3 – Refinance

In order for this system to work well, you need to be able to be “all in” for around 75-80% of value.

Know The Numbers

Let’s consider a property that you can buy for $100,000, put $50,000 worth of work into it, and now its market value is $200,000.

75% of $200k is $150,000. You’d be able to get all your money back after the deal is over and your cash on cash return would technically be infinity, since you have no money invested.

It isn’t always possible to get back all of your money. Either way, the goal is to minimize the amount you have invested.

So in the same example, if you were all in for $155,000, you’d get stuck keeping only $5,000 in the deal.

If this property generates a paltry $200/month, that is still nearly a 50% ROI. Try beating that in the stock market!

Read more about analyzing deals.

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Bonus: Buying Checklist

If I’m not getting 35% or more, I move along. Choose your own numbers based on your market and risk tolerance.

High ROI

FocusFocus on one or two types of real estate in one or two markets. It’s too easy to get distracted with all kinds of different “shiny” deals.

Easy to RentYou should focus on areas with strong demand. Also, make your properties better than your neighbors (but don’t over-improve). Don’t waste your time on apartments you can’t rent easily.

Would You Live There?

If you wouldn’t stay there, why would anybody else want to?

Ask Yourself

If you are missing these basics, keep looking.

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Bonus: Cash Return Worksheet

Rent Less Vacancy

Total Rents

TaxesInsuranceUtilitiesMaintenanceManagementReservesMisc

Total Expenses

Principal and Interest

Cash Flow

Cash on Cash Return (cash flow / total invested)

NOI (Rent-Expenses)

Purchase PriceClosing CostsRehab Costs

ARVTotal FinancedInvestment(Financed – Rehab – Closing Costs – Purchase Price)

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Bonus: Areas of Opportunity

Below Market Rents

Marketed Incorrectly

Cannot be Financed Through a Bank

Poor Photos or Description

Terrible or Hostile Tenants

Ugliest or Worst Building in the Neighborhood

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Are You Ready?

Obviously a 20 page booklet isn’t going to teach you everything you need to know to make it.

Take the First Step

The point is to show you that anyone can do it. By following this simple strategy there is literally no limit to the number of properties you can keep.

Most people miss part of the puzzle.

Either they find great deals and get focused on the short term gains –flipping for cash. This is great but the income goes away when you stop doing it.

The other group of people know the power of rental income, but work their entire lifetimes just to buy enough property to retire. They can have a great retirement, but didn’t get to enjoy all the “good years.”

When you combine the two mentalities and finally connect all the dots, you see the power of the BRRR strategy. It’s essentially combining flipping with renting.

I hope I can help you start down the path toward Financial Independence.

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