Part-time real estate investors Connor Swofford and Pieter Louw scaled quickly — from zero to 24 units in 12 months — thanks to what’s known as the BRRRR method.
Short for buy, rehab, rent, refinance, repeat, the BRRRR approach involves buying a property with potential, renovating it, and then finding a tenant. Once rented, the next step is to refinance, allowing investors to pull out their original investment, plus any equity they’ve built in the property. (Banks typically lend up to 75% of the new value on a cash-out refi.)
It’s a way for investors to essentially recycle their initial capital, rather than having to come up with, in many cases, a lot of new money for each deal.
“With a $300,000 or $400,000 property, with closing costs, you have to come up with 60 to 80 grand, which is not very scalable,” Louw told Business Insider. He’s a real estate agent in Buffalo with a background in construction and engineering, while Swofford is a startup consultant in Charleston.
The business partners, who have known each other since 7th grade, shared two costly mistakes to avoid when it comes to the BRRRR method.
1. Not budgeting your time and money correctly
Short-term financing, such as private money or hard money, is typically used in BRRRR real estate investing (Swofford and Louw have financed each of their deals with hard money). It allows investors to move quickly on distressed properties, but it can come with high interest rates, making it especially important to pay them off in a timely manner.
Thanks to Louw’s construction background, they can confidently predict their rehab costs and timeline. Even still, “things go wrong,” said Swofford. Plan for the project, especially if it’s your first, to cost more money and take more time than you think — and start small, they advise, with a property that needs cosmetic renovations, rather than a full gut rehab.
One way they safeguard against unexpected costs is by specifically looking for multi-family properties that don’t require a full rehab and have at least one livable unit. That way, they can rent out at least a portion of the property immediately and start bringing in rental income.
“Almost every property of ours has had a tenant still living in it, and that tenant is basically able to pay the interest expense as we are rehabbing the property,” explained Swofford. “So, we basically get to semi-rehab it for free in a way.”
Thanks to Louw’s network and experience, they have a list of reliable contractors that they can trust — and, with any rehab project, your contractor is your most important hire.
Keep in mind that you get what you pay for, said Louw, who prefers to pay a premium for an excellent contractor in order to reduce headaches and expenses down the line: “A contractor might cost 20% more, but if they’re getting the job done faster and more efficiently, that’s a month less of interest payments we’re making to these lenders — and then also not having it rented out, so it sometimes even saves you money in the long run.”
2. Miscalculating the after-repair value
Understanding the purchase price versus the after-repair value (ARV) — what the property is worth after renovation — is essential. After all, the key to this strategy is increasing the property’s value and building equity that can be accessed with a cash-out refinance.
“If you come in too high on your initial offer, you set yourself up for failure,” said Louw. “Not that it would bankrupt you, but it’s really going to bog you down now that you’ve got all that money tied up in that place — and in that regard, you wouldn’t have built up any equity, so you’re really just slowing yourself down for the future.”
In an ideal scenario, you can pull out enough to pay back all of your loan costs and fund your next deal. In a nightmare situation, the appraisal is lower than expected, and you can’t pay off your short-term loan. Knowing your numbers and doing your due diligence will help you avoid the latter.
They won’t close on a deal unless they’re sure of the ARV.
“We’re at a point where we don’t need to make any emotional investments. We don’t need a property at any specific point,” said Louw. “And if it doesn’t work out, if we lose to another investor or anything, it’s like, ‘Okay, well, the numbers didn’t make sense for us. Let’s move on to the next one.'”