The Science of Flipping - Buying Rentals Using The BRRR Method

Episode Date: October 12, 2021

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Welcome back to the Science Flippin' Podcast. I am your host, Justin Colby. If you are listening to this on iTunes or Spotify, you've heard this before, I encourage you to get to youtube.com forward slash Justin Colby. Subscribe to my YouTube channel as I go live six times a week right there on YouTube, including these wonderful, awesome, and highly educational podcast episodes here on the Science of Flipping. This podcast is all about real estate investing and to make you the best

real estate and the most profitable real estate investor you possibly can be. So let's dive into something I'm extremely passionate about right now, which is buying rentals and using the BRRRR method. Now, for those that may have never heard of the burr method it stands for buy it rehab it rent it refinance right and then you repeat if you want to add the other r there and so i love this method and the big reason why i love this method because it allows me to be very flexible with capital i also can create value in a property that you might not see some value in. And so this is an incredible model. And essentially, here's the rules of the model that I play by. First, I want to be all in. Every dollar in from the acquisition and the remodel, I want there to be,

I want to be at most 75% of ARV. So if ARV is 200,000, I want to be all in at 150,000. That's every dollar in for purchase and remodel. Okay, 75% of our ARV. Then what I would ideally like is to have a 1% rent ratio. So if I'm all in for 150, I would like that to rent for roughly $1,500. Now, yes, there's 12 months in a year. So if you do the math, really 1% rent ratio would be something like 1300 or 1350 to be exact, not necessarily 1500. So there is some wiggle room there to be able to have the 1% rate rent ratio. Now, I am actually looking at buying several properties this week. One of them is in Oklahoma City where I'm currently buying rentals anyways, and the buy price isn't great. Okay, so I would tell you this is where you really need to

look at the math of it all. The buy price isn't great. Let's say I buy it somewhere around 120, 125, probably closer to 125. I know I'm going to need to be putting 25,000 into it. So I'm going to be into this thing for 150,000. The rents look like they're about $1,300 a month, which stays within that 1% rate rent ratio. For me, it's in a good area. It's not the sexiest, craziest, awesome, but it's a steady three bedroom to bathroom house, which for me makes a whole lot of sense. Now, here's the reason why the buy price, I would like it to be a little bit lower is because the value, the ARV, if I remodeled it totally would be about 200. I'm not doing a full-blown remodel. I'm putting carpet and paint on. And so essentially I think the ARV is closer to 190,

maybe even 185. And if I do my very quick math on that, I'm not going to be able to hit my uh goal here so if it's 185 times 0.75 i would need to be all in at 138. so if i'm all in at 150 that means i'm going to end up leaving roughly 12 000 in this property and the reason why i like 75 is because the bank will refi my money out. Remember, buy it, remodel it, refi, or you could rent it and then refi one way or another. I usually rent it and then refi because I get a higher value out of it. So I actually would have to leave $12,000 into that property, which is not the end of the world, but I like to try to get almost as much money out as I possibly can. So that's just one property I'm looking to buy in Oklahoma City. I also have two other properties that I'm looking

in. Birmingham, Alabama, Birmingham, Alabama. Now these are different because one is a duplex and one is a triplex. Now here is why this is so different than just one single family is because I'm actually likely going to overpay for these, right? But that's okay based around the rents that they bring in. I'm not looking as much for the extra value or equity I would be creating. I'm actually looking at how strong the rents are, right? That's really what I'm doing here because I'm not going to necessarily be flipping these. I need to have a strong rent ratio and quite literally these two properties, one is a duplex, one is a triplex. My rent ratio is almost two, 2%. And that's really, really strong. While I might be overpaying and I might not be at that 75% of ARV because it's a duplex and because it's a triplex, I'm actually going to be a lot closer to like 85, 90% of ARV. But even at that number,

why it makes sense for me is because my rent percentage, roughly almost two, right? Call it 1.75 rent to all-in cost. So again, if I'm all-in for 175, I'm making almost four grand, almost four grand a month on the duplex, right? And so something like that for me, while I may be overpaying in terms of ARV in my initial model I really like this because of the strength of the rent and when the banks see strength of rent inconsistency in rent they will refine me very aggressively and quite honestly I can leverage that with other rental properties and they might even be able to give me a line of credit against it, right? Because of the strength of the rent is so good. The same is with the triplex. It's not quite almost a 2X. I'm at like almost a 1.5 on rents to all in money, right? So if I'm monthly getting one point five X on or one point five percent for the rents and

That's a really strong cap right like for rent again. I'm basically playing market value. I'm not getting a discount I'm not concerned about that right now And I'll leave my money in those deals because the rents are so so good And so I think everyone should be looking at doing the burr model immediately i don't care if you're just starting i don't care if you're an experienced investor the biggest mistake i've made in my career is not buying rentals sooner even if i was buying one a year i'd have 14 rentals right now uh and by that next year the year after one of those would be paid off in full i just made that big mistake

and I encourage you to start doing this. So this is one of my favorite subjects right now. You're gonna hear me talk a lot, a lot, a lot more about buying more rentals and how to buy rentals. But hopefully that helped you guys understand how I'm buying rentals, how I'm analyzing properties, why I would make those decisions, and the fact that I'm even willing to pay market value on something like a triplex just goes to show there's great opportunity out

there as long as you're looking at the right fundamentals. All right. So hopefully you guys like this one. If you did, make sure you're giving me a five-star review on iTunes and Spotify. And if you are not yet subscribed to my YouTube channel, get over there. Six videos a week. I just over deliver. Go to youtube.com forward slash Justin Colby. Three will be specific to real estate just for you. Get over there, subscribe. Make sure you're liking every single video

because YouTube really likes that. And I look forward to giving you guys some more great info this week on further podcasts. Talk to you guys soon. Peace. you guys some more great info this week on further podcasts talk to you guys soon peace