We have entered an interesting investment time, cash flow is being squeezed as property prices rise and rental rates stabilize. The cap rates on investments are being reduced and investors are looking for better returns. So what options are available for better returns?
There are 3 primary investment strategies that have been commonly used in the past. Turnkey investing for the passive investors, then there is fix and flip and wholesaling commonly used by active investors.
The New BRRR Investing Model
This model manages to incorporate most of the pros of each investment model as identified below and at the same time eliminate most of the cons to each investing model.
This explains why it has such broad investor appeal.
Typical Investing Strategies (pros and cons for each)
- Pro: continue to be a great passive investment where investors can do their initial upfront diligence and then sit back and watch investments perform.
- Residual income, cash flow come in month after month, year after year.
- Low risk as all income and expenses are identified and transparent at the time of purchase.
- Con: property prices are on the rise and rents are stabilizing reducing the available cash flow resulting in smaller cash flow.
Fix and flips:
- Pro: Proactive investors can be involved in every decision and make adjustments as needed to maintain control over their overall investment.
- Return potential tends to be higher as investors make the profits by taking on the role of project manager.
- Cons: high risk as the investor assumes all expenses from surprises during renovations
risk of increased holding time while marketing for sale and a number of unknown expenses.
- No residual income.
- Pro: Little cash investment needed.
- Low risk exposure.
- Con: More of a “job based” business.
- Income potential is great, but requires constant active involvement to make money.
- No residual income.
BRRR model outline
This hybrid investment strategy essentially allows the passive investor to increase Total ROI on a turnkey property by purchasing it like a wholesaler, fixing it like a flipper and holding it like a turnkey investment. Interesting right?
- Like a wholesaler buys distressed property for large discounts, the BRRR model does as well.
- Like the fix and flipper, BRRR renovates the property as a way to control the process and keep expenses low on renovations.
- Like the turnkey investor buys property to hold long term for sustained investment the BRRR model does as well.
What if all this is done for you using economies of scale buying power, economies of scale renovation pricing and economies of scale property management knowledge and systems?
With the BRRR Model you work hand in hand with a professional BRRR Company and you are able to:
- Like a wholesaler: BRRR Buys dozens of properties each month using their long term relationships to acquire these properties with cash at steep discounts just as a wholesaler would do.
- Better than a Flipper: BRRR then uses their in house trained contractors and their economies of scale buying power to renovate at discount prices. Paying for renovations with draws just as any flippers would do.
- The Bonus Benefit: Then you are able to finance the property and appraise it based on a finished property which often appraises 10-20% and more above invested price. Financing 75 to 80% LTV allows you to recoup most or all of your initial investment in which case you have little to no cash investment on a property giving you outstanding cash on cash returns.
- The Turnkey Investment: You now own a Strong Cash Flowing Turnkey Investment property which you now have financed and have a nice 20 to 25% equity position on. You can now collect larger monthly residual income on your appreciating asset.
The Benefits just keep on coming with this BRRR model
While I cannot speak for every BRRR model out there, the model that our EBG affiliates use has continuing benefits.
When you are a BRRR company and buy hundreds of houses each year and have your own renovation team and property management company, you have a huge knowledge base with incredible economies of scale buying power and you are extremely confident in what you do. You tend to be able to forecast the important things:
- You know what to buy
- You know where to buy it
- You know what to renovate (often down to the studs and everything is new)
- You know how long it will take
- You know how much it will rent for
- You know how much it will be worth after renovations
With all this confidence insuring investors a good return on their investment comes easy. Look at what they are able to offer investors that makes the BRRR model so highly sought after.
- Renovation cost guarantee: This is not their first renovation because they know what costs run and what needs to be done they Guarantee the quoted renovation costs up front (or seller will buy it back)
- 120 day renovation guarantee: time is money and their experience provides the confidence. Seller Guarantees a completed renovation of 120 days. (or seller starts paying you full monthly rent on day 121)
- Appraisal Guarantee: Seller Guarantees the appraisal will come in higher than your full amount paid (or Seller will buy it back)
- Rental amount Guarantee: Sellers property manager guarantees the full rental amount that they quoted you (or the seller property manager will pay you the difference).
- Maintenance Guarantee: for the first full year you will receive a comprehensive guarantee on the entire property, full parts and labor and material if you are using the seller’s property management.
- Rental income guarantee: For the first full year. When using the seller’s property management you are guaranteed to receive the full first year’s gross rental income. whether tenant pays or property not rented. Seller is so confident in their ability to rent for quoted price to good tenants who pay their bills (or they will pay the difference)
- 3 year manufacturer warranty: Full Manufacturer’s Warranty on any included appliances such as brand new stoves, refrigerators, microwaves, washers, dryers, dishwashers and water heaters.
- 10 Year Roof Warranty: provided by roofing company on new roofs.
It becomes easy to see why active investors as well as passive investors, flippers and turnkey companies all like the BRRR model!
To learn more specifics about the BRRR model, I invite you to grab your favorite beverage and watch this video replay of our Baltimore BRRR Market . Please note there is a lot of great information in this video. It will run for about an hour and will bring you insights that many have never seen before. Most importantly the returns are quite possibly the largest most sustainable returns currently available anywhere in the country.