No, this isn’t just the shivering cold sound you make when it’s -40ºC on a “normal” Saskatchewan winter day. The BRRRR method is a hybrid of the fix-and-flip and renting strategies, utilizing the benefits of both and reducing the risks of both methods. Essentially, you find a “fixer-upper” or property that needs a little TLC, use short-term funds to fix it up and place a tenant, then refinance for a better long-term mortgage. The process is then repeated by using the profit and equity from one property to strategically leverage and fund the next property. Therefore, creating a domino effect.

Okay, but what does BRRRR stand for?

1. Buy
2. Rehab/Renovate
3. Rent
4. Refinance
5. Repeat

Let’s get into the details…

Step 1: Buy

This seems like a straightforward step but is CRITICAL in determining the success of your process. We cannot stress this enough; you need to do your homework before you purchase a property. There is no going to a real estate agent, looking at a couple of properties, and then deciding on the spot the one you personally like the best. No, no, no. Promise us you’ll do your homework first?

Preliminary homework includes, but is not limited to:

• Researching the local neighbourhoods – Which ones are more desirable? Which ones offer the best ROI? Which ones have a forecasted growth projection in income, population, etc.? Who is your target audience and where would they prefer to live?
• Once you have narrowed down potential neighbourhoods, look at rental rates and property valuations for these areas. Are you noticing reoccurring themes and rates? Are rental rates consistent with property type in the area? Are certain renovations pulling in higher rents? Make note of this.
• Examine the ARV (after-repair value). Are properties selling higher after renovations, or are they flatlining and staying consistent amidst the crowd of properties in the area?
• Talk to a local Property Manager or Property Management company to get their perspective on neighbourhoods, property types, and rental rates. They live and breathe this information every day and can provide valuable insight.
• Take a deep dive into the city/town statistics, median income, population, demographics, etc. Talk with the local Economic Development Manager or Economics department to learn more about upcoming projects and developments that could potentially add value to your property; you can also access city/town information on Townfolio: https://townfolio.co/find-community-data
• Find a real estate agent that specializes and/or has extensive knowledge of rental properties in the local market. Most often, real estate agents are trained to cater to home buyers and not investors. As a result, they may not catch fine details that would make or break a rental property investment.
• Articulate your goals. Are you planning on buying and holding, short-term holding, etc.? These goals will help guide your investing principles and strategy to maximize your ROI.

Before purchasing, know that the property needs to (1) cash flow, and (2) there is an opportunity for extra equity. Either buy the property under market value or add equity through strategic renovations; a combination of both is the ideal scenario.

Step 2: Rehab/Renovate

Now comes the fun part (in my opinion)! Renovations are the best way to increase the value of a property and gain further equity. Time to put those hours of watching HGTV to use and get renovating the property. Generally, there are two types of renovations, (1) cosmetic, and (2) replacements and maintenance.

Cosmetic Renovations: Focus on restoring and improving upon something old and updating it to something more up-to-date and desirable for renters.

• For example, replacing the flooring, painting the walls, updating the curb appeal, renovating the kitchen and bathroom, etc.

Replacement and Maintenance Renovations: Require more remodelling and changing the existing factors to comply with updated safety regulations and requirements. Usually requires more time and capital.

• For example, updating the plumbing and drainage, electrical, roofing, etc.

The goal is to maximize your ROI (return on investment). For example, you will decrease your capital expenditure and increase profit margins by completing the renovations on your own rather than buying a property with recent renovations or outsourcing projects. However, to really maximize your ROI you NEED to complete the preliminary checklist and homework. Talk to a Property Manager before renovating to get tips that will increase rent and frequently research comparables in the same neighbourhood and property type.

Equity = Value of property at the end of renovations – current market value (price paid for the property) – renovation/rehab costs

Step 3: Rent

Time to start cash flowing! Ideally, rent should be high enough to cover all expenses and (hopefully) have a bit of cash flow. MOST properties will not fit these criteria, that’s why you need to be checking real estate websites frequently to find the needle in a haystack property. Have an idea of the (conservative) desired rent before you even purchase the property and renovate. That’s why it is beneficial to talk to a Property Manager before purchasing the property because they can guide you through scenarios of what the property could rent for. At the end of the day, there should be no surprises.

Positive rental income shows the bank that the property is cash flowing, which provides greater offs of the banking lending you money for that deal, making it easier to refinance.

Step 4: Refinance

Now that the property is in a tip-top updated state, it is time to refinance! What does this mean? Considering you bought the property (hopefully) below market value and renovated the property; the bank then reappraises the property for a higher market value than what you bought it for. A new loan then replaces the original existing loan. As a result, your capital expenditure in the property is significantly reduced and you have the opportunity to take advantage of a long-term capital gains tax, which reduces the taxes that may have been higher with a fix-and-flip property.

Note: Some banks have a seasoning period that does not allow you to refinance the property for a period of time (for example, 6 months). However, it is best to talk to a mortgage broker or bank about this topic.

Let’s take a look at a hypothetical example…

Assume you buy a property for $300,000 and put down 20% for the down payment. You have put down $60,000 and were granted a loan for $240,000. You spend $30,000 on renovations to add equity to the property and increase the rental amount. Your total investment thus far is $90,000 (down payment + renovations). Now, after a reappraisal let’s say the property is valued at $400,000. If you can get the same 80% loan on the $400,000, the value of the new loan is $320,000. You can now pay off the previous loan of $240,00 and gain an extra $80,000 cash at closing. Meaning, you got back $80,000 of your $90,000 investment and now only have $10,000 tied up in the property instead of $90,000 on a cash-flowing deal. You can now use this $80,000 to help finance your next rental property deal – aka repeating the process!

 Step 5: Repeat!

Once you have refinanced and obtained cash at closing, it is time to repeat the process!      

Every time you buy a property below market value, you are increasing your attributed net worth. The increase in net worth is the new market valuation less the price you bought the property for. With cash flowing assets, equity, and having a higher net worth, banks are more likely to lend you more money to continue the BRRRR process.

Don’t forget, there are risks to the BRRRR process too

It’s not all sunshine and rainbows, mishaps and miscalculations can occur. Potential risks that may pop up include, but are not limited to:

• Not receiving the full refinance amount you intended
• Miscalculating your numbers and valuation during the preliminary phases
• Rental rates fluctuating with the economy, throwing off initial calculations
• Not receiving the intended amount for rent
• Inability to obtain refinancing. However, there is always the option to sell the house after renovations and still make a profit (fix-and-flip strategy)

However, most risks can be minimized by doing your homework and using conservative numbers in initial calculations and projections.

Conclusion

The BRRRR process is not going to come easy on the first property. There will be hiccups, going over budget, and risks that will occur – it’s inevitable that something will go wrong. Don’t worry, this happens to everyone! You are not alone. Just like professional athletes, you will get better at the process with consistent training and practice, making mistakes and learning from them, doing your homework and due diligence, and continuous learning. But you are not going to get good without starting. Literally, just start and take action.

To really differentiate yourself and provide value to yourself and potential investors:

• Make it a goal to read business, law, economic and real estate-related books. Start with reading one book per month then gradually increase it to one per week.
• While you’re working throughout the day, listen to audiobooks and podcasts. To begin, listen to the Bigger Pockets podcast and The Everyday Millionaire by Patrick Francey. Both focus on strategies you can implement and stories of real people navigating their real estate journey.
• Join real estate communities, both local and general, on online forums, Facebook, and LinkedIn.
• If you are in Canada, check out the Real Estate Investment Network (REIN). Unique to REIN, they started a channel dedicated to real estate investing in Canada. Think Netflix, but for real estate investing. Whether you are a beginner or advanced investor, there is something for everyone! You can access the channel here: https://reinchannel.com/
• Catch up on all the latest REIN insights on their Facebook page here: https://www.facebook.com/RealEstateInvestmentNetwork
• Frequently visit both rental and purchasing websites to get an idea of property types in specific neighbourhoods, market valuations, rental rates, comparable renovations, etc. By doing this, you’ll find it easier to pick out which properties look like a good investment versus which would cost you money.

At the end of the day, the best advice is to be a sponge – regardless of if you are a beginner or advanced investor. Take the approach of “I don’t know what I don’t know” and just absorb information, but don’t forget to provide value and insight to others in the process as well. Be a giver and a taker. You’ll thank yourself in the long run

Contact

If you want to talk more about the BRRRR process in the Saskatoon and area, reach out to us! We would love, love, love to have a chat with you and discuss your options as an investor.