"The best investment on Earth is earth."

– Louis Glickman

Song to Digest With

Clint Eastwood by Gorillaz

Finally, someone let me out of my cage
Now time for me is nothing 'cause I'm counting no age
Now I couldn't be there
Now you shouldn't be scared
I'm good at repairs
And I'm under each snare
Intangible
Bet you didn't think so I command you to
Panoramic view
Look, I'll make it all manageable
Pick and choose
Sit and lose
All you different crews

Hi, I'm Rob Bergeron. If you ever call me and reach my voicemail, you'll hear me say, "Hello, this is Rob BRRRR-geron..." It's a bit funny and fitting for a guy who loves the BRRRR method of real estate investing!

Speaking of fitting, I picked up a new Tesla Model X in December of 2020. Weighing in at 6,000 pounds, I was able to depreciate it 100% for a write-off. My CPA mentioned I needed a write-off, and I saw this as a perfect opportunity. To top it off, I was able to get "BRRRR" as my license plate, and I was shocked it was available. I sent David Greene, the host of BiggerPockets, a text to share my excitement and surprise at its availability.

Investing in real estate can be a powerful way to build wealth, and the BRRRR method is one of the most effective strategies to achieve that. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. This method allows investors to recycle their capital to acquire more properties over time, creating a scalable investment strategy. Here’s a breakdown of how it works:

Methodology Behind BRRRR:

1. Buy:

• Find a Property Below Market Value: Look for properties that need repairs. These are often available at a lower price. Target deals with margins or stagnant listed properties that might be ready to play ball.

• Funding Options: Use various funding options such as cash, hard money loans, or private money to finance the purchase. Vet them and seek out a local investor friendly attorneys insights

2. Rehab:

• Renovate the Property: Improve the property's condition and increase its market value.

• Focus on Cost-Effective Improvements: Prioritize renovations that significantly boost value, such as kitchen and bathroom upgrades. Paint and flooring has incredible ROI! It's awesome to knock out major capital expenses on the frontend so you don't have to pay out of pocket on the backend!

3. Rent:

• Generate Consistent Rental Income: Rent out the property to tenants.

• Appeal to Tenants: Ensure the property is safe, clean, and functional to attract and retain tenants. In our market, we look to cashflow at least $200 a door.

4. Refinance:

• Pull Out Cash: Refinance the property to extract cash, typically 70-80% of its new appraised value.

• Long-Term Mortgage: Replace the initial high-interest or short-term loan with a long-term, low-interest mortgage. Target local banks and midsized banks for the best terms and flexibility.

5. Repeat:

• Buy Another Property: Use the cash from refinancing to purchase another property and repeat the process.

• Build a Portfolio: Aim to create a portfolio of rental properties, each generating income and appreciating in value.

Tax Implications on Refinance:

• No Immediate Tax on Cash-Out: The money pulled out during refinancing is considered a loan, not income, and therefore is not immediately taxed.

• Depreciation Deductions: Continue to claim depreciation on the property, which can reduce taxable rental income.

• Interest Deductions: Deduct the interest paid on the new mortgage from your rental income, further lowering your taxable income.

• Capital Gains Tax: When selling the property, you'll pay capital gains tax on the profit. Holding the property long-term can benefit from lower long-term capital gains tax rates.

Importance of Forcing Appreciation:

• Increasing Property Value: Renovations actively increase the property's market value, a process known as "forcing appreciation."

• Higher Equity: Create more equity in the property, which can be leveraged during refinancing.

• Better Refinance Terms: A higher appraised value allows for a higher refinancing amount, pulling out more cash for further investments.

• Increased Rental Income: Upgraded properties can command higher rents, improving cash flow and overall return on investment.

Financial Risks:

1. Overestimating ARV (After Repair Value): If the property doesn't appraise as expected, refinancing might not recover your investment.

2. Underestimating Rehab Costs: Unexpected renovation expenses can reduce profits.

3. High Interest Rates: Rising interest rates can make refinancing less favorable.

4. Cash Flow Issues: Difficulty in renting the property quickly or at the expected rate can strain mortgage payments and other expenses.

Market Risks:

5. Market Fluctuations: Real estate market downturns can lower property values and rental demand.

Operational Risks:

6. Poor Property Management: Ineffective management can lead to high vacancy rates, tenant issues, and increased maintenance costs.

7. Delays in Rehab: Renovation delays can extend the time before the property is rented, impacting cash flow.

Legal and Regulatory Risks:

8. Zoning and Permits: Issues with zoning laws or obtaining necessary permits can delay renovations or lead to legal troubles.

9. Tenant Laws: Changes in tenant laws and regulations can affect property management and cash flow.

Personal Risks:

10. Burnout: The BRRRR method can be time-consuming and stressful, potentially leading to burnout.

Mitigation Strategies:

• Thorough Due Diligence: Carefully research and analyze potential properties, rehab costs, and market conditions.

• Contingency Budget: Allocate extra funds for unexpected rehab costs and delays.

• Professional Team: Work with experienced contractors, property managers, and real estate professionals.

• Financial Cushion: Maintain a reserve fund to cover vacancies, unexpected expenses, and potential cash flow issues.

• Regular Market Analysis: Stay informed about market trends and adjust your strategy accordingly.

By understanding each step and executing it effectively, you can leverage the BRRRR method to grow your wealth and achieve your financial goals. Like anything else, just take things on one at a time until you get the hang of things. You can do it!