We're joined by David Greene, co-host of the BiggerPockets podcast, author, California real estate agent, and investor.
Today we discuss executing the BRRRR strategy from long distance, COVID-19 and 2020, planning for 2021, tax strategies, and more.
David has written two great books:
Traditional Process vs. BRRRR
The traditional process involves simultaneous down payment and financing followed by spending time and money on rehab and finishes with renting it out for cash flow. In this situation, the down payment and money sunk into rehab stays in the property. It's difficult to scale this method when using a considerable amount of money buying good deals and doing solid rehabs.
The BRRRR method is a rearranging of the order of when you finance. First, pay cash or use a hard money/private money loan. Put money into rehab. After the rehab, you refinance.
Spend $60,000 on a home in poor condition and spend $30,000 on rehab for a basis of $90,000. If it's worth $120,000 when done, this is a $30,000 addition in equity. The bank will allow borrowing of approximately 75% of that $120,000, which is $90,000. This is the same amount of money used to buy and rehab the house. With this money removed from the deal and continued ownership of a high-quality, cash-flowing property, the investor can move on to another deal.
If 75% or more of the ARV is worth more than the initial investment, this is a solid successful BRRRR because the investor can continue making deals with that same cash.
There is a seasoning period between acquisition and refinance, but there are no laws regarding the timeline before refinancing. However, some lenders do have specific guidelines. For the best loan possible, Fannie Mae/Freddie Mac, they generally require overlays, which is a six month period before refinancing.
Prior to six months, investors can look for a different lender. In this situation, expectations may need to be adjusted for the quality of the loan. There are a couple of more common options here, such as business with a portfolio lender who will hold the note on their own or the packaging of several properties together to receive commercial financing. David mentions he has had great success with the latter strategy in getting good financing and bypassing the overlay period.
Long Distance Real Estate Investing - BRRRR and Managing From A Distance
The fundamental math stays the same regardless of the market - a property needs to be purchased under market value so additional equity can be added, a rehab and contracting plan needs to be in place,
"When you're buying out of state, the first thing you need to get right with a BRRRR is that you're not paying market value. Don't think you're going to do this and get a turnkey property... It's going to be a fixer-upper, and you're going to need a contractor. If you can get those two things right, your appraisal comes in where you need it to, and the construction process goes smooth, you can BRRRR anywhere."
Once David has executed his initial process for a property, he likes to go hands-off by utilizing systems. He outsources - property managers are always hired and David has set up an email account devoted specifically for the messages from these property managers. David has a member on his team who monitors this account and handles the majority of the minor issues. This individual exports the property information to David's dashboard for reporting and analysis.
Many investors have a subconscious bias that everything functions the way it does in his or her home state. Investors should prepare themselves for the laws and processes in other states. When crossing state lines, investors should be well aware of how contracts are structured.
2020 for David
"I'm aggressive when I'm buying and building, but I'm very conservative with the reserves that I'm holding and the way that I underwrite. I really didn't care at all if tenants stopped paying. I just told myself: 30 years from now, whatever happened during this timeframe, I'm not going to care."
"This is part of building wealth, that you ride ups and downs. Undulations literally create wealth opportunities. You can't take advantage of them when it works for you and then complain about them when it doesn't work for you. Have some flexibility in understanding this is part of why there is the ability to create wealth, because markets go up and down."
In 2020, David became a real estate broker and started a mortgage company. He immediately partnered with an existing loan and mortgage professional who hadn't focused as heavily on scale, and he began hiring great people.
David's 2021 Crystal Ball
David is willing to speculate on the future, however, his position is not investment advice and is not considered the views of BiggerPockets or The Real Estate CPA.
David believes that high-income earners need to go on the offensive to disperse their wage earnings and consolidate their time savings and increase their equity. Some methods of sheltering income with real estate may disappear with a new administration and new legislation. Rent control may increase, eviction moratoriums may remain in place, and tax-deferral strategies may be altered or removed.
David is still waiting for the ball to get rolling on these changes before drastically altering his position or strategy. For example, if it does appear that the 1031 exchange is going away, David would 1031 several of his smaller properties into one larger property with lower growth potential and higher cash flow.
In a real estate transaction, especially in more complex transactions such as a 1031 exchange, there are many people who earn money that is then taxed. Agents, loan officers, inspectors and surveyors, and other industry professionals are all involved and receive income from this work. This point of this is to attempt to forecast the consequences of the changes and adjust the team, business, and strategy accordingly.
Learn more about David and his work by connecting with him on BiggerPockets or Instagram or by visiting his website: https://www.davidgreene24.com/
David also has a new book coming out soon, specifically for agents, that will be published through BiggerPockets Publishing. It's called Sold: Every Real Estate Agent's Guide to Building a Profitable Business.
Join our Facebook group, the one-stop shop for real estate investors to learn about tax strategy and stay up to date on changing tax laws: www.facebook.com/groups/taxsmartinvestors