Today, learn how we got a 62% return by using the BRRRR (Buy, rehab, rent, refinance, and repeat) method on a duplex in Indianapolis.
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When I considered investing in real estate over two years ago, I saw a problem on the horizon: funding. The Dr-ess and I had savings and enough money for the downpayment of a few rental houses. But even with our well-paying jobs, I worried we’d eventually run out of money.
I was fairly convinced of the potential of real estate to be a really fantastic investment vehicle. But I wasn’t really sure how much money I wanted to dedicate to real estate off the bat, given that we had no proof of concept that it would actually be a good investment.
See these posts below for the reasons why I think rental real estate investing is the best investment for people trying to achieve moFIRE:
- Leverage | Why I’m investing in real estate over stocks – Part 3
- Tax Benefits | Why I’m investing in real estate over stocks – Part 2
- Why I’m investing in real estate over stocks – Part 1
Real estate investing can be expensive
My fears seemed to be coming true after the purchase of our first rental home. It was a “turnkey” single family home that had already been rehabbed. We bought it for $92,000 which was full retail price. The down payment and closing costs ate up $24,000 of the original $100,000 cash I had set aside for my big real estate experiment.
Unfortunately, the turnkey rental wasn’t nearly as profitable as I hoped. We had issues with getting the property rented, and after three months I abandoned the original property management team. By the time the property was stabilized, I took a look at my projected 1 year numbers and shuddered when I saw a -2.3% strict return and only a 9.7% “real return.”
But luckily, before I had time to come to my senses, I forged ahead and bought what I now call “Indy Duplex #1.”
BRRRR: is it cold in here?
I bought this rental property specifically with the intent of using the BRRRR method. Let’s review this acronym and explain how it works:
- Buy: purchase a rental property
- Rehab: make improvements to the property and increase the value
- Rent: place long term tenants
- Refinance: use the property’s higher worth to do a cash out refinance
- Repeat: use the funds to continue building your empire
Now let’s use my Indy Duplex #1 to illustrate how this method works in real life.
First of all, you have to buy a rental property. Look for a property that seems to be undervalued relative to comparative properties, in a stable or up and coming part of town.
Our duplex is in Indianapolis, Indiana. The neighborhood is just east of downtown and is experiencing rapid growth. We bought it mid 2019. The inspection found some minor issues which we used to drop the sales price $8000. The appraisal came back on target, and we closed on it in about 30 days.
|Total cash to purchase||$161,527.00|
This is short for “rehabilitate,” which means making physical improvements to the property to increase its value. Our construction team, led by our general manager, walked the properties and generated a bid to rehab the property to a higher grade of finish. Here’s an excerpt of the improvements we made, straight from our renovation list.
When you’re deciding what kinds of improvements to do and what to skip, consider ones that add value without breaking the bank.
Here are some examples of good investments:
- Kitchen cabinets, countertops, and appliances
- Bathroom upgrades
Here are improvements that might be too expensive for the BRRRR method:
- Major plumbing and electrical repairs
- Roof replacement
- HVAC replacement
- Foundation problems
Each of these could still work if you can purchase the property cheaply enough.
In total, we spent $68,733 on our renovation.
Here are some pictures of the kitchen and bathroom after renovation. Nothing mind-blowing, but certainly solid rental grade.
The next step is to rent out your property. For our duplex, we used a property manager to photograph, advertise, and show the property. With our renovation, we were able to raise the rents from $900 a month to $1275 a side (plus $25/month pet rent on one side).
Thus, the duplex brings in $2575 a month. This was higher than we expected, and really contributed to our high return.
We also bill back utilities, which means that the tenants are paying for their own gas, water, and electricity costs.
Six months after the purchase of your property, you can do a cash out refinance. Most lenders require this “seasoning period” before they’ll consider valuing a property over the original purchase price.
This was the part of the process where I felt the least certainty. There wasn’t that much comparative sales data for us to generate a guess about the appraisal. In my projections, I hoped that the property at least would appraise for the cost of the home plus the renovation cost, or around $225,000.
In fact, the property was appraised at $256,000.
Our lender helped us do a cash-out refinance of 70% of this valuation. After closing, the $179,200 loan paid off our previous mortgage as well as the vast majority of our construction costs.
The numbers get a little hard to follow, but here they are:
|Total cash invested before refinance||$111,498|
|New loan amount after refinance||$179,200|
|Cash out refi amount||-$67,702|
|New down payment||$76,800|
|New closing costs||$5,000|
|Cash left in the deal||$14,098|
Take a few minutes to look this over, and hopefully it’ll start to make sense. (If not, comment below with your questions.)
Through the magic of the BRRRR method, we got back all but $14,098 of our initial investment. We took our recouped capital and plowed it right into our next real estate deal.
Our real life return on investment
After one year of ownership for Indy Duplex #1, we incurred $2000 of repair expenses. $500 was for repairing some roof damage from a windstorm. $1500 was for replacing a hot water heater. This is very close to the 8% monthly repair expense that we budgeted when we did our initial analysis. When we factor this into our expenses and returns, here’s what we get:
|Monthly Net Operating Income|
|Gross Rental Income||$2,550|
|Utilities (billed back)||$0|
|Net Operating Income||$1,590|
As you can see in this next chart, a lot of this income is eaten up by our mortgage payment.
|Net Operating Income||$1,590||$19,080|
|Principal and Interest||$853||$10,236|
When we compare this to our cash left in the deal, this equates to a 62.7% annual return.
|Performance after 1 year|
|Cash left in the deal||$14,098|
I hope this real life example helps you understand the BRRRR method. To be clear, I consider this deal a home run. There were no huge unexpected renovation costs, and we haven’t had to do any catastrophic repairs in the first year of ownership.
The best BRRRRs increase the value of the property so much that you can pull out every cent that you invested into the property, leaving no money left in the deal. We weren’t able to hit that magical ideal, but I feel like we came pretty close.
This 62.7% return is our strict return, which represents the actual cash flowing into our checking account every month. But as I referenced above, the “real return” is much higher when you consider things like appreciation, loan paydown, and tax benefits.
It’s much easier to just buy a property that’s already been rehabbed, but you’re unlikely to hit these kinds of returns with that method.
I’m trying to utilize the BRRRR method on my most recent acquisitions also. We’ll see if I can even come close to the return of Indy Duplex #1. Wish me luck!
What do you think of the BRRRR method? Too risky for your taste? Comment below and subscribe for more content!
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Fascinating post. My wife and I did residency/med school in Indy and while I loved the town the only thing the east had to offer was a steady stream of trauma patients. And crack. Fountain square was just starting to become a desired area, but the neighborhoods north of there were terrible. I’m thrilled to hear you are able to get these kind of Rent numbers and are contributing to the improvement of a city we remember fondly. I’m greatly enjoying your blog. Keep up the good work.
Wow thanks so much for the kind words. I’m glad the post took you down memory lane, although it sounds like things were indeed different back then.
[…] blog before, and it’s an extremely effective way to achieve passive income with real estate. In this article from The Darwinian Doctor, the author takes you on his own BRRRR journey–and how he got success from his very first […]
Can you explain the refinancing a little more. new to your blog.
Sure – after a property is renovated and rented (which usually takes at least 6 months), it’s time to refinance. A lender will re-appraise the property and offer a new mortgage based on the new appraisal value. The loan offered is usually between 70-75% of the new appraisal value. If the value of the property is higher, this hopefully means you will be able to “cash out” enough money to recoup most (or hopefully all) of your investment you put in to purchase and renovate the property.
[…] investor. You can take advantage of compound interest and growth in other investments as well. My first duplex BRRRR in Indianapolis was projected to give me about a 62% cash on cash return! After accounting for some […]
Great blog. Would you mind sharing how you found a contractor to do the renovations out of state? Thanks
Thanks! I basically got recommendations from investor friends and my real estate broker. Networking can be done in real estate facebook groups (like my PPhREI Facebook group) or sites like BiggerPockets.