HOW TO BUY REPAIR RENT AND REFINANCE RENTAL PROPERTIES
In this video, I show you a house that I purchased with a tenant who was paying $1,100 a month. It was the cheapest priced house in the entire town. When I called the listing agent to make an offer, she told me it was already “under contract” meaning it was sold to another investor. A few weeks later the listing agent called me and asked me if I was still interested in the property. I said yes, but I was curious as to why the previous buyer had backed out. She mentioned an issue with the inspection and the inspection report, and she offered to share the inspection report with me.
I reviewed the inspection report and told her that I was willing to go through with the purchase of the house, but at a price that was $10,000 less than my initial offer based on the repairs required from the inspection report. The seller was not thrilled, but they were frustrated that the prior buyer had not moved forward with buying the house and they accepted my offer. So I purchased this house for $80,000 and there was a tenant paying $1,100 a month rent. I borrowed 100% of the $80,000 purchase price plus $10,000 (for the anticipated future repairs) and I purchased the property.
The property cash flowed from day one (even with a private lender loan at 9%). Fast forward around 6 months, and the tenant is always paying rent late and giving us a hard time. When their lease expired, we decided not to renew their lease and to instead find a better tenant. The goal was to repair the house, and make the house look much more presentable that it’s current condition. Then we would find another better tenant and rent the house for a higher rent of $1,300. At that point, we would wait a few months and then we would refinance the loan into a conventional 15 year fixed rate mortgage. Then keep the property until we own it free and clear in 15 years. To give you an idea of the numbers, we just refinanced another house with a $100,000, 15 year fixed mortgage and the loan payment is $702 (interest rate is 2.75%). So after taxes and insurance on this property, we can expect our payment all in to be around $950 (including property taxes and insurance).
With a tenant paying $1,300 a month, we should cash flow around $350 a month or $4,200 a year. That should be ample cash flow to cover maintenance and repairs with a decent amount of money left over. This strategy is called buy, repair, rent and refinance or BRRR. And it’s the easiest way for you to accumulate wealth as a real estate investor.
All you need in order to do this is to have a job and decent credit. If you have both, then you just need to find a house that you can purchase below market value. This house was purchased for $80,000 in an environment where it would be worth around $135,000. The reason that we got it so cheap is because the seller was very motivated to sell. They were tired of dealing with the tenant and tired of being a landlord. The seller had moved out of the area and the rental property had become too much of a headache. I heard after the fact that there were some real issues with the next door neighbors and that the police had been called on more than one occasion. So that’s where the motivation to sell came from.
In addition to this, the property had a lot of deferred maintenance (as you can see from the video). This is very common. Landlords don’t inspect their rental properties and the property deteriorates. Landlords are trying to make money off the cash flow, so they don’t want to spend the money to maintain the property. Those two combinations together, result in a lot of deferred maintenance that accumulates over the years. Purchasing this house for $80,000 and borrowing $90,000 (for the $10,000 in rental repairs) my goal was to refinance and get a $100,000 conventional loan. The reason the loan amount is higher is because the cost of the refinance can be a few thousand dollars in fees, and if you add the closing costs, that adds a few thousand dollars more. The end result is that the goal is to have a $100,000 15 year fixed mortgage on a house that is worth $135,000 or more. That will result in immediate equity of at least $35,000 without coming out of pocket any money at all (no money down).
Then I can rent the house for $1,300 and I can pay the mortgage, taxes and insurance with the rent and still be positive cash flow by $350 per month. At that point all I need to do is hold the property and 15 years from now it will be owned free and clear. The strategy is called buy, repair, rent, and refinance. The key thing is you have to be able to find a property that you can buy at 75% of what it would appraise for. That is the hard part. You have to be buying from a motivated seller. The easiest way to find motivated sellers is by purchasing lists (like foreclosures) and marketing to them. What is remarkable about this deal is that I found it directly on the MLS. There will be many opportunities over the next 6 months to buy houses at a discount as the inventory of foreclosures, short sales and bank owned properties increase. Now is the time to learn how to get started investing in bank owned properties. The best way to get started is to attend our Wholesaling Real Estate Boot Camp and our Fixing and Flipping houses Boot Camp. If you would like to work one on one with me on your first buy, repair, rent and refinance as a private coaching student please click on the “apply for coaching” tab at the top right.