House Hacking - The BRRRR Strategy

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Dear Wealth Builders,

In the world of real estate investing, few strategies have garnered as much attention as the BRRRR method. The acronym stands for Buy, Rehab, Rent, Refinance, and Repeat, and it’s a powerful technique that allows investors to leverage good debt to build a real estate empire over time. By using debt strategically, investors can amplify their purchasing power, increase their cash flow, and ultimately, grow their net worth.

In this post, we'll dive deep into the BRRRR strategy, why it works, and how leveraging good debt can set you on the path to becoming a millionaire. We’ll also explore other similar strategies, offer real-life examples of successful investors who have used these methods, and discuss the tax advantages of investing in real estate using leverage.

What Is the BRRRR Strategy?

The BRRRR strategy stands for Buy, Rehab, Rent, Refinance, and Repeat. It’s a cycle that allows real estate investors to acquire multiple properties using the same initial investment, essentially recycling their capital to build a larger portfolio. Here’s a breakdown of each step:

1. Buy: The first step is to purchase an undervalued property, usually one that requires significant repairs or renovations. The key is to buy at a discount so that the property can be improved and appreciated in value.

2. Rehab: After purchasing the property, the next step is to renovate it. This could involve anything from cosmetic updates to more substantial structural repairs. The goal is to increase the property’s value so that it can be rented at market rates and refinanced at a higher valuation.

3. Rent: Once the property is rehabilitated, the next step is to rent it out. By renting the property, the investor generates cash flow that can help cover the mortgage and other expenses.

4. Refinance: After renting out the property, the investor can refinance the property based on its new, higher value. This allows them to pull out the equity they created through the rehab process, which can then be used to purchase another property.

5. Repeat: The final step is to repeat the process with the next property. By continuously buying, rehabbing, renting, and refinancing, investors can scale their portfolio quickly using the same initial capital.

Why Good Debt Works as Leverage

The key to the BRRRR strategy’s effectiveness is leverage. Leverage, in real estate terms, means using borrowed money to increase your purchasing power and generate higher returns. When you use debt to finance your investments, you can buy more properties than you could if you were only using cash. As long as the properties produce enough income to cover the debt payments, leverage allows you to grow your wealth faster than you would otherwise.

Example: The Power of Leverage

Let’s say you have $100,000 to invest in real estate. If you were to buy a single property with cash, you could purchase a home worth $100,000. That home might generate $1,000 in monthly rent, or $12,000 annually, before expenses.

Now, let’s say you instead decide to use the $100,000 as a 20% down payment on five different $100,000 properties, using a mortgage to finance the remaining 80%. With five properties, you’d have five rental incomes, each generating $1,000 per month, or $60,000 annually before expenses.

By leveraging good debt, you’ve increased your rental income fivefold, and your tenants are essentially paying off your mortgage.

Pro Tip: When using leverage, make sure that the rental income from the property exceeds the mortgage payment and other expenses. This is called positive cash flow, and it’s critical to ensuring that your investment is sustainable over the long term.

Other Strategies Similar to BRRRR

While the BRRRR strategy is one of the most popular methods for leveraging debt to build wealth in real estate, there are several other strategies that work on similar principles.

The 70% Rule

The 70% rule is a guideline used by real estate investors to determine how much they should pay for a property. The rule states that you should pay no more than 70% of the property’s after-repair value (ARV) minus the cost of repairs. This ensures that you leave enough room for profit after renovating and selling (or refinancing) the property.

Example:

If a property’s ARV is $200,000 and it requires $30,000 in repairs, the 70% rule would suggest that you should pay no more than $110,000 for the property ($200,000 x 0.70 = $140,000; $140,000 - $30,000 = $110,000).

By following the 70% rule, investors ensure that they have a margin of safety built into the deal, which reduces the risk of overpaying.

House Hacking

House hacking is another real estate investment strategy that allows investors to generate income and reduce living expenses by living in one part of a property while renting out the other parts. For example, you could buy a duplex, live in one unit, and rent out the other. The rent from the tenant helps cover your mortgage, and in some cases, you can live for free or at a significantly reduced cost.

Story: Brandon Turner’s Success with BRRRR

Brandon Turner, a well-known real estate investor and co-host of the BiggerPockets podcast, is a huge advocate of the BRRRR strategy. Turner has used this method to build a portfolio of rental properties that generate significant cash flow. By purchasing distressed properties, rehabbing them, and refinancing to pull out equity, Turner has been able to scale his business and achieve financial freedom.

Pro Tip: When house hacking or using BRRRR, always plan for vacancy and maintenance costs. While these strategies can generate excellent cash flow, unexpected vacancies or maintenance issues can eat into your profits if you’re not prepared.

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Tax Advantages of Real Estate Investing

One of the major benefits of real estate investing, especially when using the BRRRR strategy, is the tax advantages that come with owning property. Real estate investors can take advantage of several tax deductions and strategies to reduce their taxable income and keep more of their profits.

Depreciation

Depreciation allows you to deduct the cost of the property over time. The IRS allows investors to depreciate residential rental properties over 27.5 years, which can result in significant tax savings.

Example:

If you buy a rental property for $275,000 (excluding the value of the land), you can deduct $10,000 per year for 27.5 years as depreciation, even if the property is increasing in value.

Mortgage Interest Deduction

Another major tax advantage is the ability to deduct the interest paid on your mortgage. Since interest is often the largest expense in the early years of owning a property, this deduction can be substantial.

Capital Gains Tax Deferral (1031 Exchange)

The IRS allows real estate investors to defer capital gains taxes through a process called a 1031 exchange. If you sell a property and use the proceeds to purchase another investment property, you can defer paying taxes on the capital gains until you sell the new property.

Pro Tip: Work with a qualified CPA who specializes in real estate investing to ensure that you’re taking advantage of all available tax benefits.

Real-Life Success Stories Using BRRRR and Leverage

Story: Grant Cardone’s Multi-Family Empire

Grant Cardone, a real estate mogul and motivational speaker, is a big believer in using debt to build wealth. Cardone has built a multi-family real estate portfolio worth over $1 billion by using leverage to purchase large apartment complexes. He believes in using other people’s money (banks and investors) to finance real estate deals and scale quickly.

Cardone often says that “debt is good when it’s used to buy cash-flowing assets.” By using leverage, he’s been able to acquire properties that generate significant cash flow, which he then uses to pay down the debt and increase his net worth.

Story: David Greene’s Journey from Police Officer to Real Estate Millionaire

David Greene, co-host of the BiggerPockets podcast, started his real estate journey while working full-time as a police officer. Using the BRRRR strategy, Greene was able to purchase multiple rental properties with very little of his own money. By rehabbing and refinancing properties, he grew his portfolio while working a demanding job. Today, Greene owns over 30 properties and has achieved financial independence through real estate.

Why Good Debt Works as Leverage to Become a Millionaire

The core principle behind the BRRRR strategy and other real estate investment methods is leverage. By using good debt (debt used to acquire income-producing assets), you can significantly increase your purchasing power, allowing you to buy more properties than you could with cash alone.

Advantages of Using Leverage:

• Increased Cash Flow: By using debt to buy multiple properties, you generate more rental income, which can be used to pay off the debt and increase your cash flow.

• Faster Portfolio Growth: Leverage allows you to scale your real estate portfolio much faster than if you were using only your own money.

• Tax Benefits: As mentioned earlier, real estate offers several tax advantages, including depreciation and the mortgage interest deduction, which can offset the cost of borrowing.

• Wealth Building: Over time, your tenants pay down the mortgage, and the property appreciates in value, increasing your equity and net worth.

The Risk of Overleveraging

While leverage can be a powerful tool, it’s important to use it wisely. Overleveraging—taking on too much debt without sufficient cash flow to cover the payments—can lead to financial trouble. In the 2008 financial crisis, many real estate investors lost everything because they were overleveraged and couldn’t make their mortgage payments when the market crashed.

Pro Tip: Always make sure that your properties generate positive cash flow and that you have a solid financial cushion in case of unexpected expenses or vacancies.

Leveraging Debt to Build Wealth

The BRRRR strategy and other methods of leveraging good debt can be powerful tools for building wealth through real estate. By using debt strategically, you can acquire more properties, generate more cash flow, and increase your net worth over time. However, it’s essential to use leverage responsibly and ensure that your properties generate positive cash flow.

Real estate offers numerous advantages, from tax benefits to appreciation, and when combined with the power of leverage, it’s one of the most reliable paths to building long-term wealth and achieving financial independence. Whether you’re just starting or looking to scale your portfolio, understanding how to use debt as a tool for growth can put you on the fast track to becoming a millionaire.

Take the Risk?

Build Wealth Yourself Team

You promised yourself that this summer, you’d finally hire help.

You need help for your growing business.

You’ll get to it.

No more long nights at the office. No more panicked days spent putting out fires. No more sleepless nights worrying about a to-do list that runs your life. It’s time to hire help.

You’ll get to it.

Because finding a good hire takes time, right? There are resumes to read, interviews to schedule, references to check. And those are just more things on your endless to-do list – and you still haven’t kept your promise.

You’ll get to it.

After all, you can’t expect a quick fix when you want quality help. And no one’s going to tackle this to-do list for you. But you promised yourself help.

You’ll get to it.

It’s time for a change, right? Don’t wait until you ‘get to it.’

Get BELAY. And get intentionally matched with the right U.S.-based Virtual Assistant, Accounting Professional or Social Media Manager right now.

Learn more here.