- Many small investors with limited backgrounds in finance or real estate are still making passive incomes by investing in flipping and reselling run-down properties or starting a process called BRRRR: Buy, Rehab, Rent, Refinance, Repeat.
- Veterans and investors share with Business Insider how they got started, and what it takes to successfully make money while using BRRRR.
- They recommend spending a significant amount of time and effort to learn how to invest in rental properties and to buy low before getting started.
- Tactics like following the "75% rule" and finding reliable contractors can also save you a lot of money and time in the long run.
- "Just go get started. So many people are scared to take the first step, and that's the biggest hurdle," investor Shayla Dempsey said.
- Visit Business Insider's homepage for more stories.
Small investors with no background in finance or real estate are making impressive and nearly passive incomes by investing in run-down properties, fixing them up, and renting them out.
Some are going on to borrow against those properties in order to buy new ones and start the process again, a system called BRRRR: "Buy, rehab, rent, refinance, repeat."
Any investment system that involves taking on debt comes with risk, but for those who learn the technique and can put in the work to find and upgrade the right properties, rental real estate can be an astonishingly good way to generate years of passive income or quickly grow your net worth — or both.
The accidental investor
Ten years ago, Erik Wright made his first foray into real estate investing unintentionally.
"After college, there were several of us living in a friend's house in Arkansas," he recalled. "She owned the house and we were all renting bedrooms from her. And then she got married."
The three friends needed a new place to live, and Wright was the only one with a steady job.
"So I said, 'I'll just buy a house and you all move in with me." He found a house nearby that needed work, including new floors and a paint job, which he did himself. The house cost about $89,000 and Wright opted for a 15-year mortgage with monthly payments of around $740.
He knew he could easily afford it, since his two roommates would each pay $300 a month rent.
Three years later, Wright moved to Louisiana for a new job and sold that house for around $105,000.
After paying off the loan and closing costs, he wound up with $18,000. Since he'd put a total of $12,500 into the downpayment and renovations, $5,500 of that was pure profit.
And, he notes, "I was living mostly for free during those three years."
Read more: Opendoor CPO: Here are my 2 predictions for what the 2021 real estate market will look like
Now thoroughly sold on the concept of having tenants help pay the mortgage, Wright used the $18,000 to cover most of the 20% down payment on a $100,000 duplex.
Once again, the rent from the other side of the duplex was nearly enough to cover the mortgage. He'd caught the rental real estate bug, so when he got married and moved out of the duplex, he and his wife bought a home with a garage apartment that they could rent out.
Meanwhile, he kept the duplex, which he still owns, now renting out both sides of it for a total of $1,500 and a mortgage of $766.
Since then, he's used BRRR to buy other properties, rehab them, rent them out and then borrow against them to continue building his and his wife's real estate portfolio through their company New Horizons Home Buyers.
These days, the couple owns two duplexes and two single-family houses — six "doors" or living units, in industry lingo. In addition to appreciating in value, these properties generate about $2,000 to $3,000 in income every month, after loan payments and other expenses.
And, he says, he and his wife put that money back into their real estate business. "We pay our bills with our other income and just let the real estate ride," he said.
Tired of traveling
Shayla Dempsey and her husband Neil have been doing BRRR in the Dallas/Ft. Worth region since 2006.
"We had an insurance adjusting company, and it has a ton of potential but it's repetitive and we wanted something passive," Shayla Dempsey said. Insurance adjustment requires a lot of travel, and the couple knew they didn't want to do that forever.
So they turned their attention to real estate.
"We thought we would do flips at first," she said. "It turns out flips are way harder than you think and don't go anything like on HDTV. We switched real quick from flips to rentals."
With 14 years' experience under their belts, the Dempseys now do flips as well, something Dempsey says works better in a hot real estate market such as today's. But the core of their business is buying and rehabbing rental properties through their LLC, Four 19 Properties.
At one time, they had a total of 63 doors, but over the past 18 months, Dempsey says they sold off about half those properties to pay off the debt on the remainder, so that they now own 33 doors — 25 single-family houses and four duplexes — debt-free.
Together, these properties generate total monthly income of just over $29,000 after taxes, insurance, and property management fees. That income allowed the Dempseys to get out of insurance adjusting and stop traveling when their son was born three years ago.
They continue to buy properties for both rental and flips.
"We try to have two going at a time — we want to be purchasing a property as we're finishing up a property," she said. And, she adds, they plan to use their debt-free properties as collateral for a line of credit to finance more rental properties and flips. "Money makes money."
Read more: Billionaire David Booth says focusing on this long-term investing strategy will help you get the returns you're expecting — and the ones you're not
How to BRRRR
Thinking of trying to rehab a property and rent it out yourself? Here are some tips from those who've done it.
1. Be prepared to spend lots of time on research
"Rental properties come with a slew of advantages for generating passive income and reaching financial independence," said Brian Davis, cofounder of Spark Rental, which provides software, forms, and useful information for landlords.
But, he says, it also comes with some significant barriers to entry.
"It takes time and effort to learn how to invest without losing your shirt, it takes time and labor to find good deals, and then to manage them."
2. Learn to buy low
People shopping for homes often buy ones that they fall in love with, but you can't afford to do that as a prospective landlord.
Dempsey says she follows the 75% rule: The total cost of a property, including the purchase price and costs for rehab, must total no more than 75% of the property's market value based on comparable homes in the area.
As a result, she says, "I pass on a lot of properties."
This is why smart real-estate investors spend a lot of time and effort hunting out people who are eager to sell a distressed property quickly, for example because they inherited it and don't want to fix it up, or because they're moving or buying a different property, and need cash immediately.
Dempsey will often start conversations with homeowners of likely houses if she sees them in the yard, or even leave a note on the door, and this approach has helped her find good buys.
"They say you make your money when you buy," Wright said. "The key is finding the good deal. And that's knowing the numbers ahead of time and being able to run the comps."
3. Don't skimp on the contractor
"We've lost money a few times, and it's always been because we had a bad contractor," Dempsey said. "So vet the person, know the jobs they've done, and go speak to the people they've worked with. If you have to overpay in any part of this business, overpay on the contractor because a contractor can make or break a deal."
When Wright and his new wife bought the house with the rental apartment, he decided to do all the renovations himself.
"I watched lots of YouTubes and figured out how to do stuff," he says. "But it was every night, every weekend, every spare moment. And still, it took three months for what would have taken a professional crew about two weeks."
It was a good experience, he says, but not one he ever plans to repeat — he always uses professionals now.
4. Just get started
"I have people call me up all the time and they want to know where to start," Dempsey said. "Go to YouTube and learn everything you can. Read 'Rich Dad, Poor Dad.' Just go get started. So many people are scared to take the first step, and that's the biggest hurdle."
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