[Music]
Hello everyone and Welcome once again to
an episode of the Selling Greenville
podcast I'm your host Stan McCune realtor
here in Greenville South Carolina and as
always you can find all my contact
information in the show notes should you
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we're going to have a little discussion
about real estate investing and you
either saw the title of this podcast and
immediately knew what it was or you
looked at and you were like man I have
no clue what what he is talking about
but we are going to be talking about the
bur method the BR RR
RR method of real estate
investing now what does the
brrrr we'll just call it the Burr method
what does the bur method mean and
what does that look like practically if
I'm just going to go ahead and explain
it just in the off chance that you you
are not familiar with it or maybe you've
heard of it but you just can't really
remember here's what it means all right
the it's an acronym and very simply it
means buy rehab or renovate we'll just
say rehab buy rehab rent refinance
repeat buy rehab rent refinance repeat
here is basically what this method of
real estate investing entails for one
thing it's for people looking to
purchase a lot of rentals right for
people looking to build out a rental
portfolio this isn't really a strategy
for house flippers this isn't really a
strategy for someone that just wants a
single you know like Airbnb or something
like that this is for people that are
trying to build out a rental portfolio
here's basically how it works you have
to start by purchasing a property that
you have equity in so let's say that you
buy a property
really cheaply and but it needs some
work there's a reason why you bought it
cheap it has some problems and you have
to address those problems so let's say
after you address those problems let's
say you buy it for
$100,000 you put 30,000 into it now
you're out
$130,000 but that property that house
duplex whatever it may be is now worth
$200,000 maybe you even get some tenants
in there
as part of the the rent part of it so
you get some tenants in there they're
paying 2,000 a month so those are pretty
good numbers you you bought it and
rehabbed it whatnot for 130 now you're
renting it for you know 2,000 or
whatever it may be in this scenario and
it's worth 200,000 factoring in the
the property itself factoring in the
rents and all of that worth 200,000 now
you can go to a bank and ask them to do
a Cash out refinance and you can do this
on your primary residence as well
again some people will do like a home
equity line of credit that can be a
better option as well in some instances
but you can go to the bank and ask for a
Cash out refinance here's how that works
typically the bank is going to look at
the property get an appraisal to see
what the value of the property is and
then they will loan you up to 80% of the
value of the property some banks it's
more or less some banks might be willing
to do
85% typically they're not going to do
more than that if it's a rental
property some banks might not be
comfortable doing more than 70 or 75% of
loan to value but let's just assume for
the purposes of this podcast it's an
average Bank they're willing to loan you
80% loaned to Value so now they're
giving you a loan with that property is
collateral for 80% of 200,000
that comes out to 160,000 now remember
you put into this property
130 and you're renting it now for $2,000
a month so the property is going to pay
for your mortgage which at
$160,000 it'll be well less than $2,000
a month and you've got now $30,000 more
than you had prior to purchasing the
property and you're like s that sounds
way too good to be true no it's not
trust me it is not too good to be true
this is a strategy that a lot of people
use with one caveat and that said at
some point banks will start being
concerned about how much debt you have
and you could run into a situation where
if you have a year with bad tax returns
where your income doesn't doesn't
look very good then you might run into a
situation where banks are like hey your
DTI which stands for debt to income is
just too high
typically what the banks are looking at
is all right how much debt are you
having to pay per month let's say that
it's
$5,000 a month just kind of throwing
that out there how much is your income
your income is let's say $10,000 a month
in that case your DTI would be
50% 5,000 is 50% of 10,000 well banks
are not going to be happy about that
once you start getting a above the
mid-30s Banks really start to get a
little bit nervous about lending to you
now if you have a good track record and
you know you have some other rental
properties and you have good credit and
you you've not made a late payment or
had any issues like that then a bank
might be willing to lend to you if your
DTI is in the low 40s and there are
some financial institutions out there
that will kind of nor your
DTI but they require a higher down
payment and a higher interest rate
there's only a few of those out there
and that might not be appealing because
again you're having to put more down
you're having to to have that higher
interest rate and whatnot but there are
a few creative ways to to finance
properties even if your debt to income
is a little bit higher than what the
Traditional Bank would be comfortable
with
but that's basically the rough strategy
of of the bur strategy and then you
repeat all right so now you have
$160,000 in your in the bank you've
got a rental property in your portfolio
now you can take that 160,000 and buy
another property and go through the same
process all over again it's a really
great strategy a really effective
strategy and and a good way to start
building out a rental
portfolio now the entire premise of
doing the Burr strategy for building out
your rental portfolio is is that it
assumes that you get a property with
substantial Equity if you don't get a
property with Equity then you're going
to have an awfully hard time refinancing
it and then you run into into problems
right if you get stuck with the property
that you can't refinance or let's say
that you can refinance it but you end
up having to outlay more cash than what
you refinance let's say that you put
$130,000 cash into the property or
whatever maybe not cash that's a lot of
money cash but let's say that you put
after you know whatever loan you might
get and whatever money down and whatever
rehab costs whatnot your total outlay
of of money from Banks and whatnot is
130,000 when you go to refinance you can
only refinance 100,000 of that well
that's bad now you're out
30,000 you don't want that to happen so
you have to buy a property that has
substantial Equity right that's the
conventional line of thinking and a lot
of people talk about the 70 % rule again
when you heard that you either
immediately something immediately came
to mind or you're just like man I have
no idea what the 70% rule is so I'm
going to go ahead and explain it just in
case the 70% rule is the idea that when
you're buying rental properties well
really it it applies more to house
flips but a lot of people will apply it
to the Burr method as well that the idea
is that you shouldn't spend more than
70% of the value of a property after
repairs so let's give an example of that
let's just say that there is a home that
has an arv after repair value in other
words the value of the property after
rehabbing it is
$100,000 and you know that your rehab
costs are about
$20,000 the 70% rule says that you
should buy that property for $50,000
why the after repair value of that
property is$ 100,000 70% of that is
70,000 and then you have to subtract the
$20,000 of repairs so you have to buy
that property for
$50,000 now that is a great goal listen
if if I could get properties using the
70% rule all the time that would be
awesome but there's really only two ways
that you can buy a property with that
much Equity the one is if you buy a
house or a property that is off market
and being sold by a motivated seller so
there are a lot of people out there you
you might even get this from time to
time there are people sending out
postcards to property owners that for
some reason they have some kind of
algorithm that determines okay this is
someone that is likely to be a motivated
seller or someone that has enough equity
in their house that they might be
willing to sell it add a discount and so
there are these investors out there that
are sending postcards out or doing cold
calls or whatever it may be to try to
accumulate Properties or or to try to
find leads on properties from people
that would be deemed motivated sellers
people that might be willing to sell
their home at a discount so that's one
possibility you might be able to somehow
find a property that way or maybe
someone you know finds a propert
property that way and then they are
able to get it to you maybe they they
take a little bit of a cut off the
top we typically call those real estate
wholesalers that find a property
that's off Market with a motivated
seller really cheap and then they mark
it up by a little bit and then they end
up just selling it to someone else and
they actually never even own the
property throughout that process
that's one way that you can do
it the only problem with that strategy
is well for one thing it's not very
easy to just all of a sudden find
off-market deals that is not easy at all
it's very difficult it's even difficult
for those that are like doing that
basically full-time and then when
someone does let's say that you're
you're relying on a wholesaler or some
type of other real estate investor to
supply you with those types of
properties they typically have a buyer
list of a lot of other people people
looking at these properties as well so
even though it is off market and there's
not as much competition as there would
be in the MLS there is still going to be
tons of competition from other investors
looking to acquire the property so it's
not an easy way to go about it the other
way that you can purchase a house or
purchase a property using the 70% rule
outside of it being an off-market
deal with a a motivated seller and let's
just be honest you you are not going to
find properties on the market that that
are going to fit the 70% row I mean very
very rare it happens every now and then
in the market that we have but it's it's
very rare so we're not even going to
discuss
that the only exception which is the
second way that you can acquire
properties using the 70% rule with that
type of equity is if it's in a buyer's
market and we are not in a buyer Market
we have not been in a buyer market for a
really long time but 10 years ago when
it was a buyer's market you actually
could find deals on the market that
basically followed the 70% Rule and
really you just had to wait for the
property to be on the market for a long
time and then essentially offer a low
ball and then hope that the seller would
be willing to accept it because the
property isn't
moving those are the two scarios either
off Market deals or on Market deals in a
buyer Market if you have just on Market
things that are on the market in a
sell's market it's basically impossible
to be able to purchase those using the
70% rule but I've got good news there is
another way to do this that allows you
to get equity and that allows you to do
a ver version of this Burr strategy in a
sellers market and that is what all this
all this introductory talk has all been
to lead us to this point of okay so
we're in a s market it's very difficult
to find properties that fit the bur
model so now what I'm going to introduce
to you the idea that I'm sure there's
someone else that's come up with a
terminology for this idea but I I
have not seen it anywhere so I stand
corrected if if there is another way
that people refer to this but I'm going
to refer to this as the low Equity
delayed refinance option all right very
nerdy real estate lingo there but the
low Equity delayed refinance method for
doing the bur strategy all right here's
how this works you can ESS enally get
equity in a property one of two ways
right one is to buy the property with
substantial Equity right upfront and
that's what we just talked about that's
what the 70% rule is trying to do you're
trying to get all that Equity upfront
and then you don't have to worry about
what happens after that you've already
got the equity but there is another way
and that is to buy the property in an
area where it will see substantial
appreciation over the next few years and
where even if you don't have a ton of
equity up front after a few years you
will have quite a bit of
equity now that option is an option that
is much more likely to work in this type
of a market and we have already talked
about in previous podcasts and you
can go back and and and listen I can't
remember what episode it is but there
was a podcast I did a few weeks ago
where I talked about Market appreciation
where we tracked median price points and
looked at what are areas of Greenville
that are seeing the the highest rates of
growth in that median price point and
and based on that data we can roughly
project What markets are appreciating
the most and so if you target purchasing
in those markets you have a greater
chance of seeing the property as long as
you make the right purchase a smart
purchase you have a greater chance of
seeing that property appreciate over
time now there are a lot of other
considerations but that is kind of the
big picture
idea now let's look at two different
scenarios to see how this plays out all
right I want to make this very practical
let's say that you buy a property that
has an after repair value of
$200,000 and all in you put into it
again using a 70% rule you put in
$140,000 into that property okay so you
start with 30% Equity that's the
difference between 200 and 140,000
you've got 30% Equity right at the very
beginning and or to look at it from a
cash standpoint you have $60,000 worth
of of
equity what then happens over the next
few years makes a really big difference
how much does that market appreciate
over the next few years so a let's just
say that it's kind of in an average
Market in this area and it's appreci
ating for 5% per year so after the
first year when it was worth 200,000 it
appreciates about 5% now it's worth
210,000 remember you put 140 into it so
now you have
33.33% Equity in year two it
appreciates by another 5% so now it's
22,500 in year three
231
525 and then in year four it goes up to
$243,100 basically roughly speaking so
over the course of five years it goes
from being worth2 200,000 to roughly
being worth
243,000 your equity in the property
which again you have 140 into
it for the purposes of this podcast
we're not going to get into repairs and
and all that stuff let's just say that
you have 140 into it and that it stays
that number you're that number stays
the same your Equity went from 30% to
42.4% that's great that's just the
market doing what the market does and
your Equity at the end of of that it
went from
$60,000 to
$103,000 so again that's great you just
got $40,000 of equity just because the
Market appreciated over time but let's
use another scenario so so that was a
scenario using the 70% rule with a
property that appreciates at 5% per year
but what if you are able to buy a
property with less Equity but that
appreciates more and we T and again we
talked about this in another another
podcast where there are some markets
that the past 3 years and even going
back further than that have been
appreciating between 15 and 20% per year
which is nuts at least from the
standpoint of tracking the median price
point those markets do exist so let's
say for instance that you buy another a
different property and the after repair
value of that property is
200,000 and after your purchase and
rehab and all of that you are 180,000 in
the hole on that property so you now
have 10% Equity right you put 180 into
it
between the purchase and the rehab
and it's worth
$200,000 so before you had 30% Equity
starting off using the 70% rule in this
example you only start off with 10%
Equity it's you would think okay the the
one with a 30% Equity is going to be
better long term but remember that one
only appreciated by 5% per year which is
pretty average for this Market let's
assume for the sake of argument that
this property that you purchase with 10%
Equity appreciates 12% per year all
right so after year
one when it was worth $200,000 now it's
worth 224,000 year two
$250,800 okay so in just two years we've
gone up $50,000 in equity and your
Equity has gone from 10% to 28.25 you're
almost at the 30% Mark what does that
look like in years four and five in year
four it goes to two basically 281 and
your Equity goes up to
35.94 per. and then in year five it the
value goes up to 300 basically
35,000 with your Equity at
42.8% almost the exact same percent of
equity that we had and the other
property that we started off buying with
a 70% rule but that was only
appreciating at 5% per year now I know
that's a whole lot of numbers but to
summarize the first property we started
with 140,000 was what we purchased it
for and and with all the other costs and
it was worth 200 and after after 5
years it was worth
243,000 and our Equity was
42.4% the second property example was a
property that also was worth 200,000
after all of our costs with our cost
having been
180,000 and then after 5 years it
appreciated by 12% each year to
314,000 and our Equity was was basically
the same thing
42.8% what does all of that mean okay
practically speaking what why did I just
go through that whole exercise what am I
getting at
well here's really what I'm getting at
would you want property a or property B
well it does depend upon your strategy
but if you're a long-term investor if
you're looking to buy and hold longterm
I would argue that property B is better
in multiple ways practically speaking
the first way that it's better is simply
from the standpoint that there are going
to be more of those options out there I
already said that it is very hard to
buy a property using the 70% rule very
very difficult but to buy a property
with 10% Equity that's a lot more likely
to happen and there are properties that
are on Market that come on the market
that would allow you from time to
time to be able to purchase with a more
realistic number like
that so you're going to have more
properties at your disposal if you're
trying to acquire rental properties
you're going to have more properties at
your disposal if you are willing to have
less Equity up front the key is of
course you have to be very selective
from the standpoint of the location of
those properties you have to understand
the market or obviously have a realtor
that understands the market that helps
you to to Target the areas that are most
likely to have those disproportionate
rates of appreciation in order for this
to work and so there is some projection
that has to happen for some people
projecting is just a little bit too much
risk for them they'd rather know right
at the beginning that that they have the
equity and they're not willing to try to
project what their Equity Equity will be
after a few years or they do that but
they don't want to base any numbers off
of that that's fine but those people are
going to have a tougher time finding
properties that that fit their criteria
they they might find that they are being
so picky with their purchases that they
can never close the deal and I have had
some investors over the years that
it's been very difficult to find
properties for them because they're not
willing to project they they are only
willing to look at this the snapshot
right then and there what does this
property what kind of equity do I have
right now I don't want to project what
it'll be in the future
and the result is that that that
those buyers those investors really have
a hard time building out their portfolio
all right that's a little bit of an
aside what's another advantage to
property B well the other Advantage is
that it is much better if you're going
from 30% Equity to 42% equity which was
property a remember that you started
with 30% equity and at the end after 5
years of appreciation at 5% your Equity
was
42.4% well property B went from 10%
Equity to
42.8% equity so the amount of equity in
the property the percentage of equity in
the property went up was really
multiplied
fourfold here's why that is a really a
much more
powerful way of of thinking about
equity and thinking about
appreciation because now basically the
amount of equity that you have in the
property is going to be a lot more even
though even though in both examples they
both ended after 5 years with 42%
Equity the one property property a was
only worth
243,000 and property B was worth almost
315,000
so property
a even though property a bought with the
70% rule they ended with only $103,000
of equity I say only that's great but
the but the owner of property B who only
started with 10% Equity and $20,000
of equity ends with
134 700 almost 135,000
of equity over $30,000 of equity more
than property a so buying the property
with less Equity up front when the
property appreciates in value
disproportionately each year ends up in
the long run better than buying the
property upfront with 70% equity and
then seeing the lower appreciation now
of course if you can somehow do both of
those things that's great but as we've
already discussed discussed it's very
hard to buy using the 70% Rule and if
you're really serious about buying and
building out your rental portfolio you
really need to consider opening your
mind to the possibility of not having as
much Equity up front and and basically
being willing to delay that Equity to a
later date as it grows in
value and then once it has grown in
value now you're in a really great
position to do a Cash out
refinance because now you've got all
this equity in this property you know
you've got
$134,000 of of equity in a property
that property that example B if
property B rather if you do a a normal
Cash out refinance you should be able
to do pretty well you're going to end up
let's see here
80% 80% of
315 roughly 315 you subtract out the
initial cost of
180,000 you're talking about taking home
70 over
$71,000 is what your take-home refinance
in that example is versus property a if
you refinance after 5 years it would be
closer to
54,500 so you're doing better in the
long run with the instance of less
Equity UPF front but more
appreciation over the years again there
is the risk there from the standpoint of
you have to project what that
appreciation is going to be now I have
had success using this version of the
bur method and let me just give you an
example of how I've had success with
this my first rental property was a
quadruplex that I bought for
$158,000 this is several years ago so
I bought it for $158,000 in an area that
was considered at that time to kind of
be a low upside
area well it turns out that that area
that the conventional wisdom that people
had ended up not being
true and my quadruplex now is worth
nearly
$300,000 so do the math
80% of
$300,000 is
$240,000 I bought it for 158 I have had
some repair costs again we're kind of
ignoring the the maintenance costs I
did not have to do any immediate Rehab
on those properties but the long
story short is now I've I've I'm able to
take cash Equity out of that property
and now I can take that money I'm going
to pay off the old note that I currently
have which right now is about $90,000
that's going to leave me with up to and
again it depends on the appraisal but up
to maybe
$150,000 I can now take that money and
do the last R of the burth strategy
which is to repeat now I can take that
money and purchase other properties take
the the money that I have have either
purchase those properties and try to
refinance or maybe use that money
towards 20% down payments or 25% down
payments if necessary of course I I'm
I'm of the belief that the lower the
down payment the better because then
your cash on cash numbers are better but
regardless different strategies on that
I could take that money and then use
that as a down payment in order to
purchase other properties with financing
so there is a lot of flexibility that
that that that gives you and to me I
feel like that is again if your DTI your
debt to income allows you to buy to
continue to buy and finance other
properties that is a much better
strategy than the strategy of doing 1031
exchanges what a 1031 exchange is
you purchase a property you you know
hold on to it for a time however long
has to be at least a year typically
is the conventional wisdom on that and
obviously talk to an accountant to
better understand to better
understand how 1031 exchanges work I am
not a financial counselor by any stretch
of
imagination but you take that
property you sell it and then within a
short period of time after having sold
it then you can purchase your next
property with the proceeds from that
sale and then you won't have to pay
or you you'll be deferring the payment
on your capital gains and again I'm not
going to get into the Weeds on all of
that that's something that a good
accountant can help you with or
someone that that handles 1031
exchanges there are
intermediaries that specialize in 1031
exchanges and I highly recommend
getting one of them involved if you
intend to do something like that but
why not instead of doing that and then
you're selling the property why not take
the equity out of the property do a Cash
out refinance and then you get to keep
the property and still purchase another
obviously there are a lot of different
considerations in everyone's situation
is different there might be different
reasons for why you want to sell the
property and do a 1031 exchange I'm not
going to get into all of that but this
is another way of doing it and this is
the way that you can do it without
having to confine yourself to the 70%
rule which in a lot of ways as until
this Market flips to more of a buyer
Market the 70% rule is simply not
realistic for a lot of people
so my encouragement for you there are
opportunities out there you have to be
willing to project and and be willing to
take a little bit of a risk in order to
take advantage of those opportunities if
you are risk ad adverse then you're
going to need to wait really to
invest in this market until it flips
over to more of a buyer's market in a
seller's market there is more risk but
there's a lot of reward as well and this
is an opportunity this is a way that you
can approach it and use a tried and
true method the bur method but but kind
of turn it on its head a little bit
rather than may maybe you do still do
the
refinance right at the beginning that
you know if you buy cash you're going
to need to do a refinance at some point
right after that but then it gives you
the opportunity to do another Cash out
refinance down the road and to have even
more equity and I hope that all makes
sense I know we discussed a lot of
numbers that was a little bit in the
weeds a little bit more data than
we typically discuss in terms of
crunching the numbers if you're confused
about any of that or have any questions
please let me know I'm always available
I love discussing these things things a
lot of you guys do call me or text me or
email me to be like what do you think
about these numbers what do you think
about this what are your thoughts on
this strategy and I always enjoyed doing
that even you know for people that
aren't
necessarily having immediate closings
I just enjoy this discussion I just
enjoy Real Estate I enjoy the investing
side the number side of it I have an
analytical side of my personality
that that this tickles I guess a
little bit and so so I enjoy that and
I hope some of you do as well if you're
looking at real estate investing if
you're thinking about buying rental
properties there is a still a great
market for purchasing those you have to
be patient you have to be selective but
there are opportunities out there and if
you need a realtor to help you with that
I'm your guy give me a shout all my
contact information is in the show notes
we can try to to discuss your situation
and what opportunities are out there and
I would love to do that so just let me
know if you need help with any of that
and until next time I hope you guys stay
safe and happy house hunting
[Music]