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PraiseforBuy,Rehab,Rent,Refinance,Repeat

“IamsimplyblownawaybythewayDavidtakessomethingasintimidatingandcomplexasscalingarealestateportfolioandsimplifies it to thepointanyonecandoit.Buy,Rehab,Rent,Refinance,Repeatisatruegemandguaranteedtomakeyouabetterinvestorandawealthierindividual.”

—HalElrod,internationalbestsellingauthorofTheMiracleMorning

“Davidhascommittedhimselftomasteringrealestateanditshows!Thisbookhaseverythingyou’llneedtobecomeablackbeltrealestateinvestorandbuildwealthlikethepros.FromA-Z(orB-R),Davidcoversjustwhatyou’llneedtoexecutelikeamasterandbuildwealth.”

—DavidOsborn,NewYorkTimesbestsellingauthorofWealthCan’tWait

“Thisbookiswhatwe’veallbeenwaitingfor!Davidclearlybreaksdowneachstep of the process, with clear details and a meat-and-potatoes approach tosharing exactly how to excel at each step of the process.Mastering BRRRRreallyWILLhelpyoumasterrealestate—andthisbookwillshowyouhow.”

—PatHiban,NewYorkTimesbestsellingauthorandhostoftheRealEstateRockstarspodcast

“The only thing wrong with this book is that it wasn’t written sooner! ThisBiggerPockets classic covers every single step in the process. Best of all, theprinciples are universal and canbe applied to all types of real estate, fromasingle-familyhousetoa100-unitapartmentcomplex,andeverythinginbetween.TheBRRRRstrategyasdetailedinDavid’sbookisanabsolutemust-havetoolforanysuccessfulrealestateinvestor!”

—AndrewCushman,realestateinvestorandbloggeronBiggerPockets.com

“David follows up his success with Long-Distance Real Estate Investing withanotherheavyhitter!David’sfirstbookhelpsyouchooseyourmarket,andthisoneshowsyouwhattodoonceyou’vegotit.Thewholeprocessiscovered,withfantasticadviceforhowtomastereachstepandbecomeatruerealestateblackbelt. Ifyouwantaguide forhowtobuildarealestate investingbusiness,youneedthisbook.”

—RockThomas,FounderandCEOofMarchtoaMillion

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ThispublicationisprotectedundertheU.S.CopyrightActof1976andallotherapplicableinternational,federal,state,andlocallaws,andallrightsarereserved,includingresalerights:Youarenotallowedtoreproduce,transmit,orsellthisbookinpartorinfullwithoutthewrittenpermissionofthepublisher.

LimitofLiability:Althoughtheauthorandpublisherhavemadereasonableeffortstoensurethatthecontentsofthisbookwerecorrectatpresstime,theauthorandpublisherdonotmake,andherebydisclaim,anyrepresentationsandwarrantiesregardingthecontentofthebook,whetherexpressorimplied,includingimpliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.Youusethecontentsinthisbookatyourownrisk.Authorandpublisherherebydisclaimanyliabilitytoanyotherpartyforanyloss,damage,orcostarisingfromorrelatedtotheaccuracyorcompletenessofthecontentsofthebook,includinganyerrorsoromissionsinthisbook,regardlessofthecause.Neithertheauthornorthepublishershallbeheldliableorresponsibletoanypersonorentitywithrespecttoanylossorincidental,indirect,orconsequentialdamagescaused,orallegedtohavebeencaused,directlyorindirectly,bythecontentscontainedherein.Thecontentsofthisbookareinformationalinnatureandarenotlegalortaxadvice,andtheauthorsandpublishersarenotengagedintheprovisionoflegal,taxoranyotheradvice.Youshouldseekyourownadvicefromprofessionaladvisors,includinglawyersandaccountants,regardingthelegal,tax,andfinancialimplicationsofanyrealestatetransactionyoucontemplate.

Buy,rehab,rent,refinance,repeat:theBRRRRrentalpropertyinvestmentstrategymadesimpleDavidGreene

PublishedbyBiggerPocketsPublishingLLC,Denver,COCopyrightcopyright2019byDavidGreene.AllRightsReserved.

Publisher’sCataloging-in-PublicationdataNames:Greene,DavidM.,author.Title:Buy,rehab,rent,refinance,repeat:theBRRRRrentalpropertyinvestmentstrategymadesimple/byDavidGreene.Description:Includesbibliographicalreferences.|Denver,CO:BiggerPocketsPublishing,2019.Identifiers:LCCN2018960519|ISBN9781947200081(pbk.)|9781947200098(ebook)

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Subjects:LCSHRealestateinvestment--UnitedStates.|Realestatemanagement--UnitedStates.|Realestatebusiness--UnitedStates.|Investments.|Finance,Personal.|BISACBUSINESS&ECONOMICS/RealEstate/General|BUSINESS&ECONOMICS/RealEstate/Buying&SellingHomesClassification:LCCHD255.G742019|DDC332.63/24--dc23

PublishedintheUnitedStatesofAmericaPrintedonrecycledpaper10987654321

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Owningrealestatehastheabilitytochangelives.Whenmyparentsboughttheirfirsthomearound1985inManteca,California,theypaidaround$60,000.Thathouse isnowworthabout$375,000.Had they rented itout, the tenantswouldhavepaidofftheentiremortgageforthemduringthetimethey’downedit.Ata10 percent down payment, my parents would have turned $6,000 or so into$375,000—allwhilelettingthetenantscreatethewealthforthem.

Had they applied the cash flow from rent payments toward the loanprincipal,theloanmortgagewouldprobablyhavebeenpaidofftwice.Hadtheyreinvestedthatsecondmortgageamountintorealestate,theycouldhavestartedthissameprocessoverwithaboutfournewhouses.

Imagine the financial power that comes from owning a large portfolio ofcash-producing rental property that appreciates in valuewhile the tenants payyour loan down for you. Imagine using someone else’s money to fund thisportfolio,thentakingthewealthyou’vecreatedandspendingthosesamedollarsoverandover tobuynewproperties.Witheachnewpropertyyou start anewwealth-building cycle, increase your efficiency and effectiveness, and createequity to fund your next purchase. Soon you end up with a powerful wave,carryingyoutofinancialfreedom.

Thisbookisabouthowtocreatethatwave,whichcanbeeasilyleveraged,andbuildswealthinseveraldifferentways.Owningrealestateforasignificantperiodof time isvirtuallyguaranteed tobuildyouwealth.Cashflowingassetshave the ability to carry you to great heights that you couldn’t have achievedthroughworkingatraditionaljob.

Realestatealsohastheabilitytocompletelydestroyyou,yourwealth,andyourplansforabetterfuture.Rarelydoweseeasourceofpowerthatisallgoodorallbad.Inmostcases,powerhelpsorhurtsdependingonhowit’susedortheabilityoftheonewho’susingit.Butthosewhowantthebigrewardhavetoalsotakethebigrisk.Successisn’tfoundinavoidinganythingthatcouldgowrong.It’sfoundinharnessingyourstrengthstomakethemworkforyouandcreatingsystemsthatmitigateriskandenhanceefficiency.

So how do we learn to harness power? The process of developing orharnessingpowerthatwillpropelyoutoachievegreatthings,includingfinancialfreedom,iscalledmastery.Masteryistheprocessthatallowsyoutoharnessthesamepowerthatcandestroyyou,forceittohelpyou,andunlockyourowntruepotential.Whether it’s riding a bike, surfing awave, or learning amartial art,mastery is the process of harnessing and controlling a great power tomake itworkforyou,notagainstyou.

InmybookLong-DistanceRealEstate Investing:HowtoBuy,Rehab,and

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Manage Out-of-State Rental Properties, I tackled the controversial topic ofbuying rental property in “someone else’s backyard.” In the book, I took acontested subject (the ability to build wealth by buying in any market) andshowedpeoplehowtheycoulduseittobuildtheirwealthwhileavoidinglosingmoney.

Ichallengedtheconventionalthinkingthatlong-distanceinvestingwasrisky“justbecause.”Ihelpedexposethatthelogicthatledtotheadvice“onlyinvestinyourownbackyard”waswell-intentionedbutoutdatedintoday’stechnology-drivenworld. I showed people how it’s unwise only to focus onwhat can gowrong.Theyalsoneedtoconsiderwhatcangoright!IdetailedthesystemsIusetogrowmyownwealththroughrealestate.ThesesystemsaretheprocessIusedtoharnessthepower,toridethewavethatledmetotheresultIwanted.

Thisbookis intendedtoserveasimilarpurpose,butonadifferent topic. Iwanteveryonetoseethatwhileanyonecanbuyrealestateandbenefitfromitspower to grow wealth, there is a way to do it that is the best. The BRRRRmethodwill teachyouhowtobecomeablackbelt realestate investorandgetthe most out of your capital, time, effort, energy, and resources. MasteringBRRRR is mastering real estate. BRRRR is an acronym that stands for Buy,Rehab,Rent,Refinance,Repeat.Itisawayofdescribingtheorderofbuyingarentalpropertyandthenpullingyourcapitalbackoutinthemostefficientwaypossible.Inthisbook,I’mgoingtocoverhowtomastereachofthefivestepsoftheBRRRRprocess, and in the process, how to come closer tomastering thepowerofrealestate.

For too long, people have focused on not losing money. This has led toinaction,excuses,losttime,andlostopportunitytobuildwealth.Now,I’llbethefirst totellyouthepowerofrealestatecanworkagainstyou,andyouneedtounderstandhowtoprotectyourcapital.Butthatisonlyhalfthegame.Thisbookis going to teach you the other half of the game—how to master real estateinvesting and let the power of that wave carry you to massive financialprosperitythroughpracticaladviceandpracticalphilosophy.

Mygoal isnot just to teachyoutogrowyourwealthataconsistentrate. Iwanttoshowyouhowtodoitatanexponentialrate.Idothisbyshowingyounotonlyhow to find successat eachelementof theBRRRRprocess,but alsohow you can use success in one area to help you in the others. This createsexponentiallyincreasingreturns,awavethatdevelopsmomentumandbecomesmorepowerfulthelongeritpropels.

I commend you for being committed to this process and showing thatcommitment by purchasing this book. I’m excited to sharewith you not onlywhatBRRRRis,butalsowhytheverybestdoit,andjusthowitwillrewardyou

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fordoing real estate the rightway.Unlike flippinghouses, theBRRRRmodelwillenableyoutotakeadvantageofall thebenefitsofbuyinghousescheaply,without theheadachesorexpensesassociatedwithaquicksale.Whenyouusethe BRRRR model correctly, you begin building a foundation that will laterbecomeaskyscraper-sizedportfolioofproperties.

Manypeoplewilltellyouwhatnottodo.That’seasy.Thisbookisgoingtotellyouwhattodo,howtodoit,andwhy!You’llfindthisbookisbrokenintosevenparts,withonepartforeachofthefivephasesofBRRRRandonepartfordigging deeper into themastery ofBRRRR.By the time you’re done readingthis,youshouldhaveabetterunderstandingnotonlyofthemostefficientwaytostructure your investments, but also of how to master each phase of theinvestmentcycle.

MyStoryIf I’m going to be sharingwhy I believe you should be utilizing theBRRRRmethod,IfeelIoweittoyoutoexplainalittleaboutmyselfandmybackgroundsoyoucanunderstandhowitworkedforme.

Iamapoliceofficer.I’veworkedthisblue-collarjobforthelasttenyears.WhenIrealizedhowrealestatecouldbuildmywealth,IbecameobsessedwithbuyingasmuchofitasIcould.BecauseIdidnotcomefromawealthyfamilyorunderstandtheprocessofraisingmoney,myonlyoptionwastomakeasmuchmoneyatmyjobasIcouldandsaveasmuchofthataspossible.

Howdidthatlookforme?Iworkedabout90hoursaweekforseveralyears,slept in my car several times a week, gained a ton of weight, became veryunhealthy,andsacrificedmysociallife,allatthealtarofrealestateinvesting.

WhileIpaidaheavyprice(pardontheweightgainjoke)thisallowedmetosaveenoughmoneytoputdownpaymentsandcovertherehabcostsontwotothreepropertiesayear.Thesepropertiesbecamethefoundationofmyrealestateinvesting and eventually led towhere I am now.As grateful as I am to havethem, there is noway I could continue that process forever. I barelymade itthroughthefiveyearsIdidit!

Thegoodnewsis,Iwentfrombuyingtwohousesayearinthebeginningof2017 to twoamonth today. Ididn’t findaway tomakemoremoney. Ididn’tutilizeshadyor“creativestrategies.”Ididn’tinheritanything.AllIdidwasfindaway touse themoney Iwasmakingmoreefficiently. I finally figuredout itshouldn’tonlybemeworkingsohard—mymoneyshouldbe,too.

HadIreadabooklikethisbackthen,IhavezerodoubtIwouldnowownatleast20to30housesmorethanIdorightnow.Partofmekicksmyselfforbeing

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sostuckinmyways,butanotherpartofmeknowsit’sthatfrustrationatdoingthings the wrong way that drove me to write this book—so I can help otherpeopleavoidmymistakes.Thegoodnewsforyouisyoudon’thavetotakethehardroadIdidforsolong.I’mgoingtoshowyoutheshortcut.

Fast forward nine years from when I bought my first property, and I’mrollingalongnicelynow.LearningtoBRRRRatahighleveliswhatallowedmetomaster all the other aspects of real estate investing that are involved in theBRRRRprocess.Bywinning at all five levels, I get the verymost out ofmydeals, my capital, and my opportunities. Each of these “wins” compoundsthemselves,increasingmylikelihoodtowinevenbiggeronthenextdeal.

Nowthat I’ve figuredout theBRRRRmethod, it’sbecome theonlywayIbuy property. What I learned mastering BRRRR opened the door for me tobecomeatop-producingrealestateagent.(Successoftenopensdoorsyouneverknewwerethere—onemorereasonweshouldpursuemastery.)Inmyfirstyearof full-time sales, Iwon the rookie of the year award formyKellerWilliamsoffice,endedasthetopsellingagent,builtateamoffull-timestaff,wasfeaturedonseveralpodcasts,wrotemyfirstbook,andwasfeaturedonHGTV’sHouseHunters.Notabadyear!

What I’m trying to say is, pursuing the mastery of real estate investingcreatedcountlessexcitingopportunitiesforme,andIhavenodoubtitcandothesameforyou.Theeffortyouputintolearningrealestateinvestingwillpayyoudividendsintheend,andfurtheringeducationisoneofthebestinvestmentsyoucanevermake!

HowBRRRRSuperchargedMySuccessOnceIlearnedBRRRRandstartedbuyingmorehouses,agentsstartedsendingmethebestdealsfirst.MycontractorsgavemebetterpricingandmoreattentionwhenItookonmorerehabs.Whenmyportfoliogrew,propertymanagersstartedgivingmebetterpricingaswell.Asmyvolumeincreased,everyaspectofrealestate investinggoteasier.Realestate investing,whilechallengingatfirst,hadbecomeprogressivelyeasierwitheachdealandeachnewrelationshipIformed.

Whensomeonestartsbuyinghouses (ordoinganything, really) theyaren’tvery efficient at it. Frankly, they usually suck. At least I do. That’s whyexperienced investors often give advice to newbies that if they reallywant tolearn, they need to find an easy property to get into themarketwith and buysomething.Evenifyoudon’tmakeanymoneyonyourfirstdeal,theeducationitselfispriceless!

That’showlifeworks.Thefirsttimewedoanything,itsucks.Thefirsttime

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weski,drive,trytoread,liftweights,gorunning,startanewjob,whateveritis,wearen’tgoingtobeverygoodatit.Successcomesthroughrepeatingaprocessover and over until our brains figure it out—usually by spotting patterns ofthingsthatworkedandthingsthatdidnot,andrememberingthem.

OneofthemostdevastatingthingsIseeinrealestateiswhensomeonepaysthepriceupfronttolearnrealestateinvesting,andrightwhentheyfinallystarttogetgoodatit,andarereadytomakemoney,theyrunoutofcapitalandarestuck.It’slikeputtinginallthetimeinthegymtobuildupabase,thenquittingbeforethebigrace.

Canyouimagine?Itsucks!Iwanttoteachyouhowtoavoidthat.Thereisabetter way to invest in real estate than a big down payment and paying acontractor to make your property barely livable. Learning and mastering thisprocesswillmake sureyounever runout of capital, never stopgettingbetter,andarenot limitedbythehours in theweekyouhavetoworkasIwasforsolong.

Thosewhohavemasteredsomethingcangetsuperiorresultswithmuchlesseffort.Thelesseffortsomethingtakes,themorefunitis,andthemoreyoucanaccomplishinotherpartsofyourlife.Wedon’twanttospendourwholelivesworkingtolearnandsucceedatrealestateinvesting.Bycommittingtomasterynow,yougiveyourfutureselfanopportunitytoactuallyenjoythewealthyou’llbebuildingbytakingactiontoday.

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CHAPTERONE

GettingtoKnowtheBRRRRMethodManypeopletakenocareoftheirmoneytilltheycomenearlytothe

endofit,andothersdojustthesamewiththeirtime.—JOHANNWOLFGANGVONGOETHE

WhyBRRRRIsBetterThanTraditionalFinancingAt itsmost basic understanding,BRRRR is the bestway to buy a property ifyourgoal is toownmore thanoneor two. Itallowsyou to recover the largestamount of your capital out of the project as possible. This will help you formyriadreasonswewillcoverinthebook.

TheBRRRRmethodisanalternativeto thetraditionalmethodofbuyingaproperty.WhenIrefertothetraditionalmethod,Iamdefiningitasputtingdownalargedownpayment,thenspendingtheminimalamountofmoneynecessarytogettheplacerent-ready.Thisistheformulamostinvestorshavebeenfollowingfordecades.Itrequirestheleastamountofthought,effort,andforesight,andisthereforetheeasiest.However,whatiseasiestisn’talwayswhat’sbest.

Beforewegoany further, I’ll explain theprocessofbuyingahome in thetraditionalsense,thencomparethattohowtheBRRRRmodelworks.Onceyouhaveafirmgraspofthetwo,itwillmakemoresensewhythetraditionalmodelisn’tthemosteffectivewaytobuyrealestate.

TheTraditionalMethodExplainedThe majority of real estate is bought using someone else’s money. This isusually a bank,mortgage broker, or some other lending institution.While themajorityofhomebuyersinAmericaarepurchasingforthepurposeoflivinginthepropertythemselves,mostinvestorstakeadvantageoftheopportunitytousesomeoneelse’smoney,too.

Inthetraditionalmethod,financingisthefirststepofthewholeprocess.Thehomebuyergetsapprovedforaloan,usesittobuytheproperty,thenfixesitupandrentsitout.Theinvestorputscapitalinwhentheybuy(thedownpayment)

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andcapital inwhen they rehab (whatyoupay thecontractor toget it ready torentout).Then theyaredone.Theamount thebankallows thehomebuyer toborrowisbasedonthevalueofthepropertybeforeanyimprovementsaremade.

If the investordidwell, thehomeisnowworthmore than theypaidfor it,theyarereceivingagoodreturnoninvestment(ROI),andtheyhaveasizeableamount of equity in the property. In the traditional model, this would beconsideredasuccess,andformanyyears,themajorityofinvestorsstoppedhere.

Once the property is stabilized and rented, the investorwould start savingmoney tobuy theirnextpropertyandrepeat theprocess.Thismodel is simpleandusuallyrequireslesswork.ItiswiththisexactprocessIboughteveryoneofmyrentals from2009 to2016. Itwasn’t thebestway tobuyrealestate,but itwasallIknew.

Theproblemwith thismethod is thatwhile I’maddingvalue and creatingequity through purchasing real estate, the majority of that value stays in theproperty.While that looks nice on a spreadsheet, there is onemajor problemwith this—I can’t use that money to buy more property. The single, mostimportantactarealestateinvestorcandotogrowtheirwealthistoaddvaluetoa property—be it through purchasing below market value or adding valuethrougharehab.

Theproblemwith the traditionalmodel isyou leave somuchequity in thedeal when you are done that you can’t access this capital to buy the nextproperty,andthenextpropertyiswhereyoualwaysmakethemostmoney!Itisthrough theacquisitionof realestateatgreatprices thatwecreatewealth,andholding that property for long periods of time thatwe buildwealth. It is verydifficulttodothiswhenallyourwealthisstuckinthelastpropertyyoubought!

TheBRRRRMethodSoifweneedmoneytomakemoney,butourmoneygetsleftinthepropertywejust bought, how do we solve this dilemma? Enter the BRRRRmethod. TheBRRRRmethod works the same as the traditional method, but in a differentorder.Thatonesmalldifferenceleadstoaradicallydifferentresult.

WhenaninvestorutilizestheBRRRRmethod,theystartoffbypayingcashfortheproperty,ratherthanfinancingit.Iknowformanypeoplethiscanseemweird,butbearwithme.Therearemanywaystogetthatcash,andmanyotheradvantagestopayingcashthatIwilldiscusslater.Fornow,justmakesureyounotethatmoneyisputintotheprojectinstepone:buyingtheproperty.

Next, the investormanages the rehab portion.Moremoney is put into theproject.Inrealestate,investorscanaddvaluetotheirpropertyintwoways.

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1. Theypaylessthanwhatit’sworth,“buying”equity.2. They increase the value by improving the property’s condition, “forcing

appreciation”or“building”equitythroughtherehabprocess.

It’simportanttonote, intheBRRRRmethod,thesearethe first two thingstheinvestordoes.WithBRRRRyouareaddingvaluebeforeyouarefinancinganything.

After the rehab portion, the investor puts the property up for rent andimmediately starts collecting cash flow. This cash flow is higher than in thetraditionalmethod in thebeginningbecause there isnotyetamortgageon theproperty.

Once the property is bought, rehabbed, and rented out, then the investorrefinancesit.Theamountfinancedisbasedonthevalueofthepropertyafterithas been fixed up (when it’s higher). This differs from the traditional modelwheretheamountfinancedisbasedonthevalueofthepropertybeforeitisfixedup(whenit’slower).ThisisthekeyfactthatmakesBRRRRsocost-effective.When the bank is evaluating the property to give you a loan, it’s valuing aproperty that’s fixed up and worth more with the BRRRRmethod.With thetraditionalmethod,thebankisevaluatingthepropertybeforeit’sbeenfixedup,makingitworthless.

Becausesomanyhousesareboughtwithfinancing,manypeoplejustassumeyoucanonlyget a loan tobuy ahouse, but that’s not true. InPartFive:TheRefinanceProcessofthisbook,wewilltalkabouthowlendersgiveloans.Fornow,justunderstandaloancanbesecuredbyanassetatanytime,notjustuponpurchase.

What’s important tounderstandat thispoint is thatultimately, theBRRRRmethodgetsyoumoreofyourcapitaloutofyourprojectbecauseoftheorderinwhich you conduct the various stages of buying a rental. In the traditionalmethod,youfinanceitfirst.IntheBRRRRmethod,youfinanceitlast.Thisoneseemingly insignificant difference in the order in which you finance yourpropertyisthedifferencebetweensomeonelikemebuyingtwohousesayearorbuying24housesayear.It’sinsanelyimpactful.

Smallhingesswingbigdoors,andBRRRRistheultimatesmallhinge.

HowBRRRRIncreasesYourROIThe best investors use the BRRRR method for several reasons. One of thebiggest is the fact it increases your ROI significantly. Increasing your ROImakes your money work more efficiently for you, and working efficiently iswhatBRRRRisallabout.

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I’mgoingtoexplaintoyoujusthowBRRRRaccomplishesthis,butbeforeIdo,I’mgoingtoexplainwhatROIisandhowit’scalculated.

ROIDefinedROI is ametricused todescribehowan investmentperforms. It isoneof thesimplest ways to compare investments, and it’s used across all investmentvehicles,notjustrealestate.

ROI is thepercentof your total investmentyoucan expect to receive in ayear. If yourROI is 5 percent, you could expect to receive 5 percent of yourinvestmentbackina12-monthperiod.Thatmeansifyouinvested$10,000,youcouldexpecttoreceivea$500return.

ROI is one of the firstmetrics you need to understand in your journey ofmastering finance. It is incredibly useful—and universal—because it’s alanguage spokenby prettymuch every businessperson. If you putmoney in abankCD(certificateofdeposit)ata5percentreturn,5percentwouldbeyourROI.Ifyoulendsomeonemoneyatan8percentreturn,8percentwouldbeyourROI.

WhenapplyingROItorealestate investing,wetypicallyareonlyreferringtocashflowwhendiscussingROI.Thisisanimportantdistinctionbecauserealestateisauniqueinvestmentthatmakesitsownersmoneyinseveralways,suchasappreciation,cashflow,payingdowndebt,etc.NotethatwhenwetalkaboutROI,weareonlytalkingaboutthecashflowportionofyourprofit,nothingelse.Becauseit’sspecifictocashflow,ROIinrealestateisalsoreferredtoasa“cashoncash”return.

TheformulaforcalculatingROIisverysimple.Youtakeyouryearlyprofitanddivideitbytheamountofmoneyyou’veinvested.Wecall thisamountofmoneyyou’ve investedyour“basis”because it isoftenmadeupofmore thanone sourceof capital.With investing,we spendmoneyon thedownpayment,closing costs, rehab costs, holding costs, etc. The accumulation of all theseexpensesaddedupisyourbasis.

InordertocalculateyourROI,youwouldtakeyourmonthlycashflowandmultiply it by 12 (because there are 12 months in a year). Then divide thatnumberbyyourbasisandboom!You’vegotyourROI.

Example:Youhaveapropertyinwhichyou’veinvested$50,000ofcapital.Thepropertycash-flows$400amonthafterexpenses.

$400x(12)=$4,800

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$4,800/$50,000=9.6%

YourROIis9.6percent,meaningyouwouldearnback9.6percentofyourinvestmentbasiseachyear.

HowtoIncreaseYourROIEverygoodfinancialplannerorbusinesspersonis interested in increasing theirROI.Because there are two numbers included in the formula forROI (yearlyprofitandinvestmentbasis),therearetwomethodstoincreaseyourROI.1. Youcanincreaseyourprofit2. Youcandecreaseyourbasis

Pretty simple right? Understanding these formulasmakes real estate seemmuchmoremanageable.

Thereareseveralwaystoincreaseyourprofit.Themostbasicwayistoearnmore (raise rent) or spend less (decreases expenses). Entire books have beenwritten on these methods and it’s important you understand them. Goodinvestors know techniques to earn more money and spend less on theirproperties.

InPartThree:TheRehabProcessof thisbook, I’mgoing todiscusssomewayswecandothisusingtheBRRRRmethod.However,tryingtoincreasecashflowisadifficultproposition.Rentsonlygoupsofast,andifyoutrytoincreasethembeyondwhatthemarketcanwithstandyou’llendupwithvacancyandlessrent. Expenses can only be dropped so much, and trying to decrease thembeyondareasonablelevelcanleaveyouwithlessthanidealtalenthelpingyouaccomplishyourgoalsandrunyourproperty.

Once I realized this, I started looking for ways to decrease my basis asopposedtojust increasingmyprofit. Ifoundthat tobemucheasier,andthat’swhenIstartedusingBRRRRthemost.

Thereasonthisworkedsowell isyourcashflowtendstoincreaseasrentsincrease.Rents only increase so fast, and sometimes not at all. This creates arestraintonyourabilitytopumpuptheprofitportionoftheformulaandtakescontrolawayfromyourabilitytoimpactyourinvestment.

Decreasingyourbasisismuchdifferent.Youhavemuch,muchmorecontroloverthisportionoftheprocess.BRRRRworkssowellbecauseitallowsyoutoreducethebasisbyusingafewsimpletechniquesandrestructuringtheorderinwhichyoufinancetheproperty.

And in case you were wondering, decreasing the basis can have a BIGimpactonyourROI.

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Consider this: if you use the BRRRR method instead of the traditionalmethod, and are able to decrease your basis from $50,000 to $20,000 (byborrowing the $30,000 difference), your cash flow would decrease by about$150amonthattoday’sinterestrates.

However,yourtotalROIwouldsignificantlyincrease.

Example:

$250(newcashflow)x12=$3,000

$3,000/$20,000(newbasis)=15%

Your new ROI is 15 percent, up from 9.6 percent. That is a 61 percentincrease in ROI by simply doing nothing but borrowingmoremoney againstyourinvestmentbecauseyouswitcheduptheorderinwhichyoufinancedit.

Now,thisisactuallyamuchlessdramaticsamplethansomeofthedealsIdomyself.Iusedittoproveapointthatevenonadealthatisn’takiller,BRRRRcan increase your ROI massively just because lowering your basis is moreimpactfulthanincreasingyourcashflow.

ManynewinvestorsfailtograspthisandassumetheycanonlyincreasetheirROIslowly,yearafteryear,asrentstickupward.Experiencedinvestorslookforwaysinwhichtheycantakemorecontrolovertheirinvestmentstomakethemperformbetter.

BRRRRGetstheMostOutofYourCapitalIncreasing your ROI is good, but it’s really only one ofmanyways BRRRRmakesyouabetterinvestor.Inmyopinion,anevenbetterbenefitofBRRRRisthe fact it allowsyou tomakeyour capitalworkharder for you, not just yourROI.

Asaninvestor,theamountofcapitalyouhaveavailabletoyouisextremelyimportant. Tome, itwasworthworking 90-hourweeks!Without capital, youcan’tbuydeals.Ifyoucan’tbuydeals,youcan’taddequitytoyournetworth.You can’t add cash flow to your passive income.You can’t get repetitions inbuying, rehabbing, and managing property—hurting your ability to improve.Withoutcapital,youcan’tinvestinotherpeople’sdeals.Youcan’tmakeloans.Youcan’tfliphouses.Really,youcan’tdomuchbutreadandtalk.

Ensuring you have capital available to continue investing is of utmostimportance.Youcanbethesmartestinvestorintheworldbutifyoudon’thaveanycapitaltoputintoplay,youaren’tmakinganymoremoneythantheworstinvestor.Whilemanybelieveinputtingasmuchdownonapropertyaspossible

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(to increase cash flow by lowering themortgage), this is a too-simpleway tolookatinvestingthatdoesn’tconsiderenoughofthefacts.

Byborrowinganextra$30,000,welose$150incashflow(atleastinitially,althoughsomeofthat$150isgoingtowardtheprincipalandisn’treally“lost”).Butwhatwe’vegainedistheabilitytoreinvestthatmoneyformorecashflowthanwelostbyborrowingit.IfwemakesuretheROIwemakeonourmoneyishigherthantheinterestratewearepayingtoborrowthemoney,wecomeoutontop.

Forexample,let’ssayweinvestthat$30,000atthesamereturnwereceivedin the lastdeal (15percent).A15percent returnon$30,000wouldbe$375amonth.

$30,000x.15=$4,500

$4,500/12(#ofmonthsinayear)=$375

Comparethattothe$150welosttoborrowit.That’sadifferenceof$225inourbankaccounteverysinglemonth.

Wouldyouratherhave$375(plusanotherproperty,plus theequityyou’veadded to it,plus theopportunity to raise rents in the future,plus themortgagepay down from your tenant, plus the future appreciation of the property) or$150?

Inotherwords,whywouldn’tyouwant toborrowmoneyata4–5percentinterestrate(fromthebank)whenyoucaninvestitat15percent,plusgetalltheother perks of owning investment property? Thinking from a perspective thatonlyconsiderslosingcashflowbyborrowingmoremoneyagainstapropertyisincrediblyshortsighted.

ThisexampleI’mproviding isprettymodest. Ioftenhit returnsofover70percentonthehousesIBRRRR,andthatisonthebadones.It’snotagimmick,it’sallinthemath.Asyoucontinuetoread,you’llseeexactlyhowyoucandothesamething.

A70percentROI isn’tabadconsolationprizeonapropertyyoumisson.BRRRRallowsyoutomakemuchbetteruseofyourcapitalthanthetraditionalmethod.Onceyou seemore examples of how thisworks in real life, andyourealizehowitallowsyoutocapitalizeonthepowerofthewavethatrealestateinvestingcreates,I’mconvincedyoutoowillneverinvestanyotherwayagain.

BRRRRIncreasestheVelocityofYourMoneyVelocityofmoneyisacooltermusedtodescribehowmanytimesyoucanmake

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