Capital or money is limited. Most investors will run out of capital before they max out on the number of mortgages they can qualify for. What if there was a way to own an investment property and get back most, if not all of your initial capital back. Then you rinse and repeat the process. Is it really possible to have your cake and eat it too? I will share with you one of the most efficient ways of investing in real estate.
You may have heard the term BRRRR. It’s the talk of the town these days. This is the bread and butter of our investment strategy and is what we did to acquire and convert 12 properties into 24 units throughout 2019.
Think of it like flipping, where you get a big, fat paycheck but
1) it’s much more tax efficient
2) you get to keep the asset that will pay you every month and you get to participate in all the future wealth building from owning real estate.
BRRRR stands for:
The first step is to buy a property that has a specific layout and is zoned appropriately that allows you to convert a space, usually the basement, into a legal, self-contained dwelling unit. In essence, you are turning a single-family dwelling into two units. The house has to have a specific layout because there are certain requirements in the Ontario Building Code and specific city bylaws that have to be met in order to successfully do a secondary suite conversion. If your house doesn’t adhere to these requirements, it can be a headache and costly to apply for a minor variance or zoning amendments. And the risk is there are no guarantees it will be approved at the committee of adjustments since a NIMBY neighbour will usually veto it. Then you’ve wasted time, money, and effort. A few important details are parking requirements, setbacks, ceiling height, window size, natural light requirements, and egress, just to name a few.
After permits have been opened by the city, there are regular inspections by building inspectors to make sure everything is done safely and to code. If you and your contractor don’t have experience doing these second-suite conversions, the project is going to run a lot longer with hidden surprises, failed inspections, and other costs that the contractor didn’t account for. Time is money and you’ll be paying for vacancies, soft costs, and some surprises you and your contractor did not budget for into the quote. After the renovations are completed, the city will close the permit and you officially have a legal second suite.
Vacancies are almost zero in the areas that we invest in. There are more tenants than rental units available. By having a newly renovated unit with nice finishes, you will attract high-quality tenants that pay above market rents. As of writing this in Aug. 2020, we see rents as high as $2,000 for an upper unit and $1600 for a lower unit. With strong fundamentals backing our real estate market (employment growth, population growth, growing infrastructure), we expect this trend to continue. Having the units rented out will help with your debt service ratio which qualifies you for better financing in the refinance step.
After renovating and converting your house to a legal secondary suite, it’s time to ask the banks for more money. This is your payday after all the work you’ve put in. Also known as forced appreciation or sweat equity, if you know the right types of renovations to do, every dollar of renovation you put in should yield more than a dollar of improvement to your home value. The bank sends an appraiser to confirm that your property is indeed worth more after the conversion and ta da, just like that, you’ve printed yourself some new money. Magic!
Home purchase: $450,000
Down Payment $90,000
After Repair Value: $600,000
New Mortgage: $480,000
You pay off your old mortgage with your new mortgage and you’re left with $480,000 – $360,000 = $120,000.
You get all your renovation costs back ($50,000), plus most of your down payment ($70,000). You only have $20,000 left in this deal.
You spent $140,000 for your down payment and renovation and after you’ve refinanced the property, you get back $120,000. That’s how you recycle your capital. Rinse and Repeat. As the market gets hotter and hotter, the margins get smaller. Whereas this strategy used to allow an investor to pull out all his money plus more, now you’ve got a good deal when you get back all your renovation costs and some of your down payment. The window of opportunity is closing fast. Soon, we’ll have to be doing three-unit conversions or invest further and further away from the city.
In summary, buy, renovate, rent, refinance, repeat. You get to “flip the property” for profit and keep a cash-flowing property. It really is possible to have your cake and eat it too! Sound too good to be true? We’re living proof that this strategy works and we’re helping our clients do the same. This is the difference between flipping, (which is getting yourself another job) and investing. Are you ready to BRRRR?