BRRRR Method for Airbnb

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Hey, what's up guys, it's James here and in today's video, we're gonna be breaking down the bur method that you might have heard of on other channels you might have heard of elsewhere, we're gonna be breaking down how and why we use this method to purchase properties with very little money actually left in the deal. So actually get our money back out of the deal when buying short term rental properties. Now, this is an option, whenever you're buying short term rental properties, you kind of have the option to either buy three different one of three different types of properties. One would be a renovation project, where it's, you know, there's significant renovation work needs to be done, and you can increase the value of the property went by doing those renovations and pull a lot of your money out of the deal, we're going to walk through all the numbers behind that in this video. Or the other option is to buy a property that is just what we call a furnish and list property. mean, that doesn't require any substantial renovations, maybe a little bit of paint, if anything, but for the most part, you're just furnishing the property, getting it set up and ready and listing on Airbnb, or the last category would be what we call a turnkey property. And that's generally going to be a property that's already set up and operational as a short term rental property. And so you're buying it sometimes with bookings already lined up in the calendar, and you're buying it really just ready to hit go on and start bringing in income. Now, with a turnkey property, you're obviously going to pay a premium for that, obviously, with a furnish and list property, it's going to be slightly less expensive than a turnkey property, but you're still going to pay a premium for it. And the one type of property that you're going to get sort of the best deal on is going to be the furnish, and are they the story renovation project property. But as you would expect, suspect the amount of work required for each of them goes in the inverse order. So turnkey property, you're paying more for it, but you have way less work to do, it's really just ready to go, the furnish and list property you're getting a slightly worse deal on, and it's only a little bit more work to do to get that property set up. Whereas a renovation project, you're going to get a way better deal on that property, but it is going to take more time and energy in order to actually get that property up and running. So there's all these different options, one of them and one of the that's personally just my favorite is the burr method. And I'm going to walk through why in this video. But the main reason is because it allows me to keep my money moving and grow my portfolio a lot more quickly, without needing to constantly be earning and declaring a whole bunch of additional income that I can use for down payments to finance those properties. So we're going to jump into it here. Before I do that, I just want to remind you guys, whatever your strategy is whether you want to do burrs, whether you want to you know, renovate properties, whether you want to buy a furnishing list property or a turnkey property, I highly recommend if you're looking at investing in short term rental properties, that you check out the link in the description down below. To register for the free training there, we're also going to give you a analysis spreadsheet that we use to analyze all of our deals completely free. So just sign up for that
the link in the description down below. Now let's go ahead and jump in here. So I'm going to use an example property to illustrate this whole kind of process. And this is actually a property that we purchased last year. And so the purchase price on the property was $500,000. And this blue carpet should tell you everything you need to know about the state of the property. Now, it wasn't in a total state of disrepair. But it was definitely very, very dated, it had been a long time since any renovations had been done for the property. So this was a property where we needed to do quite a bit of renovation work, obviously, we're not going to be leaving the blue carpet in this property, as you would suspect that wouldn't do too well as a short term rental. But there's a lot more there's popcorn ceilings need to be redone, the bathrooms in the kitchen need to be updating the flooring all throughout the property to be updated, there's a lot of work to do. And so with this property, if you're putting 20% down, and oftentimes on short term rental properties, you can get a lower down payment. So there's all kinds of different ways to do that. But let's just assume a 20% down payment just to make the numbers really simple 20% of $500,000, that means you buy get the property for $100,000 of your own money going into it for the downpayment, the loan to value in this case is important because this is where we're going to bring this up later on. But the loan to value just means the the loan, the ratio of the loan amount on the property, the mortgage, to the actual value of the property. So it means that you are basically borrowing 80% of the property's value, meaning that with a 20% down payment, you're obviously at 20 loan to value. So you are you're borrowing 80% against the property. And so basically you are looking at a mortgage amount of $400,000. So that's obviously the difference between your $100,000 downpayment and the $500,000 purchase price. So this is basically it's important to know this because the bank is generally going to lend you whether it's 80% or 90% of the property's value, they're going to lend that based on the property's value. That's the one thing that will remain constant. So if the property's value goes up, you can later refinance the property and still get that same percentage the same 80% of the value The property as a mortgage as a loan, so that's important, we're going to bring that up and show why that's so important later on. So in this case, again, just to recap these numbers, we bought the property for $500,000, we put $100,000 of our own money into it as a downpayment, the loan was then 80% of the property's value, which is $400,000. Now, the closing costs are going to be about another $5,000. And that's just going to be for legal fees, things like that, Doc, she purchased the property, our renovation budget for this property that we ended up spending was $60,000. That's what we spent renovating the property. And that means our total cash into the property from the downpayment, the closing costs and the renovation is $165,000. So what we actually put into the deal was the $100,000, downpayment. $60,000, for renovations, and that $5,000 for closing costs, that's $165,000. Now, why, right? You know, the the appraised value on this property after the renovation is $650,000. And the big question there is going to be why I know a lot of people wonder, well, if you buy the property for $500,000, and you put $60,000 into renovations, doesn't that mean that the property is now worth $560,000? Not $650,000? That's a valid question. And the reason for this is, you know, really illustrated by this second picture here, why is it worth so much more? How did we pick up that additional $90,000 in value out of seemingly out of thin air, and it's because of the second picture here,
there's a value that the marketplace is on not needing to do these repairs, no one wants to do this renovation work, people don't want to buy a property, that's a project a lot of time. So people are willing to pay disproportionately more for a property that's move in ready that's actually already renovated already up to date, because the market places that value on not need to do the work. But also, because people you know, can a lot of people just can't envision what a property can be like, they don't have the expertise to do that renovation work, they can't have, you know, they don't have the expertise to be able to see the potential in a property. And so naturally, if you go into a property with blue carpeting, you see that as a much less valuable property than one that is already moving ready. It's beautifully done, right? And so if you can, another way to think about it is imagine if the property were to only be worth $560,000, after the renovation, well, then no one in their right mind would ever buy a property that needed to be renovated, because you would be able to spend less money. Because you think about it, you get 80% of the of the $60,000 as a loan from the bank anyway. So you actually need to spend more cash to buy a renovation project in that scenario. And you're going to, you know, the property just doesn't make any sense there. Right? If you think about buying a $560,000 property, your down payment is only going to go up by a few $1,000. What is that about $15,000, that your down payment is going to go up by so you could buy a $560,000 home with only $115,000 120 versus buying a $500,000 home and then renovating it, which would cost you $165,000, who in their right mind would take more money out of pocket to buy a property that they then have to do a bunch of work to renovate that then isn't worth any additional money beyond what they paid plus what they renovate it for right just doesn't make any sense. So what would happen is no one would ever buy properties that needed to be renovated, they would only buy move in ready properties. And so there just be no desire, no demand for these properties. And that's ultimately what happened in the real market is that there were wasn't desire and so therefore the price needs to go down. And then once you bake in enough margin there for people to actually be able to get value at a buying that property that needs renovation work, then it hits a price where people go, Okay, I'm willing to do that work, because I'll actually get some benefit for it. So that's kind of the the logic behind why the market works this way and why you're you're going to kind of create value out of thin air. Now that's not to say that you can do renovation on any property, obviously, and just generate value right has to be in the eyes of the market. So generally, you're going to see people renovating properties, mostly spending the money on the kitchen on the bathroom, those things tend to jack up the value of the property quite a bit. There's other strategic renovations you can do that are going to increase the value of the property more than others will and you need to start with a property that by and large in the market as seen as needing renovations. So we're not picking a property that just because of your own personal tastes, you don't like it, whereas the rest of the market sees is moving ready, but you just personally don't. We're looking at it for a property that the entire market looks at and they go that needs work, that property is not moving ready by any one standard. Those are the ones that you're going to get a better deal on. Now with the appraised value of $650,000. It's important to remember again, the bank is willing to loan us 80% of that value of that $650,000 amount cuz again, they want to make sure that we have 20% in the deal. But that can be from money that we've put into the deal or from appreciation that we created, right, we now have an extra, you know, 160, whatever, $1,000. Roughly, I
think it's $140,000. So we have extra in the deal, that'll bring us beyond that. So again, just to keep it really, really simple, just think about this $650,000 value and think the bank will loan me 80% of that, the bank is going to loan me 80%, that meaning $520,000, not our new mortgage is $520,000. Now, if you remember, our mortgage amount initially was $400,000. So the difference there is $120,000. And a mortgage is just a loan. Right? So initially, the bank gave you a loan for $400,000, and you used it to buy this house. And now they're saying, Well, we actually have an extra $120,000, that we can give you as a loan. So you get that $120,000 back, that's the additional mortgage amount, that's the amount that you can cash out. And so that means that you actually get cut a check for $120,000. And that can obviously be used to pay off a lot of this closing costs or renovation the the down payments that kind of gives you that money back. And now your ending cash in the deal is only $45,000. So now you own a property that is worth $650,000. Right? How much money do you have actually have your own money in the deal at this point, but $45,000, and how much of the property Do you own? Well, you own 20% of the property, you owe $520,000 to the bank, so you're going to have a mortgage that you make monthly payments on and that mortgage value is $520,000, because the bank owns 80% of your property, but you still have 20% equity in the property, and you own and yet you only have $45,000 of your own money in the deal. The reason for that is the rest of the equity you have is sweat equity, the rest of the equity you have you actually created out of thin air like we talked about. And so that's how you have more than more money in the deal. Technically, you have $130,000 for the value in the deal, that 20% that you still have in the deal. But yet, only 45,000 of that is actual cash you have in the deal, the rest is value created through the renovation work. And so the advantage of this is pretty simple to see, right? If you have $165,000 In this scenario, then you're going to need to, you know, buy this property. And let's say it was a turnkey property that you just bought with your $165,000. Well, that means that now in order to buy the next property, you need to come up with another $165,000. And for most people, that's going to take a number of years to get that kind of cash back on hand. Now, in this scenario here, you're going to be able to have ending cash in the deal of $45,000. So now you only need to come up with another $45,000 to you know, get that entire money paid back to you. And now you've got that same $165,000 that you initially had. And so that means that if you refinance this property after let's say, a year, two years, and in most cases, you're actually going to be making a lot of that money back in cash flow from the property as well, it means it's now very easy to add another property every year, even multiple properties in a year, because you don't have to come up with another $165,000. In order to come up with another downpayment, you really just need to, to, you know, come up with another $45,000, save another $45,000 in order to come up with that same $165,000 that you had before, which should be enough to buy another similar property, renovate it, pay for the closing costs. And then you can just rinse and repeat over and over again. So it just allows you to build your nest egg a lot more quickly. And if you pay attention to compound and growth curves, anything that you can do to cut off that you know long kind of flat part of the traditional compound growth curb, you can speed that up, that's going to help you a lot in the long run. Now, again, it's really important when you're doing this, that you make sure we talked about this in other videos, you make sure that you run a worst case scenario analysis and make sure that your property is always going to cashflow positive, so that you're never going to be at risk of having to sell the property. But this is also a really nice way to build in a safety net as well to your investment because you've actually increased the value of your property. So it's gonna be worth more than what you paid for it and what you actually spent on the renovation. So I hope this has been valuable to you. If you have any questions for me, let me know in the comment section down below. If you want to learn more about this strategy and about investing in short term rental properties, buying properties like this for short term rental versus buying turnkey if you just want to know the strategy overall know how to build massive cash flow through short term rental investing. Make sure you check out the link in the description down below to our free training that covers all the details on that. Other than that, like the video subscribe to the channel to make sure you stay up to date with the two new videos we post every single week. And with all that said I'll see you in the next video.