Dave Meyer (8:22)
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Cost Segregation guys is the number one firm nationwide specializing in identifying these faster depreciating assets in your property. They've completed tens of thousands of studies across all 50 states, from remote cabins to apartment complexes. So if you own investment property, this is a no brainer. So visit cost segregationguys.com, for your free proposal and find out how much you could save this tax season. Welcome Back to the BiggerPockets podcast. I'm Dave Meyer giving you my step by step plan for getting four rentals by 40 years old. Before the break, we talked about your first deal being an owner occupied house hack that allows you to save money and build equity so that you have enough money to go out and do this again. Now, Property two is going to be a little bit different. Now that you have some experience and hopefully some money from house hacking, we're going to look for a deal that has a little bit more meat on the bones, got a little bit more juice, because we want to build equity. That's the thing that's going to build our net worth and really secure our retirement in the long run. Now, the way you do this is by finding what is known as a value add property. So this is finding a property that's not in the best condition and doing some sort of renovation. It doesn't need to be a full bur. You don't need to tear out all of the walls. This could be anything from a light cosmetic deal or if you want to, you can do one of my personal favorite strategies I call the slow burr. You could do a full gut rehab. That's where there's a lot of equity to be gained. But the point here is property two is going to be a value add project where you actually do a renovation on a property to build lots of equity. Now, depending on who you are, you should decide how intense of a renovation that you want. So if you don't have any experience with renovations, I would look for something that's more of a light cosmetic or a light rehab. That's something like renovating kitchens, painting, putting in new floors. But you're not doing anything structural, you're not moving walls, you're not popping the top, you're not doing anything like that. Unless you have experience with renovations. If you have experience or working construction or know someone who could help you with that process, you could do a bigger project. But for deal two, I would recommend most people stay on the lighter side of the renovation. It will reduce your risk and there's still significant upside in these kinds of deals. The next thing that you need to look for in your deals are one, in today's market, you should be looking for deals that have been sitting on the market for 60 days or more. We are in a buyer's market right now, which means that buyers have leverage. And if any seller has a property that's been sitting on the market for 60 days or more than they're going to probably be pretty motivated to negotiate with you. So look for those deals because that's where you're going to be able to buy below current comps and that's going to give you even more equity throughout the course of your deal on top of just looking for things sitting on the market 60 days. I think two key things that you want to look for in your deals are areas where you think there is going to be rent growth. So where there's going to be a lot of demand for renters, that is always helpful as a real estate investor. And the second is a place that's in the path of progress. You don't want to invest in a place where properties aren't going to appreciate. There's not going to be demand if you want to sell it. So look for places where people want to live, where the government is investing. Those are great ways to take your deals from a single or a double to a home run over the lifetime of your investment. So those are the things to look for in the deal. And just as a reminder, the goal of this deal is to build equity as much as you can and to get a cash flowing rental. All right, so let me just give you an example of how this works. You go out and buy a property worth $300,000, then you're going to need to put money into it, right? Let's say you have a rehab budget of 50 grand, which is a generous budget, right? Like that's enough to make significant improvements to a property. So your total all in costs are going to be 350,000 for this deal. And what a lot of people do for a brrr property is take out what's known as a hard money loan. These are loans that are designed specifically for these types of projects where you don't just borrow the money to buy the property, you also borrow the money that you need to do the renovation. And oftentimes with a hard money loan, you can put as little as 10% down. So because your total costs are 350,000, you're going to need $35,000 to get into this deal, which after a couple of years of saving up your money from your first deal plus building equity, you should be able to do this within two, three or maybe four years. You should have that much capital. Now you go into this deal, you buy it for 300 grand, you add value to it. After putting in 50 grand, hopefully this property is now worth, let's just call it 450,000. So you put in 350, now it's worth 450,000. And I know that might sound like magic, but it's not. You can absolutely put 50 grand in and build $100,000 of equity. And that happens all the time. That is a relatively normal type of return that you can expect on a good BRRRR deal. So you build that equity, which is great. Obviously your net worth just went up. But the real magic of the BRRRR property is that you can take some of the equity that you built out and apply it to property number three. So you're going to take out a new mortgage, you're going to have to put 25% down, which is about $112,000. You're going to need to pay off your old mortgage, right? You still owe the hard money lender 315,000, but after those two things, you can take $20,000 out of this deal. So you only put 35 in, right? Remember? And now you're pulling $20,000 out of this deal for your next deal. Now some people want to do a perfect burr where they can pull out 35,000. That might be possible. But even in this example, you're pulling out 20,000 that you can go use for your next deal. You're more than halfway to your next deal. That's what's so powerful about the BRRRR strategy. And on top of that, you should also have a cash flowing rental property at this time, right? Because the key is, even after that refinance, you need to make sure that this deal is going to cash flow at least modestly. Doesn't need to be tons of cash flow. It doesn't have to be the highest cash on cash return. Remember, the main goal of this deal was to build equity, which you have done, and to get at least break even. I would recommend 3,4% cash on cash return minimum for this kind of deal. Now once you've done that, you have 20 grand already. You're saving 6 grand a year from your house hack. Now you're making, let's call it $3,000 a year in cash flow from deal number two. And so in two years, you should be able to get deal number three, right? You have 20 grand in equity, plus you're saving nine grand a year in cash flow. That will get you $38,000 in just two years. And this deal we just did only cost us $35,000. So in two years you can get to deal number three. So that brings us to property number three. And the goal of this property is to generate as much cash flow as you can. You still want to buy a great property. You don't want to be buying something that's never going to grow, but you want to prioritize cash flow and cash on cash return here over equity appreciation. So we're not necessarily doing a burr or a house hack here. We are trying to find a cash cow. So the way that we're going to finance this is through the equity from our first two deals. Presuming both of those properties continue to appreciate at a modest rate of 3% per year. That's about average. And you add that to the equity that you built in the BRRRR deal, that was a significant amount of money. Plus you're saving $800 a month. If you waited, let's just say two years between your second deal and your third deal, you're now 35 years old in our example. You should have, just from doing those first two deals, another 60 to $70,000 to invest, which is more than enough to invest in this third property. Now, I know for some people or if you watch a lot of social media real estate content, you might think waiting two years for your next deal is a long time or waiting five years from your first to your third deal. I don't actually think so. It took me six years to get to my third deal and three properties. I had eight units at that point, but it took me three years and that has been totally fine. By 15 years of doing this, I have become financially independent. And so I promise you, you can follow this timeline. It can absolutely work. Your goal, remember, is to get to four properties by 40 and you're already at three by 35 on this timeline line. Now, there's sometimes a trade off between cash flow and appreciation, not always. And you honestly want to find a little bit with both. I personally never look for deals that just maximize cash flow. Like you can buy something, maybe it's in a D class neighborhood or a market that's never going to grow. Maybe you can get a 12 or 15% cash on cash return in those markets. I don't personally like those kind of deals. For Me, I need to at least be able to believe that these deals are going to grow at least on average appreciation and that they're still going to be good assets sometime in the future. They're still in a desirable place where there's going to be demand. But I am willing to give up buying in the best possible neighborhood in order to get my cash on cash return up to eight, ideally closer to 10% on this kind of deal. Now if you have 70 grand to invest, which you should by this point of your investing journey, you should be able to buy something for about 300 grand. Now that's not going to buy cash flow in every single market in the United States. But I think this deal is an example of a good time to go out of your current market. Unless you live in western New York or the Northeast, parts of the Northeast or in the Midwest. If you live in some of those areas or even Tennessee, some areas in the south, you can buy a cash flowing duplex for like 250 grand or 300 grand. But if you don't live in these markets, you can just invest in those markets. I know it sounds intimidating to invest long distance, but if you've done two deals at this point, you've already done a burr, you've already done a house hack, I promise you you can invest long distance. I have done it is not that much harder and in a lot of ways it forces you to develop some of the skills and systems that are going to make you a better investor over the long run. So I would personally not shy away from that once you've found a market where you can actually do this realistically. Again, lots of places in the Midwest, in the Southeast, some places in New York or in New Hampshire, places like that, this is definitely possible. The things I would personally target on this deal is an 8% cash on cash return or better after stabilization. Now we're not going to prioritize a big equity bump on this. We're not going to do a big brrrr project. But sometimes, and honestly, oftentimes in today's day and age, like you gotta fix up the house a little bit, you gotta throw some paint on there, put in some new floors, make a couple of improvements, and then once you have gotten rents up to fair market value, that's when you need the 8% cash on cash return. So even if the rents today and the Zillow price don't give you that 8% cash on cash return, that's actually fine, that's quite normal. What you need to do the job of you have as an investor is to project out what's my cash on cash return going to be when I'm done fixing up this property. And if it's 8% or better, that's what I look for, then I would look for at least 2 to 3 upsides on these deal because 8% cash flow is great, but you obviously want the deal to perform better and better over time. And so I like looking for areas where there's likely to be rent growth if it's in the path of progress or I also love places with zoning upside. Now, I just want to say one more thing before we go back to our example that there are a lot of markets in the Midwest that you can buy these kinds of deals. But I recommend looking for ones that still have good appreciation. I said it before, but I want to reiterate here that as a real estate investor, you do not want to see your property values going down. So look for places like Milwaukee or Indianapolis or Grand Rapids or even Detroit over the last couple of years. These are markets that are growing and they have good strong fundamentals, but they're still really inexpensive. That's what you want to look for. You don't just want to find deals that are cheap because they're cheap. A lot of times if they're in a mediocre market and they're cheap, it means that they're probably not going to appreciate. You're going to miss out on a lot of the benefits that you should be getting from holding onto this property long term. So presuming that you find this, you get a $300,000 deal with an 8% cash on cash return. If we return back to our example, now we're getting 750amonth from property number one because rents have been growing at 3% a year, 350amonth from property number two and 400, 420 per month from property number three. That is over 1500 dollars a month in tax advantage cash flow, which is closer to earning $2,000 per month, like in a job that's going to get fully taxed. Now, you're only five years into this, but hopefully you're starting to see that these things start to compound what is not a lot of cash flow in the beginning gets a little bit more and a little bit more and a little bit more. And it's not just when you acquire new deals just by owning these properties and you've already gone from modest cash flow and deal number one to 750amonth on property number one. Now you're up to 350amonth on a BRRRR deal that was prioritizing equity growth over cash flow. But you're still getting cash flow. And as you'll see in our next property, the longer you hold this, every deal continues to get better. It's not just about acquiring new properties. It's about allowing every deal that you own to mature over time. And just like wine or many other things, most deals continue to get better and better the longer you hold them. So now that we've done property number three, let's move on to our fourth property that you should be targeting before the time you turn 40. We're going to get to that, but first we have to take one quick break. We'll be right back.
