1) What is the real estate investment deal?
In this post, I will be describing my investment in a Triplex rental property using the BRRR (Buy, Renovate, Refinance and Rent) strategy.
My reasons for publicizing my real estate portfolio holdings are twofold:
- For others, to pass along what I’ve learned to anybody who is interested in investing in real estate passively
- For myself, to keep track of my holdings and their returns
2) Where is the property located?
The property is a legal Triplex rental property, near the Hamilton core, which required extensive renovations.
You may have noticed a trend in the location of my real estate investments. They are all in the Hamilton area because my JV partner focuses his investments in this area.
Vancouver and Toronto are known for their high real estate prices, but it can be very difficult (if not impossible) to find cash-positive flowing rental properties in these cities. Many real estate investors invest in the surrounding areas where rental properties are more affordable and benefit from the ripple effect of Toronto’s real estate market. When you crunch the numbers, your return on investment is often higher in the surrounding areas vs. investing in Toronto.
Areas that are sought out by real estate investors include Hamilton, St. Catharines, Durham region, Kitchener/Waterloo area and Barrie, often near current or proposed public transportation routes/stations.
3) Are you the active or passive investor in this investment?
I was the passive investor in this Joint Venture. My role was to provide all the funds required for the investment.
My JV partner brought the “sweat equity” for this deal. He found this property from his realtor. Having a realtor on your team who is experienced in real estate investment properties is crucial. They can often find properties for investors before they hit the MLS. Renovations were done by his team of contractors under his supervision.
All potential profits were divided 50/50.
4) How much was the investment? What was the Return on Investment (ROI)?
The goal of the BRRR strategy is to get back your original investment after refinance while leaving the mandatory 20% equity in the property. Real estate investors like to call this “infinite returns” since none of your money is in the property anymore. You now own a positive cash-flowing rental property using the Bank’s money with tenants paying down the mortgage. Pretty sweet deal!
After 1 year of renovations, the property was refinanced at a newly appraised price of $650,000. The new mortgage was $520,000 (80% of $650,000). This mortgage was used to pay off the original mortgage ($256,000) and pay back my investment funds of $250,000 (down payment/closing costs + renovation/carrying costs)
Not every investment with the BRRR strategy works out perfectly like in this case. Sometimes, you may have to leave a portion of your original investment in the property’s 20% equity after refinance.
Essentially, my JV partner’s “sweat equity” made us $144,000 ($72,000 each) through Forcible Appreciation. The bulk of this amount was left in the 20% equity in the property ($130,000). Remaining $14,000 was cash profit that was split between us.
As you have probably seen on HGTV shows, people renovate houses and flip for a profit. With the BRRR strategy, you are basically “flipping” the property to yourself through the refinance. You pay no taxes on the capital gains from the refinance. The capital gains are deferred until you sell the property in the future.
What happened with the $130,000 equity left in the property? Well, now that the “Buy, Renovate and Refinance” part was done, the last R “Rent” was all that was needed to be done. Just like in passive index investing, this BRRR strategy is “Buy and Hold” for the long-term.
After renovations, this property consisted of:
- a 2 bedroom unit on the main floor ($1495/mth)
- a 2 bedroom unit on the 2nd floor ($1395/mth)
- a 1 bedroom unit on the 3rd floor ($1095/mth)
Total rents of $3985/mth
My 50% portion of the $130k is $65k, which is compounding at a calculated ROI of 37%/yr. That’s pretty good in my books!
This may seem a bit confusing if this is your first time seeing the BRRR strategy in action. Don’t worry. I felt the same way. Coming from a background of passive index investing, it took me a while to wrap my head around the concept. At first, I didn’t believe it. I thought that the returns were too good to be true.
However, once I understood the strategy and process, it then made perfect sense to me. It is simple math, and math does not lie. Now I understand why you always hear stories of multimillionaires who made their fortunes through real estate investing. It works!
As an aside – imagine that my JV partner did this on his own with his own funds. His ROI after the year of renovations would be $144,000 / $250,000 x 100% = 57.6%!!!
- I invested $250,000
- After a year of renovations, the price was forcibly appreciated, and my ROI was $72,000 (50% of $144,000) for a 28.8% return
- The capital gains earned from the renovations were left as the 20% down payment for the refinance, which is compounding at an ROI of 37%/yr.
- My original investment of $250,000 was returned to me after the refinance . These funds were transferred back to my RealCo, which we then deployed to purchase and renovate a 5-plex rental property with the same BRRR strategy. Rinse. Repeat.