Step 1: Do your homework

We realized it was important to read enough to know what we were getting into, but not so much that we got our PHD in real estate – really we still have a lot to learn, but we didn’t want to let that cause analysis paralysis for us. We wanted to learn enough to test it out. We talked to real estate investors we know, read books (The Book on Rental Property Investing and this BRRRR book), joined the BRRRR community on Facebook, and read a bunch of articles online.

Step 2: Build your team

We realized we couldn’t invest in real estate alone. Part of our homework was finding the right people with the right skills to help us. We needed:

(1) Someone who could crunch the numbers

(2) A realtor who understood the market and could help purchase the right property

(3) A lender to help with financing options

(4) A contractor and/or network of local subcontractors

(5) Property manager (optional – we are still self-managing)

(6) A lawyer to help with lease, LLC, and liability questions

Step 3: Know your numbers

We focused primarily on three key numbers before we bought our rental. This is an important step where we took extra time – we didn’t want to run out of money half-way through a renovation or end up with a home we couldn’t make money on.

(1) Cash-on-cash return – Our investment return (think stocks and bonds but with real estate)

In our case (for single family rentals) we calculated cash-on-cash return (Annual Net Cash Flow / Total Investment). Annual Net Cash Flow involves educated-guesstimating how much you can rent the property for and total monthly costs (i.e., mortgage, expenses). Total Investment = amount of downpayment + renovation cost.

Our Example:

• • • Gross Monthly Rent: $1500
    • Subtract: $900 mortgage & $50 maintenance
    • Net Monthly Cash Flow: $550
    • Net Annual Cash Flow: $550 * 12 = $6,600
    • Total Investment Cost (Downpayment + Remodel): $50,000 + $30,000 = $80,000
    • Cash-on-cash return: $6,600/$80,000 = 8%

– 8% is considered slightly low for a cash-on-cash return. A better target is 12-18%. We decided this was acceptable because this is an area of town with strong home value and rent appreciation potential.

– Part of knowing our numbers meant determining our priority of cash-on-cash return vs. long-term price appreciation. We thought of it like an 8% tax-free dividend while the asset price was slated to grow in the long-term.

(2) Amount of money we had to invest – We decided we wanted to put at least 20% for our own risk perspective, and we knew that houses in our target neighborhood were at least $200,000 – that helped us determine that our downpayment would be at least $40,000. We ended up putting 25% down for a favorable interest rate which made our downpayment $50,000. We ended up spending $30,000 on renovations because we DIY’d a lot of it – see renovation section for more on this.

(3) Monthly mortgage – One other big consideration for us was not taking on too much risk which meant asking ourselves “If this house goes unrented, could we pay this mortgage without compromising our budget/lifestyle?” Thinking about it this way and having clear parameters made us feel more comfortable taking on this big risk for our first rental investment. It definitely helps us sleep at night knowing we could pay the mortgage if it did go unrented.

Step 4: Find your market and house

This is where a good realtor came in handy for us. Our realtor not only knew how to help us through homebuying and the market, but also understands the rental market and renovation approaches. He helped us think through the right location, how much to pay, home size, what types of renovations to do, which features are important to renters, how to market a rental, and how much the house would rent for once renovated. We ended up selecting a neighborhood near the city where there is a lot of investment and development.

Step 5: Figure out financing

We didn’t just have $80,000 in cash ready to spend on this rental, so we needed to figure out how to come up with the money. Travis determined the best way for us was to do a cash-out refinance leveraging the equity in our primary residence (this worked for us at the time because we were in a low-interest rate environment). We talked to a loan officer that we trusted , and he helped guide us through the cash-out-refinance process (e.g., borrowing money against our existing home to use as a down-payment). We ended up taking out $80,000 cash by refinancing our existing loan which increased the total loan against our home by that much. Thanks to a lower interest rate though, we ended up with the same monthly mortgage cost. At that point we had $80,000 to use towards buying and renovating.

Step 6: Purchase

Re-enter realtor. Now that we had our money to spend, we started making offers on homes that met our criteria and hit our numbers. We made a couple of offers on houses that were already renovated, and it turned out we were competing with both investors and first-time home buyers. After a couple months of offers and patience, we found our right house. The house we bought needed so much work that there were few people as crazy as us willing to buy it.

Step 7: Renovate

We underestimated renovation costs and timing significantly  because the house needed to be completely remodeled (think old wires, rotted floors, old pipes, world’s smallest/unusable kitchen, no laundry room, old roof – you get it). We got quotes ranging from $50,000-$70,000 which was more money than we had at that point. We ended up spending $30,000 because we recruited a saint of a family member who is a contractor, and we spent nights and weekends learning construction, DIY renovating, getting sweat equity from family, and sub-contracting out some components (tile, hardwood floors, paint, landscaping) for 5 months (twice as long as expected). We ended up picking out higher end finishes than what some would call “rental quality” because we knew that would attract a good renter in our market and would be worth it in the long run from a resale value too. These trade-off decisions are tough in the moment, so always going back to thinking about our “target tenant” and what they would value helped us make the decisions throughout the renovation.

Step 8: Get Ready to Rent

We got lucky and found several interested tenants through word of mouth mostly because we were sharing our progress and story with friends and family along the way. We consulted with a lawyer to get some advice on liability (e.g., to LLC or not) and lease questions/contract language. We ended up using apartments.com to use their template to create a custom lease, run background checks, and we also use it to handle automatic payments and maintenance. Since we manage these rentals ourselves, they aren’t exactly passive, but there is always an option to hire a property manager to help with the day-to-day. Even with the help of a property manager, I wouldn’t consider rentals a truly passive investment.