David is now co-host of the BiggerPockets podcast, and author of a book focused on teaching the BRRRR method. He has a lot of experience as an investor, agent, and educator, now he’s finding new ways to share his knowledge with his book. We’ll cover what you can expect to learn by reading his new book, and cover the BRRRR method a little more in-depth than we ever have. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“If more people did that, they just wouldn’t suck at life” – David Greene
David Greene Real Estate Background:
- Real estate agent and investor, co-host of the BiggerPockets podcast & Keller Williams Rookie of the Year
- Started investing in 2009, has a portfolio of over 30 SFR’s & shares in large apt. communities, mortgage notes, and note funds
- Based in San Francisco, CA
- Order his new book here: Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple
- Listen to his previous episode: JF806: How He Adds $30,000 Equity to a Cheap Home by Doing This One Thing
- Say hi to him at https://www.davidgreene24.com/
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a situation for you – it’s Situation Saturday. The purpose of Situation Saturday is should you come across a particular situation like we’re gonna talk about today, well, you’ll know how to handle it, because our Best Ever guest will talk us through it.
Today we’re gonna be talking about the BRRRR rental property investment strategy, and it’s gonna be made really simple, which happens to be the title of today’s Best Ever guest book, David Green. How are you doing, my friend?
David Green: Good, Joe. How are you doing, man?
Joe Fairless: I am doing well, and welcome to the show. A little bit about David — and Best Ever listeners, you know David; you have listened to his episode before on this show… And then also, he is the co-host of the Bigger Pockets Podcast; he’s also a Keller Williams Rookie of the Year, or he has achieved that, and he is a real estate agent, obviously, and real estate investor.
He started investing in ’09, as a refresher, and he’s got a portfolio of over 30 single-family homes. He’s also got shares in apartments, he’s got mortgage notes, note funds etc. Based in San Fran.
First, David, how about you give a little bit of quick background of yourself, and then let’s roll right into some lessons we can take away from the book that’s come out recently.
David Green: I’ve been a police officer for about ten years. I started buying rental properties with money I made working overtime. I was on your show number #806, and we kind of talked about ways that I go buy fixer-upper properties, add value to them and then refinance them, which eventually became the BRRRR strategy, which is the book that I just wrote, kind of detailing how other people can do that, too.
When I wrote my first book, “Long-distance real estate investing” about buying houses in other markets, because California and the San Francisco Bay Area is just stupid expensive – you can’t buy anything here – I started getting interviewed on other podcasts to talk about it, and then that eventually led to me getting to take over as a co-host of the Bigger Pockets Podcast. So now I do the same thing as you – we teach people how to build wealth through real estate, and get into this awesome thing that we figured out.
About two years ago I stepped away from being a police officer, I went full-time into being a real estate agent, as well as an investor, just because I got the bug for real estate. I really liked it. I started doing good, sold a lot of houses… It turns out that really most real estate agents kind of suck, if we’re being honest, and it wasn’t too hard to start doing well with that… So now I’m building a real estate team and I’m helping people to buy real estate, and I just love to talk about real estate all the time.
Joe Fairless: Yeah, I have noticed a lot of agents are terrible… What did you to see “Okay, here’s what they don’t do, and here’s what I’m gonna do”? What are some specific points? I wanna get into the BRRRR stuff, but I’m curious about what you did, that you saw they weren’t doing.
David Green: I think that’s such a good question, because what I did was I looked at everything that frustrated me, and I said “How can I solve that problem, rather than just letting the frustration take over and make me a negative person?” And I’ve found that’s actually become a super-power of mine. When I get really frustrated with “Man, I can’t just get this piece to work in my life…!”, I work really hard to solving that problem, and then I go teach other people what I did, and people really like it.
My problem with real estate agents was I knew more about real estate than they did. I’m hiring them to help me either buy a house or sell a house, or figure out how to solve this problem of how do I take a junk house and turn it into something nice, and they don’t know what to do to help me. They really just know how to fill out forms and be friendly and nice. Most of them are trained in sales skills, but they’re not really trained in real estate skills… So I was always frustrated by that, and when I got my license, I basically kind of branded myself as “I’m okay to not be the nicest guy in the room.”
If I don’t have the coolest-looking Instagram or I don’t have the most inspiring quotes all over my Facebook, that’s alright… But I’m gonna know what happens in a transaction. I’m gonna have the best home inspectors, I’m gonna get you accurate rehab bids, I’m gonna help run numbers for you… I’m gonna paint that picture as clear as I can for my clients, the same way that I would if I was the one buying or selling that house. And there’s not many other people doing that, because frankly, most real estate agents don’t know real estate. It’s kind of a tricky genre, where you’re in charge of finding your own business and then serving your own business, so what happens is agents focus way more on how to find business than how to serve it.
And because there’s not many people that were doing well, we did really good, so now one of my goals is to be the top agent in the San Francisco Bay Area and in the Sacramento market, and give people an option when they wanna buy or sell a house from someone who actually knows how real estate works, as well.
A side benefit of that has been all the business skills that I’ve learned having to build a business, like I’m sure you’ve learned, too. They really do help in the investing stuff, as well.
Joe Fairless: Now that you’re an agent and you’ve got the process, certain things that are identified now, you are the solution to those challenges, with things that frustrated you – which is exactly what I do, by the way, whenever I’m writing a book; I read the books that are out there on my topic or similar topics, I read the reviews on Amazon, and I read the negative ones and the positive ones, and especially focused on the negative ones, I make sure I address the negative ones proactively in my book. [laughs]
David Green: It’s so genius, Joe. I mean, if more people did that, they just wouldn’t suck at life. People are giving you the answers to the test when they criticize you. They’re telling you “Here’s what you got wrong.” And when you’re thin-skinned or you’re afraid to hear that, and you avoid it, and you only go to people that tell you what you wanna hear and you just stay the same all the time… But if you can embrace that… “Okay, let me address where I did better”, eventually you just won’t make any mistakes and you’ll be the best at whatever you do.
Joe Fairless: So let’s talk about your book, “The BRRRR rental property investment strategy made simple.” First off, for anyone who is from Pluto, what is BRRRR, and then roll right into how do you structure your book.
David Green: Alright, so BRRRR is an acronym for “Buy, Rehab, Rent, Refinance, Repeat.” It’s just the order of how I buy rental property, and the book – I basically split it into five parts. There’s a Buy part, a Rehab part, a Rent part, all the way through… And I say “This is how you become really good at each of these things. This is how you buy deals, this is how you rehab a house. This is how you analyze and rent it out. Here’s how you refinance it. This is what you need to know about loans”, and then the final chapter, the Repeat, is how you build systems to do that for you over and over.
My philosophy is if you master the BRRRR strategy, you will then inherently master real estate investing, because you’ve done every part of it that makes you a good investor. And the whole beauty of the BRRRR strategy in the real is that you don’t leave equity in a deal. You get your equity back out, which you can then go to use to buy another property.
It’s my belief that the only time in a real estate deal that we actually make money is when we buy that deal under market value, or when we add value to it through the rehab process. That’s the only two parts, right? And you need capital to do both of those things. You need capital to buy something, and you need capital to fix something up. So if you’re leaving all your capital in the deals that you’re doing, it looks great on your spreadsheet, but you can’t go buy new deals, unless you get capital from somewhere else.
So that’s basically why the BRRRR strategy works so well – I can go in there and I can buy a property, fix it up, pull all of my money out, or maybe a little bit less than all of it (sometimes more than all of it) and go buy the next house. And the more I do this, the better I get; the more practice and repetitions I get, the better investor I’ll become.
Joe Fairless: And if you take all the equity out, or even more equity than you put into it initially, do you have a requirement that the property still needs to cashflow, because obviously if you take more out, then you might have some higher expenses on the debt side…?
David Green: That was my first concern when I started doing this at a higher volume… And what I’ve found is interest rates are so low and the price points of homes I’m buying at is so low, it very rarely affected my cashflow. I mean, it can be a difference of like $75/month, to pull out a lot of money. So I stopped being as concerned about that as I was.
I used to have a requirement that every house I bought needed to cash-flow, and as my real estate agent business did better, and some other businesses that I bought did better, the actual cashflow from rental property became less important to me… And what I cared about more was the equity that I had in that deal, how much value I added to the home, and what neighborhood it was in; how well it was gonna do over a long period of time.
So I stopped looking at “In the next six months, what is this house gonna make me?” and I started looking at “30 years from now, am I gonna be glad I bought this house?” So now I’m playing a different game, where I’m saying “30 years from now…” — God, if you look back at what home prices were 30 years ago, it’s sickening. How many people do we know that wouldn’t wanna go back in time and buy all the real estate they could? I’m trying to operate from that perspective, and I’m doing it in a way that’s responsible, so that I don’t get so over-leveraged that I literally can’t afford my payments. That’s where you’re gonna get in trouble.
Joe Fairless: And let’s talk about not getting over-leveraged… What’s your approach?
David Green: I personally believe that cashflow itself is nice, but it’s not an offensive metric. Cashflow is not really designed to build you wealth. Equity is designed to build you wealth; running your property efficiently and effectively will end up building you wealth, and holding it for a long period of time will build you wealth. Paying down that loan and letting it appreciate in time.
So I am a bigger proponent of cashflow as a defensive metric. This is what you need so that you don’t lose the property. And having a very healthy amount in reserves. I look at people that lost their homes in 2008-2013 when the market was rough – all of them did not have enough reserves to weather that storm. They didn’t know if it was gonna cashflow or not. They literally didn’t even understand what cashflow was when they bought their house, and they didn’t have any money in reserves. That’s a recipe for disaster. I make sure that I leave a ton of money in a deal reserves, so that any storm that hits, me I can weather. All my properties either cash-flow, or if they’re losing $100 or $200/month, I don’t really care if that goes on for a couple years and then the rents increase and I’m in the positive again.
Joe Fairless: Specifically what’s your reserve requirement for your properties, and then do you have a loan-to-value approach or guideline that you use?
David Green: Well, most banks will only let me borrow 75% of the appraised value, which is what I go for. So you’re buying a house in really bad shape, and then you’re pumping up its ARV (after repair value) as high as you can get it, because that’s what you’re gonna be able to draw against when you go to take your loan out. But you’re always gonna be leaving 25% equity in that house, just because the banks are gonna make you in the majority of the time.
So what matters is is the house in such a high price point that to pull out 75% of its value will now make it cash-flow negatively? And most rental properties – they’re not.
This isn’t a problem that comes up very often if you’re buying in areas that are close to the 1% rule, because they’re gonna cashflow so strong, they just cash-flow a bit less. I like to have six months of reserves for every house, put aside in an account, as well as probably $30,000-$40,000 at any given time to cover unexpected capital expenditures. A hurricane blowing a tree onto one of my houses and the roof getting broken, or something like that.
And then the other thing I take into consideration is let’s say I was retired, Joe – those reserves would be even more than that. But I’m still working, and I live way beneath my means, and I have lots of money coming in. I don’t need to be as conservative, because I’m replacing money every single month that I’m sticking in an account.
I’m at a point in my life now where 100% of the money I make, I invest back into real estate… So maybe I just take 10% of that that I would have invested and I put it back into my reserve account, and I invest 90% of what I make.
Joe Fairless: And when you say six months of reserves for every house, what are those reserves covering for those six months?
David Green: If you take your mortgage, your property tax, your insurance, your property management, your capital expenditures, your maintenance and your vacancy – which on most of these houses that are $100,000 or $120,000 it’s really not that much.
Joe Fairless: It sounds like a lot…
David Green: Well, maybe $600-$700/month is what I might have to spend. I’ll just take that times six. So if it’s $700/month, I’ll put $4,200 aside for each one that I do. But when you’re first buying a house, and then you rehab it, you’re renting it out, I don’t always go get a loan immediately and pull the money out. Sometimes I let it sit there for 3-4 months without a mortgage on it at all, so my cashflow is really high. That might be 60%-70% of my reserves that I’ve built up, just the house paid for itself. I didn’t even have to take my own capital. So there’s only a little bit of money of my own that I have to put aside in that reserve account, and then boom, I’m on to the next one.
Joe Fairless: Okay, alright… So you delay the refi a little bit, build up the cash reserve; there’s your cash reserve, you keep it in the account, and then you move on.
David Green: Yeah, I let the real estate pay for itself. It puts its own money aside in that reserve.
Joe Fairless: Do you have separate bank accounts for each of the homes?
David Green: Oh, brother, that is such a mess, honestly… [laughs] I’ve got like 8-9 different bank accounts all throughout the country. The problem is financing becomes very hard once you start to get a lot of homes. So you’ll have a bank that will say “Yeah, I’ll let you refinance this one, but you have to do the loan through our bank. It’s a portfolio bank, so we’re not gonna sell it. And you have to pay the mortgage from a checking account that you have with us.” So now I have to open a checking account with them, and I have the mortgage getting paid from them.
I have to move money from a mother account into that account every month, so that they can pay the mortgage, and I have to see if I can get my property manager to deposit my rental checks into that account, for that house. Sometimes they won’t, because it’s a small known bank in another area, so they put it into the mother account… It’s kind of a complicated spider web moving around, and that’s one of the reasons that I would say to people who wanna expand really big – single-family is not a very efficient way if you’re looking to expand a portfolio really big. You start running into problems like this that you don’t have with other asset classes.
Joe Fairless: So why would you do that, versus buying 40-unit apartments?
David Green: So the first reason is it’s really hard to get into that space right now, because everybody’s there. Money is kind of cheap, and there’s a ton of people getting into multifamily investing. So for the guys that have been doing it and know what they’re doing, they can do well. To try to break into that space brand new, you’re already at a bit of a disadvantage, and you don’t know what you don’t know.
Even that though, I know that I could get into and I could do it. I have a lot of buddies that are doing it. But the timing it would take me to learn that asset class would literally lose me money that I could be making working on my real estate business, or buying single-family homes. So single-family works for me because it takes very little time. I’ve got systems put in place that I talk about in the BRRRR book, so that when a deal crosses my desk, I don’t really do anything. I just forward it to the right people, they have criteria and standards that they’re held to, they start the process, they end up putting the house under contract, managing the rehab, getting it rented out, finding a bank to refinance it… I don’t really have to do anything.
My overall goal is to continue buying houses under value, adding value to them, renting them out and refinancing that money short-term to go buy more, and every time I do that, I’m adding a good chunk of equity, like $30,000-$50,000 to each house.
At a certain point, when I feel like the economy is reaching a peak, maybe like a 2005 or so, I’m gonna sell them and 1031 that money into something that I feel is really solid, that will kind of weather any storm. Maybe like a multifamily property in Indiana, or Kansas, or one of those bomb shelter states that is rarely affected by the overall economy… And leave it in a big multifamily property there until I see another crash. Then I’ll be like that little gopher that comes out of its hole, or the groundhog, and looks around, and is like “Oh, it’s safe!”, and go out there and buy a bunch more single-family again.
Joe Fairless: Okay, I get that. I was gonna play devil’s advocate on why single versus multi– again, whatever a listener wants to do, I don’t care; I’m just wanting to play devil’s advocate on two things you mentioned, and I’d like to hear your thoughts… So less competition – usually that’s what commercial real estate investors say about single-family. That’s why they go into commercial real estate, because — I would say there’s certainly a lot more single-family home investors that commercial, but there are less commercial properties than single-family, so I guess it depends on your market…
But as far as the other one, time to learn the asset class – basically, you’re talking about the opportunity cost, where the time you’re learning, you could be closing on more deals… But I think you could buy a 30-unit and spend significantly less time on that one 30-unit transaction than 30 single-family transactions…
David Green: Well, I think you’re right about that. Factually speaking, you’re accurate. I think that is the case. What I’m probably gonna end up doing is adding equity to all of these properties that I’m buying individually, and then converting that equity into the 30-unit, or into the 50-unit.
Joe Fairless: And that’s where you sold me… Because I was gonna ask you — you said cashflow is playing defense, and you’re using equity as your offensive strategy, and now I completely understand your approach… Because if you’re not focused on cashflow, cashflow does pay for you to go on trips, and do all the other things – well, what’s the end game here…? And then you proactively answered my question – you’re planning on taking these 30 or so properties and then when the time is right, packaging them up, selling, doing a 1031, and then getting something that is cash-flowing heavy, plus also has some scalability for you and your time.
David Green: Yeah, and I should have qualified that – cashflow is a defensive metric in the single-family rental space. Single-family homes were not built with the intention of building cashflow for their owner. They were built with the intention of somebody living in it and raising a family, or holding all their stuff. Multifamily properties were built with the intention of being run like a business. That’s why we value them differently. Multifamily properties – their value is based on their NOI. Single-family properties are built based on a comparable sale. It’s just the single-family space is not a business-oriented space, so you’re not gonna really get a lot of cashflow that way; or at least you’re gonna have to work a lot harder to make it work… Whereas what you’re doing in the multifamily space – it was designed for exactly what you’re talking about, and that’s a very fair point to make. If you want cashflow, that’s the space you should be in.
I’ve found this little hack where I can build equity really quick in this space, and then convert it into the space later where the cashflow is bigger, and I think that when I get there, my cashflow will be a lot more than if I’d just started trying to do my first deal a 30 or 40-unit property.
Joe Fairless: A huge part of this is finding a property that you can buy that is under-valued, or you can rehab it and then get some equity built into it… So how are you finding those properties?
David Green: The first thing I do is I target a house that nobody wants. I look for distress. There’s three kinds of distress. You’ve got market distress, which is the whole market is for sale – 2010. You’ve got property distress – that’s where the house itself is in really bad shape and no one wants it; or personal distress, which is where the person is in some kind of distress – medical bills, you lost your job, foreclosure, bankruptcy, those kinds of things.
It’s easiest for me to target property distress. Personal distress is kind of what wholesalers would be targeting, or people who are out there beating the bushes, looking for a good deal. I look for junk houses. I look for the houses somebody else started the rehab on and couldn’t finish. Or in a market where to spend 50k on a rehab is like three years of their salary. That’s a lot of money in some of these Southern states, or Midwest states. But for somebody with California or New York money, that’s not hard for us. We can go raise that pretty quickly from other people that need somewhere to put their limited capital.
Once I find a house that I know is in bad shape, I look at what it would be worth when it was done, and I work backwards. We call that the ARV. Okay, if this house was fixed up like that, it would be worth $120,000. And I figure out what it would cost to get us there.
Let’s say it would take $30,000 to fix it up. Well, I know that I wanna be all-in for 75% of the ARV when I’m finished. So I know that if it’s gonna be worth 120k and it’s gonna take 30k to fix it up, I can spend up to $60,000 to buy that house, which puts me all-in for 90k, which is 75% of the 120k that it’ll be worth… And those are the houses I write offers on. I’m not the guy who writes 100 offers a week. I find that to be really time-intensive, not very efficient.
I target houses that have been on the market for a long time. Then my agents are like, “Hey, I think we’ve got a good shot. We can get this house.” I go buy it, I have my rehab crew get out there, they fix it up; once it’s done, I talk to the bank, they get an appraisal, they let me borrow 75% of what it appraised for, I take my money out and I go buy the next one.
Joe Fairless: Anything else real quick that you think we should talk about as it relates to the BRRRR approach that we haven’t discussed already?
David Green: Yeah, the biggest reason I think the BRRRR approach is the best approach to take is that I used to do it the old way, the traditional approach – I would save up 30k, I’d go buy a house, I’d spend 15k to fix it up. $45,000 later, I’ve managed the rental property and I’ve gotta work for another year to save up more money. It was extremely slow, and I did not get very good at being a real estate investor because it’s hard to get good at anything that you do once a year.
Once I got into the BRRRR strategy, I could buy two houses a month instead of two houses a year. I started getting the wholesalers bringing deals to me first. I started getting contractors giving me better bids. I started going through contractors and finding the good ones a lot faster. I found better property managers. The whole thing just became a lot more efficient when I was doing something at a higher scale. And that’s what I want people to understand – you’re never gonna get good at anything if you just do it very rarely. The people who are good at stuff just get thousands and thousands of repetitions in doing the same thing… BRRRR enables you to do that, and you can build your business around it, as opposed to the traditional method, which really has a lot of natural things that will hold you back.
Joe Fairless: How can the Best Ever listeners learn more about your book and what you’re doing?
David Green: You can get it on Amazon, it’s “Buy, Rehab, Rent, Refinance, Repeat – The BRRRR Rental Property Investment Strategy Made Simple.” You can follow me on Bigger Pockets, or your best bet is probably to follow me on Instagram – I’m @DavidGreene24. That’s the easiest way to get a hold of me.
Joe Fairless: Cashflow is a defensive mechanism in the single-family space. Perhaps that is mind-blowing for some people, and I hadn’t heard it talked about that way, so perhaps it blew my mind as well… But it makes a lot of sense, at least for my own portfolio of my three single-family homes that I’m looking to sell right now, because there’s 350k in equity in total in them, and I make about $300/month from those…
David Green: And Joe, I hear this all the time. I looked at mine and I saw the same thing. If you looked at your ROI, it’s not bad, but if you looked at the return on your equity, you’re like “Man, I’m making like 1% on my equity on these deals.” But what happened is now you’ve got 350k that you can go put into an asset class that does make cashflow, and you’ll make so much more money with that 350k than if you had tried to just buy that multifamily place right away, and had to save up that $350,000 to do it.
Joe Fairless: True. It’s a great point. It’s very true. The first house – I had $20,000. That would be challenging, to buy a multifamily property for 20k in [unintelligible [00:23:54].27]
David Green: [laughs] That’s what’s awesome about real estate investing – we’ve got all these different strategies and mechanisms and synergy that we can kind of combine together to make this really cool finished product… Like this Voltron of wealth-building when you add it all up.
Joe Fairless: And thank you for using the word Voltron. That’s one I’ll have to look up afterwards. Thank you for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.
David Green: Thanks, Joe.
