HOW TO GET A FREE DUPLEX
When I first started building my real estate business, I didn’t have much money. In fact, I had a ton of student loan debt and I could barely pay my debt plus living expenses at the time. I knew that I wanted to buy real estate, but it would take me a long time to save up the money for a down payment for each property, which meant it was going to take me a long time to grow the business. I needed to find a way to grow faster, and eventually I was able to find a way to get properties for FREE.
Once I implemented this strategy, my business took off and grew very quickly. This strategy is commonly referred to in the real estate world as the “BRRRR” strategy, which is an acronym for Buy, Renovate, Rent, Refinance and Repeat. Once you learn how to do this, it is an extremely powerful tool to use for growth.
The key to making this strategy work is finding a property that has potential to add value during the renovation. I like to buy properties in areas that have very large ranges of values. For example, I buy in areas where I can get boarded up homes for $50,000 that are right next to fully renovated homes that are worth $200,000. With a deal like that, if I can keep my renovation budget under $150,000, I am adding value to the deal through the renovation process. Then after the renovation, banks will offer a loan based on the ARV (after repair value) of the property, which means I can get some or all of my money back out of the deal. I will walk you through the numbers from one of my deals so you can see how it works.
Step One – Buy
I bought a run-down duplex in Columbus, Ohio for $120,000. The property needed some serious cosmetic work, but structurally it was in good shape. $120,000 for this property was a good deal, and I loved the location as well. I researched the area and found several comparable properties nearby that had already been fixed up and recently sold for well over $225,000. I knew that once I renovated my property, it would be compared to those properties when it was time to refinance.
There were multiple offers on this property, but I made an offer over the asking price and won! To fund the deal, I borrowed the entire purchase price and most of the renovation cost from a private lender that I had pre-arranged to borrow from. The lender was a real estate investor I met through my networking efforts. I paid $500 up front to the lender, and 9% interest for the duration of the loan, which lasted about 6 months. The total cost of the loan ended up being approximately $7,500.
Step Two – Renovate
When I do projects like this, my goal is to have the total, all-in cost to purchase the property be less than 80% of the ARV. For this property, since we were using $225,000 as the ARV, we wanted to be all-in for under $180,000 ($225k times 80%). I knew the purchase price was $120,000, the loan expenses were $7,500, and I would have another $5,000 of miscellaneous expenses (closing costs, taxes and insurance during renovation, etc.), which put me at $132,500 prior to the rehab. So I knew I had a budget of $47,500 to get this project done at 80% of final value.
I walked through the property with my contractor prior to purchasing to get a budget for the renovation project, and we were targeting a $45,000 project cost all-in. We put in all new vinyl windows, installed new cabinets in the kitchens, updated the bathrooms, new interior paint, resurfaced the original hardwood flooring, and added new light fixtures throughout. The project took about 10 weeks total to complete. We ended up going slightly over budget and the project came in around $50,000.
Also – a quick note on the renovations. When I use the BRRRR strategy, I like to put higher end finishes in the property, which will help get the highest appraisal value when you refinance. For example, we put granite countertops in, do nice subway tile showers, etc.
Step Three – Rent
Once the renovation was finished I put both sides of the property up for rent and started showing it. After a few weeks I had rented both sides of the property out for a total of $1,900 in rent.
Step Four – Refinance
Prior to buying the property I was pre-approved for a loan with a local community bank for a cash out refinance on a rental property. The bank had a 6-month “seasoning” requirement, meaning that they would not offer a loan on the property at a higher value than what I paid for it until I had owned the property for at least 6 months. This is typical with most banks, so I typically can’t refinance until the 6 month anniversary of purchase. The bank agreed to loan me 80% of the appraised value after repairs, on a 30 year amortization, fixed for 5 years at 4.125% interest.
As I mentioned above, my goal with this project was to add enough value to the deal to pay off my private lender and not have any of my own cash left in the deal – essentially a free property. My total project cost ended up being about $182,500, all-in, including the purchase price, the renovation cost, the payments to my private lender, the closing costs on the refinance and other miscellaneous costs.
The appraisal came in at $235,000, meaning, based on this appraisal I added $52,500 in value to the property. The bank loaned me 80% of the appraised value, which was $188,000. This allowed me to repay my private lender, restock my own cash used for any expenses, and put an extra $5,500 in the bank! And I get to keep the duplex.
Step Five – Repeat
Repeat as many times as possible and reap the rewards. I believe this is the best strategy to get started investing in real estate because it allows you to grow quickly without much money, and the rewards can be very good.
At the end of this project, I essentially got paid $5,500 to buy a duplex. I also added a little more than $50,000 in value to the property which I get to keep in the form of equity. The property also generates about $7,000 per year in cash flow after all expenses, shown below:
Monthly Rent Income : $1,900
Monthly Debt Service: $900
Monthly Tax: $100
Monthly Insurance: $75
Monthly Reserves (maintenance, etc): $250
Total Net Cash Flow: $575 per month ($6,900 per year)
The expenses above also include about $3,600 per year of debt that is paid off, adding to the overall benefits of the project.
I have used this process a number of times, just like this, and it really works. The process works on any size property too, from a single family house to a 100+ unit apartment building. Sometimes a project will go over budget, or the appraisal will come in low, but even if you don’t get all of your money back out of the deal, it is still a win to get almost all of it back. It is possible to get free rental properties! It doesn’t get much better than that!
