The BRRRR Strategy Explained: How to Refinance and Renovate Your Way to Multiple Rentals in Canada

Introduction

Welcome to the Wisdom Lifestyle Money Show. I'm your host, Scott Dillingham. The show is designed to help Canadians invest better in Canada and the United States. We are the North America-based mortgage financing lender and provide education to both countries.

Discover how you can become a better investor and access the financing you need. Welcome back to the show. Today, I'm gonna be talking about how to get the money to purchase multiple rental properties. That's the challenge most investors face.

They want to invest. They don't know where to start. They don't know where to get the money to invest. So a lot of times they end up not investing because they don't have those resources available.

So I'm gonna dive into all the steps needed and options to make sure you can get the money as well as qualify for multiple properties. I'm gonna dive into the strategy that I did. So when I first started buying investment properties, I would move into them and I would try to find something that had two units. I realize this may or may not be an option for you where you are right now in your life, but if you're someone who's just starting out, that's a step.

The Core Idea

If not, we can move on to step two after, which we'll cover if you already own a home. But I purchased a property that I could rent out one side. And what I did is I renovated that unit that I was renting out so I could get maximum rent. Another benefit of renovating the rental properties as you buy them is if you renovate it up front, you're eliminating a lot of the issues that the property might have.

So that makes your life as a landlord easier because you're not gonna get those phone calls or you're not gonna get the same level of phone calls from the tenants saying, this is broke, this isn't working here. That becomes minimized when you fully renovate the property. There's just gonna be little odds and ends that you have to take care of. And beyond that, just regular wear and tear.

So I renovate every single property that I buy that I plan to rent out. So I rented out the one unit and I lived in the other. So that was my first property in Windsor. It wasn't my first property in total.

I moved from Sarnia, which is where I bought my very first home, to Windsor. So I kept my Sarnia home. But still same thing, I did buy my first one with 5% down. I lived in it for a while.

Deep Dive

Then when I moved to Windsor, I rented out that other property. So buying properties for 5% down is so much easier than initially getting that 20% down. So the key is though that you have to move into it if you're doing 5% down. You can't say you're gonna move into it and then don't.

That's fraud. You don't want to do that.

So I actually did move into them. And I lived in each one for actually a couple years. Now you may not need to live in it for a couple of years.

That's just what I did. But by moving into them, I was able to get 5% down.

Practical Steps

So with the 5% down, that becomes easy. Now as you get more properties, what happens is you get some appreciation. So appreciation is when your property value increases because of the whole market, recent sales, all that stuff. Even though you bought with 5% down, that means you have 5% equity in your property.

After a year or two, you could have 20, 30, maybe 40% equity in the property, depending on the renovations you did when you first bought the property and also what the market is doing. There are years where real estate is flat. There can also be years where real estate is negative and it goes down. But if you're buying property and the values go down, I wouldn't worry about it if it's a year or two where they go down.

You have to look at the whole market as a whole because real estate does, it can go up or down. But if you look at the overall chart of real estate back from 1900 until now, you'll see the average is real estate's going up. Okay, so even if you have a down year, it doesn't matter if it's stocks or real estate. There's down years and there's up years, but the overall graph, if you were to stand back and look at the past 100 years, the overall flow is up.

So don't let a down year bother you or make you fearful of the market or delay because sometimes when the prices are going down, that's the best time to buy. You don't want to miss out. But my point of this is that you hold onto the property to the point where it's going up. And then once it goes up in value, you can refinance your home and you can pull out the equity up to 80% of its total value.

Key Takeaways

And the banks and the lenders that we have access to, they will give you the money. So it's like you get cash and then you use that cash as an investor to buy another property and keep going. So let's say you've already bought the home though, right?

Maybe you had 5% down. Maybe you had more.

Same thing. So this would be step two.

It's very similar. But so if you're someone who already has a home now, you just wait till you get that equity in your home.

Resources

You may have enough now. If you've bought your home in the last four or five years, there's going to be huge equity depending where you live because the market's a bit on fire.

There's a housing shortage. There's more people that need housing than there is houses. So it makes a tougher scenario for good properties. There's lots of bad properties that are vacant and available, but nobody wants to live in those.

So if you renovate your property and make it good, you'll have an in-demand product. But ultimately, you refinance your home to get the down payment and to purchase again. Now, if you're somebody that there are people that heat debt and they don't want to refinance to get their money, obviously you can save. But the other option would be if you had a partner, if you had somebody that wanted to go on the mortgage application with you that had money for the down payment, that would be acceptable to partner and move forward.

But now you're sharing the ownership and everything with somebody else, which you may or may not want to do. But regardless, it's a way to move forward if you don't want to refinance your home to pull out the equity. So that is what most investors are doing to get started in real estate. Now, I would say it's also super important to speak to your lender when you're considering investing in real estate.

Introduction

And you want to make sure you work with a lender that works with investors, right? Someone like us. Doesn't have to be us, but someone like us, because we, that is our niche is investing. Because a lot of the lenders look at the transaction that you're doing now and they only focus to see if they can get that approved.

So if I have a client who wants to refinance their home and they're telling me they want to refinance their home to buy a rental property and I've not run the numbers to make sure the rental property purchase will work, the potential client is in a lot of trouble or could be because they might process that refinance. They could get their money, but they may not have enough income to purchase the next property. So that's the challenge when you work with lenders that don't specialize in working with investors.

They don't think a couple steps ahead. They only look at getting the application done that you're trying to do done. And that's at a huge detriment to you because who wants to move forward, refinance their mortgage, owe more money on it, pay more interest and not be able to invest it, right? When that's the goal is investing.

Definitely want to make sure you're working with a lender who also processes the potential purchase pre-approval at the same time and make sure both will work for you so you're not in trouble. Now I'm going to take a quick pause. When I come back, I'll tell you the exact to the T strategy that I did every single property and how I use it to my benefit to qualify and speed up this process. Once you have the initial money out of your first refinance from either buying a home that you move into for 5% down and rent out the other, or if you already have an existing property, just wait a little bit and let time naturally drive up your property's value and then we'll dive into the exact steps I took.

The Core Idea

Welcome back. All right.

So this is where it gets fun. At least it does for me because this is now an autopilot. Once you reach this next step that I'm going to dive into, you can invest on autopilot. You can repeat this process over and over again and you can keep growing your real estate portfolio, your net worth, your income, all of those things.

After you retrieve the money from your property and now we're buying a full-on investment property, you do need 20% down, right? You can't buy all these at five, right? Five is only when you're moving into it and you can only have three homes with 5% down at a given point in time because there's only three insurance companies in Canada and they all will only do one. So really, it only works at the start of your portfolio, buying at the 5% down.

But so you have the money out. So what I would do every single property is a mortgage plus improvements. Now you have to be careful because not all lenders offer a mortgage plus improvements on a rental property. So you got to make sure you're partnering with the right ones.

Deep Dive

Again, any questions, let us know. We'll let you know who they are. And from there, what you do is you get some quotes from contractors on the improvements you want to do. Now keep in mind the banks have limits and all lenders, not just banks, but they all have limits onto the amount of renovations they give you before you switch to what's called a progress draw.

So mortgage plus improvements in a nutshell means you get a sum of money, they hold it for you, it's approved, ready to be given to you, but it's held until you prove that you complete the renovations and then they release all the money to you at the end. Okay, it's a great program, but you have to know you have to have the money to be able to fund the renovations and then you get reimbursed from the lender. Again, for rentals, this is ideal because if you have a renovated rental, I know I touched on it earlier, but renovated rental is going to get you more income, less tenant issues, and you're going to bring the value of your property up.

Okay, so you have multiple benefits. Now, if your improvements are greater than what the lender offers as a mortgage plus improvements, you can do a progress draw mortgage. So those tend to be more costly because it's done as an open mortgage and open mortgages have a higher rate, but they do them as an open mortgage because as soon as your renovations are done, they convert your mortgage to a regular one. So you don't want to be locked in on a five-year term.

Renovations take three months, then you have to pay a penalty when you're done the renovations to convert over and it's crazy. So they do it as an open term. So there's no penalty when you switch to your final mortgage product. But with the progress draw, they'll give you the money for the renovations, but they'll give it to you in stages.

Practical Steps

That's why they call it progress draw. Depending on the progress of the improvements, they'll give you a draw, in other words, money for that percentage that you've completed so far. And depending on the bank or lender that you're working with, you can get three to five draws. So let's say a project was $100,000, right?

And your lender would give you five draws. Ultimately, you'd get a draw when you were 20% done the project. Then you'd get your 20 grand.

Then you finished another 20. So you're at 40 in total. You get another 20 grand and it keeps going like that. So you do get money along the way, but never up front as like a large lump sum.

Again, depending on how intensive the renovations you want to do, depends on the mortgage product that you would select. But then once you've done all the renovations, you go back to the bank or lender and you do a refinance. So you pull out your, the renovation costs ultimately, which you can use as a down payment on another property. Now, the thing with this, I find the sweet spot is waiting three to six months after you complete the renovations to move forward with an appraisal to do the refinance and switch lenders.

Key Takeaways

Because if you do it immediately, a lot of appraisers don't see the bigger picture. They're going to see the before and after pictures. They're going to know you renovated it, but they're not going to give you your forced appreciation. I find all the time the appraiser will just give out what you paid in expenses.

So you're not getting that appreciation. But if you wait three to six months after you complete the renovation, then they'll tack on the appreciation that you got and it'll be justified. So then once you have that appreciation, you'll have that money to pull out of your property and then you can do it again. Now, obviously, depending on debt ratios and all that stuff, that's why you need to work with an expert that specializes in rental property financing and they'll be able to guide you and obviously if you max out on your debt ratios, there's different lenders.

I had an episode I talked about how to buy unlimited properties and that was about the structure of how we structure the lending based on debt ratios and all that. So if that's where you are and you're looking for the other lender, look that up. ca and it's episode 17, discover how to buy unlimited properties. So there I talk about the financing aspect to maximize and to keep going, but ultimately, that is how investors do it because there's not many people in Canada that can get so much money that they've got 20% down every couple months to keep purchasing additional properties.

Some people do, of course, but that's rare that somebody makes that type of money. This is how investors get creative to pull the money out and to keep going. Now, you have to be careful, of course, because you want to make sure your rents are aligned. I don't suggest pulling more out of your property if it's going to create a loss on paper.

Resources

I always shoot to make sure that my properties are cash flowing at least a couple hundred bucks per property. And obviously, the larger the lending you're applying for, the smaller that cash flow is going to be. But depending on how you bought the property, where you bought it, the renovations needed, all that stuff, it is still very much possible to get a couple hundred dollars per unit for an investment property. After you repeat this and repeat this, you'll find that it's easier and easier to keep going.

Just the residential lenders will dry up and then we can go commercial and keep it going. But after you get a handful, I find the next logical transition for an investor is not the single family or the duplex properties. It's now multiplex investing where you can get six units, 12 units, 20 units, that type of thing. Those down payments tend to be smaller as a percentage, but obviously larger because the properties are bigger.

So once you start getting into commercial, down payments start as low as 15% down, which is amazing. And on a residential mortgage, for a rental, usually you can get a 25 or a 30-year mortgage depending on your lender. But if you go commercial, you can get 35 to 40 years depending, again, on the cash flow of the property. Commercial just makes so much more sense as you grow your portfolio because, again, you're getting that longer amortization so you're getting more improved cash flow.

There's smaller down payment percentages. And again, you can use that refinance proceeds as those down payments. Or what some people do is they realize, built up my portfolio, I've got 10 properties, I'm going to sell a couple of these smaller ones and use all those proceeds and buy some bigger ones.

Introduction

So that's when people start offloading. They're not selling to get out of the market, they're selling to increase their holdings and get larger properties. So that's very common as well that I see all the time. But with those larger commercial buildings, which you start getting into them, things become cheaper.

Like, for an example, say every unit has their own furnaces and air conditioning, but they're all older. They all might be working, but they're older. So your total dollar cost for that renovation, if you wanted to repair or replace all those furnaces, it would be more because you're buying it for six units as opposed to one or two. However, once you start buying in bulk like that, you get discounts, right?

You'll get discounts on the equipment, you get discounts on the labor, and same thing, it doesn't have to be HVAC. It can be flooring, it can be a roof. You do the roof for the whole building, it's going to be cheaper per square foot than when you're doing a single family or duplex home.

So it's called economies of scale. So you start to save when you get to those bigger properties. And then same thing with commercial, it's different. As you increase the rents, right?

The Core Idea

So you keep the same strategy where you invest into the property, you renovate. But as you do that, the rents are heavily tied to the value of the property. So the more rents you can bring in on that property, the more the value of the home skyrockets. One of my investor friends has told me he did some math and he calculates for every $1 of rent that he increases depending on where the property is.

He believes he can get anywhere between $10. And if it's a killer property, he can get up to $100. I think $100 is a little high personally, but this is his opinion of what the value of the increase in the property is. I think in the Windsor-Essex area, it'd probably be closer to the $10 to $20 mark in my opinion.

But I guess it does depend on what you paid for, where the property is, all that good stuff. But the rents are heavily tied to the value of the property, more so than on residential. So you keep that same strategy and then you can grow and grow, refinance again and just keep growing. So then you're owning these massive apartment buildings and you didn't really need too much of your own money because you leveraged correctly.

So I hope this episode was valuable to you. If you are looking to invest seriously and you want to grow your net worth in your portfolio and your income, give us a call.

Deep Dive

My office line's 519-960-0370. We'd love to chat with you and go over some options.

Take care. Thank you so much for tuning into the show today. If you found value, please follow the show and rate it five stars. It would mean the world to me.

And lastly, all the resources that we spoke about are at the bottom of the show notes. Looking forward to seeing you in the next episode.