• Victor Whitmore did a cash-out refinance on the first two houses purchased.
• The cash was then used to purchase then the next set of investment properties.
• Whitmore and his business partner repeated this process many times to grow their portfolio.

In 2003, Victor Whitmore made a blunt decision that would change the course of his life.

He was 27 years old, working as a systems analyst for a communications company, and making about $36,000 a year, according to his tax filing viewed by Insider. That year, he decided to invest in real estate.

Whitmore and his now business partner, Joel Thompson, saw a newspaper ad for two run-down single-family houses in Tulsa, Oklahoma. They had been put up for sale by the same seller for a discounted rate of $17,000 each if the properties were purchased together.

Whitmore scraped the cash from two tax refunds, buying and selling used watches, and an $8,000 loan from his parents. They both also applied for multiple credit cards to access cash advances until they could make an all-cash offer.

It was the first investment in a series of many who would follow. The early properties became part of a four-step process referred to as the BRRRR method that starts with buying, rehabbing, renting, and going to the bank to request a cash-out refinance. That new cash would then be used to repeat the same steps on the new property.

The rental income is used to pay back the loan or mortgage, while the cash is put towards purchasing the next property. Each time the process is repeated, the intent is to increase the cash out while growing the number of properties within a portfolio. If done correctly, and so long as home prices or borrowing costs don’t drastically change, it allows an investor to scale without using more of their own money.

Mortgages rates are still double from where they were in August 2021, when they hovered just below 3%. The 30-year fixed sits at 6.34%, as of Wednesday. But Whitmore says they are irrelevant in the face of your returns. As long as you understand your numbers and what your margins are, you can build that added cost in. One way is by charging more rent.

“Rental rates are going up just as fast as the interest rates and they kind of go in unison. That’s why inflation always benefits the real estate investor,” Whitmore said.

The national median monthly rent is up by 7.5% since August 2021 from $1,829 to $1,967 in April of 2023, according to Rent.com.

It requires having a high level of risk tolerance, especially in the beginning when you’re trying to scale by taking on more debt, Whitmore said. If your mindset is to get that investment property paid off quickly so you can cash flow an extra $ 1,500 from rental income, this process isn’t the right fit.

Whitmore and his partner used this process to purchase five single-family homes before they rolled their returns over into an apartment complex. By that point, they not only had $120,000 in cash for a down payment, but they had built a portfolio and the experience that would enable them to qualify for a commercial loan of $1.12 million.

This method is a long journey that could take many years before an investor can comfortably pull out their returns. That’s the reason why he kept his IT job until the company went bankrupt in 2006. Until then, any money they made from deals was deposited into a joint account and used to make the next investment, he said. By the time Whitmore needed to pull income from his portfolio’s cash flow, they had accumulated 20 single-family homes and a few multi-family complexes.

Whitmore and his business partner have since purchased and owned over 2,423 rental units, according to public records and property viewed by Insider. Of those units, 20 were single-family homes and 2,403 were in multi-family complexes, not including their own shopping centers. They have since sold most of those properties for profit but still hold three multi-family complexes that house 471 rental units. Whitmore is also the co-founder of Precision Equity, a real estate investment and management company specializing in apartment complexes and retail centers. The firm manages their properties.

His top 4 tips to snowball a portfolio

The BRRRR method depends on a cycle of debt that increases overtime. Your goal is to maximize the loan-to-value (LTV) ratio you qualify for each time you go to the bank. One way to do that is by building a good long-term relationship with a lender, he said. If a lender doesn’t have confidence in your ability to repay the loan, they may only lend you 60% of the property’s value, he adds. As you do more deals with the same lender, they will be more lenient on the LTV ratio. You could also land a lower interest rate, he added. A golden rule for building this relationship is that you can never be late on a mortgage payment, he added.

Whitmore told Insider he has received LTV refinances on his retail properties for up to 85%, where the standard is 80%, based on his long-term relationship with lenders.

Another way to increase the refinanced amount is by adding value to a property. To do so, you need to get good at spotting gaps, he noted. This means looking for a house that’s selling below its neighborhood’s comps and improving it enough that its value matches those around it.

For example, if the average home value is $120,000 in the area of ​​interest, a house that’s $60,000 and needs a light rehab can be a great investment.

Look for a property that has a solid foundation but requires some cosmetic upgrades — and there are many of those, he noted.

“There are so many houses out there that have just been abused because they were foreclosed on, people didn’t care,” Whitmore said. “A lot of single-family homes, even in nice neighborhoods, are rented. And a lot of people don’t realize that renters are typically or traditionally harder on properties than otherwise.”

Easy fixes include new paintings, blinds, and light fixtures that can go a long way in making the interior look nice. Flooring and cabinetry are also good gaps to fix, as long as you stick to builders or apartment grade. Don’t go overboard with picking top-of-the-line products.

Avoid major rehabbing projects. If there are structural issues, you don’t want to mess with that, just move on to the next house, he said. Other projects you want to avoid include a house that requires a new roof, a furnace, or an air conditioning system.

He may consider bringing in a structural engineer if it’s a big investment. But for a $50,000 house, Whitmore says you can spot structural issues just by looking for cracks in the interior walls or in the exterior brick. If the floor or door frame is at an angle, that’s also a red flag.

When the house is getting appreciated, you want to be there to walk that person through the upgrades and repairs you’ve done, he said. This is especially important if you have done work on anything behind the scenes that isn’t visibly obvious, such as the ventilation system.

Whitmore also highlights the cosmetic upgrades along the way. You want the appraiser to leave feeling good about the experience. When he was able to do this, the appraised value often returned above what he initially expected based on the comps, he said.

“As an investor, you have an idea of ​​what you think it’s worth when you’re done, and a lot of that is based on comps,” Whitmore said. “But when it comes back even higher than you might have otherwise thought and you’re pleasantly surprised, I think a big part of that was there and representing the property for the appraiser.”

If you want to scale with the little money you started with, don’t expect to touch the returns anytime soon. Even when the cash begins to flow, whether it’s through rental income or a refinance, it has to go back into growing your portfolio, he said.

For example, cash flow from rental income should be used to build up a reserve that can cover mortgage payments if there’s no tenant or you have to make repairs. The cash from refinancing needs to go towards investing in the next property. This sounds straightforward, but it takes a lot of discipline, he noted.

Whitmore and his business partner didn’t start off by having a big enough reserve to cover unforeseen events, and it cost them. In one instance, they had spent money rehabbing a property, only for a tenant to move in for four months and then leave with the house trashed, he noted.

“There were multiple times throughout my journey when I borrowed money against credit cards or my house to keep things going. And it was a juggle. It was very hard until you spent some time and really built up those reserves,” Whitmore said.