If you are a real estate investor or learning about real estate investing, you might have heard about the BRRRR method. BRRRR is an acronym for buy, rehab, rent, refinance, repeat. In this article we will go over these five steps and how to execute the BRRRR method real estate investment strategy.
What Is the BRRRR Method?
Buy
The plan is to buy an inexpensive property to rehabilitate it. To determine if the BRRRR method will be effective on the property, research that it is a sound investment and confirm the purchase price can cover your expenses to rehabilitate. You must understand a couple of things here.
What would the after-repair value be of the property? It should be more than your purchase price + the cost of repairs.
How soon can you complete the renovations and rent out the property
Rehab
Rehabbing a property means bringing the property back to its original state and making the property livable. Investors in the BRRRR method go in for renovating the property further by offering the latest amenities and features that can get them higher rent.
Rent
The third stage is to look for tenants as early as possible. The earlier you let out the property, the earlier you can start repaying your mortgage with the rental income. The rental income will enable you to pay the mortgage and build equity with the monthly profits. That will require you to set the right rental price for the market and ensure you find reliable and high-quality tenants.
To determine what rent to charge, you should consider a figure that covers your purchase and rehab costs. Ensure it matches the market rates. Many factors come into the picture when you look out for tenants. It requires advertising on various media platforms, carefully reviewing applications, and checking references and credit scores. Only after complete satisfaction should you sign the rental agreement. If you find it challenging, you could use the services of a property management company.
Refinance
Once you have the tenant or tenants settled in the property, you start building upon your equity in the property. The next step of BRRRR is specifically on cash-out refinancing. With the cash-out refinance, you can withdraw money and buy another distressed property. Another way of refinancing is to pay off outstanding debt.
Repeat
As the word suggests, you must repeat the complete process and buy more properties using the cash-out refinance option. The steps repeat, and you make money on each new property you acquire.
How to Finance a BRRRR investment
First-time BRRRR investors may find it challenging to determine how to finance the initial purchase and rehab costs and what type of property will yield the best ROI.
Here are a few options available if you are short of cash for the initial investments:
Traditional bank loans: Most banks require a certain percentage of money. They may offer cash out or only a pay-debt option. Another problem with traditional banks is calculating the amount you can borrow on the property’s purchase price. It may not be sufficient to cover all the expenses you will have.
Local bank loans: Local banks may be more flexible on rental property lending with mortgage limits and debt-to-income ratio issues than conventional banks. The rules for a down payment also can be similar though these banks may provide loans to meet the rehab costs.
Private lenders: These people are not professional money lenders and can include business partners, relatives, or friends. So they have no fixed rules, and the rates may depend upon your relationship with the lender.
Hard money lenders: Sometimes, you can source short-term loans from private companies or individuals known as hard money lenders. They may give loans accepting your personal property or other assets as collateral.
Pros and cons of the BRRRR method
No investment strategy can be perfect. Likewise, there are both pros and cons to the BRRRR method.
Pros
If everything goes correctly, you will get good returns on investment. When you purchase a fixer-upper for a low cost, repair it, and rent it, chances of achieving a positive cash flow is high.
You earn passive income. Once you finish the rehab stage, you will start making a passive income via the rent you collect.
The BRRRR method is not a one-time strategy. It is a repeatable process. You keep accumulating wealth as you reprise. Owning and managing multiple rental properties will reduce your overall expenses.
Cons
Loans can be costly. The interest rates are high if you take a short-term or hard money loan. You will be under pressure if, during the rehab step, you require additional loans to meet expensive repairs and improvements while you are not getting any income from the property yet.
Rehab projects on distressed homes can become uncontrollable due to unexpected expenses and issues, complex timelines, and managing contractors.
The waiting period can go long and take time to show profits. You cannot say how long the rehab will take; secondly, finding the right tenants may consume time.
Lenders appraise the property when they refinance, so sometimes, the loans can be much lower than what you anticipate.
As you keep repeating, the workload will multiply. Finding quality renters can become demanding.
Conclusion
If you are a new BRRRR real estate investor, do thorough research, talk to people in the business, and make sure your calculations are accurate. To be safer, you could consider hiring a mentor or a third-party contemporary property management company to identify, purchase, fill, and manage residential properties and enjoy a stress-less rental income.
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