You don’t necessarily need loads of upfront cash to have success in real estate investing. An effective strategy is far more critical. The BRRRR Method for real estate investing is a popular but mostly unknown strategy because it allows you to start small and work your way toward bigger and better goals.
Many successful real estate investors begin with the BRRRR investing strategy and climb their way to the top. But that doesn’t mean they don’t still use it once they get there.
What is the BRRRR Method?
BRRRR is an acronym for Buy, Rehab, Rent, Refinance, Repeat. The BRRRR Method’s goal is to end with an increase in the value of a property so that you can return your initial investment and begin again while collecting cash from tenants.
An example of success with the BRRRR Method is the ability to refinance a rental for $130,000 when your total investment is just $100,000. You then use the refinancing money to cover investment costs while collecting rent monthly.
You then repeat to generate another property you can continuously collect rent from. Each time you repeat, your passive income and net worth rapidly increase.
How does the BRRRR strategy work?
The process begins with buying a property that needs work with a low listing price. You’ll want to find a property that needs some updates but not a total overhaul.
In most cases, your initial property investment will be funded by hard money through a short-term lender. No matter where the money comes from, you need to make sure that you have enough to cover the property’s cost and renovations.
Once the property has the necessary updates, it’s time to find a tenant to rent the property— a reliable tenant to ensure you keep cash flowing.
Renovations and a good tenant in place increase the home’s value, which is essential to the stage of the BRRRR Method when you seek to refinance your investment.
When you refinance the property with a bank or credit union, you can then use the money they give you to pay off the initial lender as you continue to collect rent from the tenants. After this point, you can use the money you accumulate throughout the process to fund your next property.
Take note that the bank will only give you a percentage of the property’s appraised value when you refinance. For example, they may refinance the $100,000 home for $130,000 but give you 80% of the value, or $104,000. That leaves you with enough to pay off the short-term lender, while the closing costs absorb the leftover $4,000.
The BRRRR Method isn’t to walk away with a lump sum of cash. Instead, you are using the strategy to generate as much passive income as possible. However, a fail-safe is the ability to sell the property after refinancing and still make a profit.
Are There Risks With the BRRRR Method?
Yes, as with anything there are risks with the BRRRR real estate investing strategy. The BRRRR method’s catch is that you have to spend considerable amounts of time researching before investing.
You want to make sure that the property is selling for below market value and that the after-repair value will be comparable to similar properties. This research should ensure that the difference between these two estimates provides enough cushion for refinancing costs to cover your total investment.
Keep in mind that your total investment includes the purchase price of the home and the necessary renovations. Remember that when you refinance the loan, the bank will only give you a portion of the value.
Another thing to research is how much rent you can expect to collect from tenants and that the renovations justify what you charge. Refinancing typically requires a six-month waiting period, and you need to have the cash flow to pay your initial lenders.
It pays to sit down and speak with the lender you intend to refinance through before committing to this Method. Getting information regarding whether or not you qualify to refinance and how long their waiting period beforehand can save you from the chance of being stuck with a property you need to sell to pay off short-term lenders.
Why Use the BRRRR Method?
What do many real estate investors find so attractive about the BRRRR method? It’s less risky than other investment strategies and quickly generates a monthly income.
Other methods such as real estate wholesaling are ideal for making money quickly but require you have the cash to purchase the spot. It is also a one-time deal that doesn’t produce money every month.
And unlike purchasing a livable home to rent out immediately, it allows you to make sure the property is in the best condition possible. Doing so not only makes it easier to get tenants in place but also reduces the amount of money you can expect to pay on repairs.
