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One of the core elements of any great real estate investors toolset is a strategy that allows them to grow and build wealth in a flexible and reliable way. For some, that strategy is house flipping. For others, it is commercial properties and investing in larger properties. However, for many, the BRRRR method is the way to go.
Of course, much like every investment strategy you will encounter, the BRRRR method does not come without its risks and mistakes that can quickly turn your rental property investment into a sour experience if you are not careful. So, in order to help you protect your real estate investment strategy, I want to show you 5 key risks and mistakes you need to avoid.
But first, before we dive into how BRRRR works and where you need to be careful, if you want clear insight into how the financial side of this method works, we are here to help. All you need to do is click the link below for a free strategy call with our mortgage team at LendCity.
What is The BRRRR Strategy
In short, the BRRRR method is a cycle that you can follow with your investments to build equity in cash-flowing rental properties in order to build your portfolio faster than you would through more passive investing methods.
But how does the BRRRR method work? Let’s take a look.
Buy – Much like most real estate strategies, this method starts by buying a property. This property should be one that has room to improve while also holding the potential to bring in reliable rental income.
Renovate – Once you have the property, it is time to make improvements and increase the value of your investment through old-fashioned sweat equity.
Rent – Then, after renovations are complete, you should bring in a tenant to rent the property. This will allow you to begin making rental income.
Refinance – After that, you need to do a cash-out refinance on the property to withdraw your equity.
Repeat – Finally, with the funds you have made through refinancing and renting the property, it is time to pursue your next investment.
5 Critical Mistakes You Need to Avoid
While the process is generally very straightforward, there are still a variety of places where the BRRRR method can go wrong. So, in order to help your investments stay on track, here are five of the most common and critical mistakes that investors make with this investment strategy.
Buying The Wrong Property
The BRRRR method hinges on you quickly bringing new value to an investment property. However, while real estate naturally appreciates with time (a long-term market trend that has persisted for decades), not every property has the potential to experience rapid appreciation the same way.
Some investment properties that you can purchase are basically move-in ready. As a result, there is not a lot of room for you to make strong, value-adding renovations. Thus, you won’t build the equity you need to refinance and continue the cycle.
You also should never buy the most expensive or highly-valued house on the block if you plan on building equity through rapid appreciation and renovations because these properties are not going to appraise much higher than they already do at the time of purchase.
Overestimating Your After-Repair Value
Another major mistake that can derail your investment is over-estimating the after-repair value (ARV) of the property. If you buy a property for $300,000 and expect it to be worth $450,000 after $20,000 worth of repairs, your plans will be clearly derailed if the appraisal comes back at $350,000.
This is why it is important to consult professionals such a your realtor, mortgage agent and contractors when budgeting for your property. Their experience can help you estimate how much room there is for improvement and where you need to focus in order to achieve the value you need.
Not Budgeting Your Time Properly
This investment method – much like any investment method that requires you to deal with a vacant property for an extended period, runs the risk of becoming too expensive if you do not budget your time well.
After all, during the renovation period, you still need to pay for the property expenses on your investment regardless of the fact that it is not generating income.
If a renovation runs long, both your renovation and property expense budget may run out and you will either be forced to take on additional debt, or lose the property entirely to avoid defaulting.
Skipping a Full Property Analysis
Finally, the last critical mistake you need to avoid making for your BRRRR investments is skipping out on the full property analysis.
When you are buying a property that you know needs work, you should always take the extra time to assess the property for any additional damages or projects that may come up. Otherwise, you can be mid-renovation only to discover the job is much larger and more expensive than planned.
The most common example is water damage. What may look like a small patch of easily-fixed water damage by a sink, could actually be a sign of mold growth in the walls. You want to know about these problems early so you do not burn your entire budget on unexpected repairs.
Not Selecting the Correct Lender For Your BRRRR Financing
The BRRRR method relies on two separate pieces of financing, the initial mortgage to purchase the property, and the refinanced mortgage to draw out the equity. So, naturally in order for this to succeed you need a lender who can get you the best products on the best terms for each of these steps.
However, sometimes certain lenders will have rules, restrictions or conditions that will impede your progress or cut into your process. For example, some lenders have limits on how soon they will allow you to refinance a mortgage under them. Or, they have harsh fees and penalties for breaking your term and refinancing early.
This is why it is important to have a proper discussion with your mortgage agent about your plans so they can help you find the right financing. So, if you are ready to give this method a crack, let us help you with a free strategy call at the link below.