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It’s not just an early snowfall that has us saying, “BRRRR.” The BRRRR strategy for real estate investment is a great way for investors to quickly grow their portfolio. BRRRR stands for buy, rehab, rent, refinance, repeat. These five steps can take you from no investment to multiple properties without tying up all your cash in different homes.
If you are asking yourself “How does the BRRRR method work?” click the link below to book your free strategy call with our team at LendCity and let us help you get the best available financing for each step of the process.
Buy
Your first step is to buy an investment property. For the BRRRR method to work, you’ll need to find a relatively inexpensive property and could use some updating. The ideal property will allow for major changes that will update the value of the home, such as adding another bedroom.
Your goal with BRRRR is to pull out all of the money you put into the property when you refinance, but still have enough equity to reduce risk. This is where the 70 percent rule can help. Flippers use this rule to calculate the maximum price that they can pay for a property when considering the after-repair value (ARV) and estimated repair cost. To find that number, they use this formula: (ARV X 0.7) – repairs = maximum purchase price. This is not a one-size-fits-all formula, and your case will differ depending on your market and property, but it will help you narrow your search parameters.
Rehab
Your goal with rehab is to increase the value of your property. While you’ll be renting out the property and want to make it attractive to tenants, the person you need to keep in mind when rehabbing is the appraiser. The appraiser determines the return on your investment.
There are two types of upgrades you can make to increase the value of your investment property:
- Renovations that make the house livable and functional
- Renovations that add more value to the house than their cost
If you bought your property at a deep discount, there’s likely a reason why. Your first step is to make the home safe and livable for tenants. If the property hadn’t been occupied recently, make sure everything is up to code and the home has the amenities any tenant requires, like a kitchen and a bathroom.
When it comes to making the property look nicer, skip the glam. Adding luxury amenities like granite countertops or a hot tub usually aren’t going to make a significant difference in improving the value of your property. Finishing a basement or a garage isn’t going to increase the value that much either.
Instead, there are other basic changes you can make that will earn you much more in property value than you’ll pay. Some worthwhile changes include:
- Refinishing hardwood floors
- Adding tile
- Opening up the kitchen
- Converting a half bath into a whole bath or adding a bathroom
- Improving the curb appeal, e.g. shutters, paint and landscaping
Rent
Even when it comes to finding renters, your goal once again is demonstrating value. Yes, you’ll enjoy passive income, but this is about impressing the appraiser and increasing your property’s valuation. Banks won’t refinance a property that isn’t occupied.
The bank won’t be overly concerned with who your renters are, but a bad tenant could leave a poor impression on your appraiser. Make sure the home looks its best before the appraisal. Notify the tenant(s) when the appraiser is coming and ask them to clean ahead of time. Ensure that your tenant has taken good care of your property and that any issues are addressed before contacting the bank.
Discover How To Rent A Property With This Step By Step Guide
Refinance
You may need to do some shopping before finding the right bank to refinance your rental property.
Some banks will let you cash out on your investment, while others offer to pay off your debt. For the BRRRR strategy, you want a bank that will let you cash out so you can put the money towards another rental property.
You’ll also need to ask lenders about their seasoning period. The seasoning period is how long the bank requires you to own the property before they will let you borrow against the appraised value. You need to borrow against the appraised value for BRRRR to work effectively. The bank may be willing to lend as soon as the appraisal takes place; however, not all lenders will be so quick.
If you’re having trouble finding a bank that will let you cash out quickly on the appraised value of your rental property, reach out to your network. Local investors who have used the BRRRR method can point you to a lender who has experience with this strategy.
Repeat
You’ve successfully cashed out on your down payment by refinancing your rental property. Now, you can take that cash and use it for a down payment on your next property. This time you’ll also have the passive income from your rental property, so your wealth will grow even more quickly.
Is the BRRRR method right for you?
BRRRR is a great strategy for anyone looking to build a real estate portfolio and grow wealth quickly. As you gain more passive income, you can add more properties, with each going through the BRRRR process. BRRRR allows you to snowball your wealth.
BRRR also requires that you oversee a lot of moving parts to get a return on your investment. You need to be comfortable managing renovations – possibly several at a time depending on your ambitions. If you like fixing up properties, working with contractors and managing projects, the BRRR method is perfect for you.
You also need to be comfortable with aggressive real estate leverage. Your rental property must have good cash flow, or you risk overleveraging. You’ll need to be financially stable enough to pay for two rounds of closing costs for both the initial purchase and the reappraisal.
If you want to grow your real estate portfolio quickly and are ready to jump into renovation projects to make it happen, you can find success with the BRRRR method. Don’t let the wintry name fool you – BRRRR is a great way to warm up your real estate investing.
If you are ready to dive into the BRRRR strategy today and secure ideal financing for every step of the process, click the link below to book your free strategy call with our team at LendCity and let us show you how brrrr works.