If you’re just starting out in Canadian real estate investment, you might find yourself confronted with a laundry list of terminology that seems impenetrable at first, including “BRRRR.” One of the most commonly used terms in real estate refers to one of its most popular strategies for building an investment portfolio. That’s BRRRR, or Buy, Renovate, Rent, Refinance and Repeat. You probably don’t have to be a real estate mogul to understand the basic concept behind BRRRR. Investors buy a house, fix it up, rent it out to a tenant, refinance the home once it has some equity and repeat the whole process.
Table of Contents - Step-By-Step Guide to BRRRR: Buy, Renovate, Rent, Refinance and Repeat
BRRRR may sound a little overwhelming at first, but there’s a lot to love about the BRRRR method when you know what to expect.
5 Steps to BRRRR
Step One: Buy
Before you can use a rental property to build equity, you need to own the place. That means hunting down the right property for your portfolio’s needs. To successfully accomplish a BRRRR, you will be looking for a house that needs minor to moderate rehabilitation only. Keep this step in mind for the future.
When you’re searching for the right fixer-upper opportunity, you have to find a property you can improve considerably without pricing it outside its neighbourhood. Start by looking at the average price of homes in a given area. Then, find a home that is going for $30,000 or more under market value. Enlisting the help of a real estate agent can identify motivated sellers willing to unload their house for a song.
When you find a place, you’ll need a 25 percent down payment to secure a home loan. You’ll also need the capital required to spruce up the house.
Step Two: Renovate
Once you’ve found the perfect fixer-upper, it’s time to get to home rehabilitation. Remember that you’re not trying to turn your property into a palace. You’re not even trying to put your personal touch on the home. That’s a task for the renter (and one they will tackle with glee). When you’re renovating a property, the goal is to improve the home’s value as much as possible without making it too expensive for the neighbourhood it’s located in.
Once you’ve found a reliable contractor, have them start with the kitchen. Updating appliances, adding an island (if there’s room) and installing new cabinets and countertops can drastically increase a home’s value. After that, replacing carpets or adding hardwood are also excellent interior projects to undertake.
On the outside of the home, three projects offer a significant return on investment:
- Siding replacement or repainting
- Adding a new deck
- Increasing the size of your entryway
These upgrades to curb appeal will improve the value of your rental property by several thousand dollars.
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Step Three: Rent
Ultimately, the goal of a BRRRR is to leverage your improvements to one property into a more extensive and more diverse real estate portfolio. It would be fantastic if you could make that happen overnight, but moving onto the final step of the BRRRR takes time. In fact, a lot of reputable financial institutions won’t allow a property owner to refinance a home until 6 to 12 months after the purchase. This period is known as the “seasoning” period.
Here’s another fun fact about refinancing a home: some banks and lenders won’t refinance an empty building. Rather than just let your home sit vacant for the duration of the seasoning period (and to improve your odds of securing a refinancing loan), you’ll need to find a renter.
Whether you want to continue renting the property after the seasoning period ends or you’re hoping to sell the property once you refinance, the smart choice is to establish a year-long contract with the option to either renew or go month-to-month at the end of the contract period. The best part about a year-long rental agreement is that you don’t have to make long-term decisions right away, and you have several choices when the time for action arrives.
Step Four: Refinance
Once an appropriate time since the home sale has passed, it’s time to refinance your rental property. When the time comes, you’ll need someone living on the property full-time. Mortgage lenders often operate under the assumption that a lived-in residence is better-taken care of than one left to sit alone. With a renter in place, your next step is to locate a lending institution that is familiar with the BRRRR process. Remember, there is no benefit to your strategy remaining a secret, so make sure to seek out a lender who understands the BRRRR method and will give you a loan at the price point you need.
The best part about the refinancing process is that you should end up seeing your property appraised for a higher value the second time around, thanks to all the improvements you’ve made in the intervening year. As a result, you should secure a larger amount of capital than your original loan by a significant margin when you refinance.
Here’s an example: Let’s say you buy a home for $100,000. Then, you have a contractor implement several home improvements that raise the property’s value by $25,000. When you refinance your home, you find yourself eligible for a $125,000 loan even though the loan you previously took out is only $100,000. This allows you to pay off the first loan with the second loan and still have $25,000 left over for a down payment and improvements to a second site.
Step Five: Repeat
Now comes the easy(ish) part! Once you’ve completed the BRRRR cycle, it’s time to take your fresh investment capital and find a new property in which to invest. All the while, you can rely on a steady supply of income from your first renter, or you can go about securing a buyer and get a payout in one lump sum. That choice depends on you!
Access BRRRR Friendly lenders
To continue growing your real estate portfolio using the BRRRR methods, it's incredibly important to leverage a lender that supports BRRRR's, as not all do.
Some lenders have caps on the renovation funds when doing a BRRRR, while others don't. Lastly, some lenders charge mortgage penalites, some don't.
You need a lender on your side to set you up for success and minimize your fees.
An Intro to BRRRR Real Estate Investing [Fixer Upper Rentals!]
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