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There is no single way to invest into real estate, with countless methods and strategies out there, it can be difficult to find a method that works for you. Many investors frequently talk about the ‘BRRRR Method’ of investing, but what exactly is it?
BRRRR stands for; Buy, Rehab, Rent, Refinance, Repeat. This is a very popular method due to the cycle it creates, allowing you to grow your portfolio at a consistent rate. This method also allows for a faster turn-around than traditional investing, increasing its overall appeal.
So, if you would like to see how this strategy can help kickstart your investment career, we would be glad to get you started with a free strategy call at the link below.
The BRRRR Method
When done correctly, this method of investing allows you to maximize the amount of money you recover from a property and convert it into an extra source of cashflow. However, to do this properly, first you must understand each step of the process.
Much like a flip, the BRRRR method relies on you buying a property in need of updates and/or repairs. This may make it difficult to get a traditional mortgage as the majority of lenders require an appraisal on the property. However, with a home in need of updates or repairs, it will be difficult for lenders to determine the value of the property.
Despite this, you should still talk to a lender to see if they have any options available for you. They may have specific mortgage products for flippers or BRRRR investments that you can take advantage of. Otherwise, it may be possible to use a home equity line of credit (HELOC) or a hard money loan to finance your investment, but these options come with higher risks and are often not recommended.
When buying a property that needs to be updated, it is key to calculate the expected after repair value (ARV). The ARV of a home is the expected value of the home after you complete any work required for the property. This is determined by comparing the expected final result of the home with similar properties locally. This should take into consideration things such as square footage, age, condition, the number of bedrooms/bathrooms and type of build.
Additionally, when making your offer it is often recommended you do not offer more than 70 per cent of your expected ARV. For example, if a property has an ARV of $500,000, you should not pay more than $350,000 for it.
Once you’ve bought the property, it is time to complete any updates or repairs you planned for when making your purchase. Look for things that will increase the value of the home such as new light fixtures, updated kitchen and bathroom appliances, landscaping or a fresh coat of paint. Then, set a realistic budget and timeline for the work to be completed. Do not allow the repairs to put your expenses over the ARV of the property.
Next, it is time to find some renters to occupy your property. Ideally you are looking for good tenants with good credit, a stable job, and a history of consistent rent payments. You can get this information from their application and running a credit check. Just be sure you do so in a way that abides with local laws.
To determine how much, you are going to charge in rent each month, you need to consider what would be fair for the renter to pay, while still producing a positive cash flow for you, after all, you do not want to lose money on the property. Comparing your monthly mortgage payments and other expenses to local rental rates should help you find a rate that works for you.
Also, it is important to be sure you have found a renter before proceeding to the next step, as most lenders will not refinance an unoccupied property, thus halting the entire process.
Discover How To BRRRR With This Step By Step Guide
The BRRRR method calls for you to do a cash-out refinance so you can use the money you receive to purchase your next property. This requires you to find a lender who offers cash-out refinances, and you will need to be able to meet the requirements they set for the loan.
Each lender will have their own set of conditions before they finally approve you for the cash-out refinance. You will need to meet a minimum credit score (this is often set at approximately 620 when looking for a cash-out refinance), a maximum debt-to-income ratio of below 50%, and you must have equity built up in the property. Other lenders require that you own the property for a minimum period of time before they will allow you to refinance.
While refinancing, you will also be required to get an appraisal to confirm the new value of the property, which does come at a cost to you as the investor. There may also be other fees for you to pay such as new closing costs and legal fees in order to get the loan.
Finally, to commit to the BRRRR method, you need to go back and do it all again. By using the equity, that you have taken out during the refinance, you can buy a new property and continue the process to grow both your wealth and your real estate portfolio. Each time you go through this cycle, be sure to reflect upon where you ran into difficulties so you know what to avoid next time (or how to solve a problem you cannot avoid due to it being out of your control).
The BRRRR method is a proven way to grow your wealth, but it is not without its risks. That is why you should never invest blindly. Be sure to do your research and consult with experienced lenders who understand your situation. In order to get connected with the lender who is best for you, visit LendCity.ca or call 519-960-0370 and book a consultation to prepare for your next deal. Alternatively, click the link below to book your free strategy call with us today.