The BRRRR is a real estate investment practice that has gained popularity with investors worldwide. With BRRRR, you can build up your real estate portfolio over time. You do not need to shell out a large sum of money to achieve your goal. The BRRRR concept has been instrumental in building portfolios of many investors.
BRRRR is an acronym for Buy, Rehab, Rent, Refinance, Repeat. It is an accepted method of building not only a real estate investment portfolio but also a healthy cash flow. This strategy follows the order of the above steps as an investment strategy in real estate. Though the BRRRR method is not everyone’s cup of tea, nor is it a foolproof way of reaching your goals in real estate, it is one of the best ways to capitalize on your abilities and with as little funds as possible.
The Methodology of BRRRR
The BRRRR Method has five steps that you need to follow to the end. Read on and know more about the method that has made success a reality to many investors in the real estate industry.
Buy
First, buy the property. Whether you’re using your own savings or other people’s money through private loans, there are some important factors you need to consider before purchasing. What you want is to buy a property that is distressed, abandoned, or bank foreclosed where you can get good discounts. The place where the property is should at least be a good community. Properties that have been in the market for way too long can also get you discounts. Aside from those mentioned, properties that need repair work are ideal for BRRRR. Converting an extra living space into a bedroom or dividing a big bedroom into two adds value and more rental income. Look for unfurnished properties so you can add fixtures and furniture that can help increase the appraisal value of the property.
Rehab
Rehab and update the property with the goal of not only making it livable but also very appealing and updated. Doing the bare minimum will not get you the rent you want, and more importantly, will not provide a desirable appraisal value for refinancing. To maximize your returns, you should know what to update or upgrade. Focused rehabs will also allow you to set a rental rate in the higher end of the spectrum, relative to the place where your rental property is. Get a professional contractor to help you in the rehab because sometimes, you just get carried away when doing the rehabbing you tend to overshoot budgets. The bottom line is that your improvements must add value to your investment. But at the same time should not hurt your cash flow and leave you with nothing to re-invest.
Maximize Your Rehab
Here are some ideas on what parts of the house you might need to prioritize and update in a rehab to get the maximum AVR value and get the attention of prospective tenants.
- Roofing. The roof is one of the main house parts to check thoroughly. Roofings in not so good shape cause water damage to your ceiling. They should be repaired or even replaced. Unattended, they will eventually give you expensive repair bills and loss of tenants.
- Kitchen and Bathroom. These areas need to be updated and modernized as needed. No one would want to rent a house with outdated and worn kitchen and bathroom facilities, and you will not get the rent you wanted in the first place. These areas can also improve the value of the house, appraisal-wise.
- Drywalls are one of the more inexpensive parts to upgrade. Clean and fresh drywalls add value to the house.
- Landscaping is another area where you do not have to spend so much to do it. Trim overgrown vegetation until the landscape is pleasing to the eyes and clean looking.
Rent
Being selective on prospective tenants will save you from future headaches. Get tenants who exhibit financial stability, have good jobs and possess good credits. You can also do a background check with their previous landlords. Do some research online for properties similar to yours and in the same or nearby areas before you set the rental rate. You do not want to be charging too low or too high for your rental. The rehab and renovation you have done on the property also influence how much you can ask for rent.
You should also be aware of the responsibilities of being a landlord and an investor. Also, take some time to learn about insurance policies covering rentals.
Refinance
Refinancing will give you the funds to capitalize on your momentum and keep your business model going, so long as the figures have been alright from day one. Refinancing involves looking for either a traditional bank or a hard money lender to take out your short-term loan and convert it to a permanent or long-term loan. This step will give you funds to continue through cash-out refinancing, lower the amortization by extending the term up to 30 years, and a lower interest rate. So how does this work? Here is a sample computation:
| Property Buying Price | $200,000 |
| Your Equity | $40,000 |
| The Loan Amount | $160,000 |
| The Rehab Works | $30,000 |
| Your Closing Cost | $5,000 |
| The Total Amount | $235,000 |
| You were able to rent it out at | $2,500 |
| ARV | $320,000 |
| Refinancing Cash-Out at 70% | $224,000 |
In the example, the cash-out refinancing permanent loan will net you $64,000 after paying off the short-term loan that you can re-use for another BRRRR project.
Repeat
With the cash you got from cash-out refinancing, purchase another property you can rehab, rent, and refinance again. This way, you minimize exposure of your own money because you now use the funds from the lenders to do the process again.
Things To Consider
Though the BRRRR method is near ideal in building up wealth and real estate portfolio, there are factors that you need to be on top of during the process. Here are some things you should keep in mind to keep you on track.
- Always have a detailed plan for the rehab. You do not want to overshoot your rehabbing budget.
- Get a professional contractor to help you properly assess the property. You do not want to miss anything that will make you stay up all night.
- Get pre-approved for the permanent loan as an exit strategy.
- Research and compare all listings on the location of your property or other properties in nearby communities. You will have an idea of how much the rent is for similar properties. You will also be able to gather ideas about the design direction and how much you are willing to upgrade the house to get on par or even slightly surpass the other properties.
- You should know when your rehab is enough. You do not want to fall short or over-rehab.
Warming up to BRRRR
BRRRR gives you an avenue to increase your real estate rental portfolio in the shortest possible time, or you can also do it at a relaxed pace, so you do not strain yourself much. You can also pace yourself and your projects as comfortably as you want to. Done right, BRRRR will not stress your finances but snowball your income as you go building your portfolio.
At GL&L Holdings, we can talk about BRRRR and many other key criteria of real estate investment and help you get through your first deal. We also do Joint Ventures to help you expedite your eventual net profits. Call us now at (832) 770-9415 or send us an email at info@gllholdings.com.
