The BRRRR method is a popular and proven process of creating wealth through real estate investment and stands for buy, rehab, rent, refinance, and repeat. By using this strategy, real estate investors are able to use little to no cash to acquire properties and grow their investments over time by creating cash flow through rental income.
Not only do they get cash flow from the rental income, but over time, they also own the property outright. They then use their accumulating assets as collateral to borrow more money to buy even more properties.
Buy
When you go to purchase a property, you want to look out for undervalued or distressed properties that you can add value you to. You might find these properties in up-and-coming neighborhoods or a property that needs some TLC in a more established area.
If you don’t have the money on hand you may need to obtain some type of fix and flip financing.With the rise of the fix and flip industry as a whole over the last decade, many private money companies offer short term fix and flip loans for these very purposes. These loans are quite popular because great opportunities to buy properties often don’t last long and these loans can be financed faster than traditional loans and stand out as great offers to sellers.
Rehab
After obtaining the property, you want to fix it up and make it livable. As you are doing that, you should also understand what sells in your marketplace and who your target buyer is. You can use many online analytic tools to understand your local marketplace and what a buyer or renter wants in a home.
If houses with 2 bathrooms sell for 30K more than houses with only 1 bathroom, you will know you are on to something, and adding a bathroom as part of the rehab might be worthwhile when it comes to reselling it or renting it out. In essence, you‘ll want to focus on high value repairs and additions rather than low value ones.
For example, adding a swimming pool would be a very risky addition in most markets and might rule out some families with young children who deem it as dangerous and high risk. But upgrading the kitchen to a nice modern look with great appliances will likely give you the best ROI on your dollar.
You should also keep in mind that every month you spend rehabbing is time that the property is not generating revenue, so you’ll want to complete the renovations as fast as you can.
Rent
Once you’ve completed the rehab it’s time to find some renters. You’ll want to find people who are responsible and not going to wreck your beautiful new renovations. In fact, finding high quality tenants is an important aspect of this business.
Keeping a waiting list and sharing upcoming vacancies with friends on social media will help ensure you find top notch renters, but any vacancies will affect your cash flow, so it‘s important to find some good long term responsible tenants sooner rather than later.
Refinance
Most real estate investors use hard money loans to initially acquire a property with the BRRRR method. However, since hard money loans generally have higher interest rates (8% to 14%) than traditional bank loans, they are only meant to be used for short periods of time (6 to 36 months). Therefore, investors will want to refinance into a more affordable financing option once their property has 6 to 12 months of seasoning which is required by most banks. Seasoning, being the amount of time someone has owned the property.
Refinancing into a 30-year fixed rate mortgage is usually an investor’s best option because it requires low monthly payments from the investor, hence why this is the most popularly used mortgage in America.
The key to being successful with the BRRRR method is being able to have your property appraised for much more than the combined purchase and rehab costs. This will give the investor funds for the final step which is to repeat the process.
Repeat
Ideally, during the first two steps of the process (purchase and rehab), the investor was able to add enough value to the property to make it significantly more valuable than before. Having a more valuable asset means that when the investor refinances the property, they can borrow more against it to purchase another property and repeat the BRRRR process. With each property purchased the investor not only builds wealth over time but experience, knowledge, and contacts, making the BRRRR process easier and easier to perform.
In Conclusion
It’s important to note that real estate investing is a skill just like any other. Just because you buy a place and fix it up does not mean you will make millions. You need to master the skill and keep repeating the BRRRR strategy, and through trial and error you will learn how to maximize your profit.
One of the best things about strategies like this is that they are more easily scaled than working a 9 to 5. Because instead of you working for money, eventually you get to the point where the money works for you.
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