To achieve success with the BRRRR investment method, a solid grasp of the market and a well-thought-out strategy are essential. The BRRRR method stands out as the go-to strategy for expanding an investor's real estate portfolio and can provide long-term passive income. Although this a common method for real estate investing, this system does require a significant amount of financial investment and personal commitment.
The 5 Step BRRRR Â Process
Buy a property below market value.
Rehab to increase the property's market value through repairs and improvements.
Rent the property to provide rental income.
Refinance using the increased value and equity to obtain a cash out loan.
Repeat.
To fully master the BRRRR method it is very wise to collaborate with, or have access to, a network of experienced and reliable real estate professionals.
There is a substantial amount of upfront capital needed to purchase and renovate any property. An experienced financial advisor or mortgage professional with a variety of lenders and experience with real estate investing can help guide an investor through the financial requirements, expenses, tax implications, and any other potential financial considerations.
Properties considered to purchase must have the potential for renovation, potential for rental income, and be purchased at the right price. The purchase price of the property should not exceed 70% of the estimated after-repair value. A real estate agent experienced with working with investors and investment properties is a useful ally to help find suitable properties and provide information on the local and current real estate market. Many real estate agents also are licensed in property management.
A seasoned home inspector can prove to be invaluable in helping to determine the renovation potential of the property, prevent purchasing a property in need of expensive repairs beyond your budget, and to point out condition issues that may help when negotiating the purchase price.
Carefully considering and budgeting the purchase price, cost of repairs, and necessity of renovations is crucial. It is imperative to be knowledgeable about what repairs are necessary, how to complete the repairs, or know where to look to hire reliable, affordable, and experienced contractors. A well-connected network of real estate professionals can offer valuable recommendations for contractors that align with your needs.
After the property has been renovated, renting the property is the next step. Carefully consider if you have the time and ability to manage this responsibility on your own, or if the rental income will cover the added expense of a management service. A good property management service can help find a suitable tenant, collect rents, and look after maintenance, however, this will cost a percentage of the rental income.
Refinancing the property can be done after you've increased the properties market value and determined the after-repair value (ARV). The rental income and down payment adds to the total equity. Most lenders will usually require at least 25% equity. Some lenders can also require a six month time period between when you acquired the property to when you can apply for refinancing. Consult with your mortgage professional for cash-out refinancing terms, rates, and conditions. Enlisting the help of a licensed appraiser to determine market value will also show the equity you can potentially put towards your next investment property.
Pro Tip: The 70% rule is advisable for both BRRRR method investors and home flippers. The purchase price of the property should not exceed 70% of the estimated after-repair value. This leaves a 30% financial cushion that helps off set the costs of repairs/renovations and gives you sufficient equity to qualify for refinancing.
The BRRRR strategy stands as a proven method to effectively expand your real estate portfolio and establish enduring passive income streams. While it can yield substantial benefits, it's crucial to anticipate significant initial expenses, potential market fluctuations impacting property values, and challenges related to tenant management. Building a reliable network of real estate experts who align with your investment objectives is paramount.
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