The world of real estate is full of acronyms and abbreviations. If you’ve ever thought about renting out properties, you’ve probably encountered “BRRRR” or the “BRRRR method” for buying real property. Although the term seems absurd, how it is described is an excellent option for investors to invest less money in renting out their properties and earn a steady and passive income.
BRRRR means Buy Rehab, Rent Refinance and Repeat. This well-known real estate investment strategy involves purchasing and flipping distressed properties, renting them out, and then refinancing the cash-out to finance further investment in rental properties.
With BRRRR, investors can refinance their investment property and receive the majority of, if not all, of their money returned to be used for future investment. For those looking to increase their passive income by managing multiple rental properties, the BRRRR method is a great way to achieve this.
The most crucial element of this BRRRR method is the ability to access your liquidity. This is to withdraw your money out of an investment property and not tax on the earnings.
What is the BRRRR Method?
The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method allows investors to purchase the property in cash or with a loan, perform improvements, let properties for tenants, and later refinance the property when the value of the property has risen. This is the procedure:
Buy
Begin by finding the best price on a rental property that you could improve the value of by making repairs and renovations. It would help if you looked for a home that needs some attention. These kinds of properties are likely to cost less to acquire. But it would help if you didn’t decide to purchase a property for the sake of it. You must ensure that it’s a profitable and sound investment first.
The buying phase requires a thorough analysis of the deal. This involves calculating the cost of renovations and estimating the monthly rental costs, and confirming that rental income will give an adequate profit margin. To ensure your rental is successful, research the most reliable rental markets and have a sufficient buffer for your remodelling costs. Use the rule of 70% to determine what you’ll have to spend.
One of investors’ biggest hurdles is finding out what to do about financing BRRRR properties. This is because they have to fund the property multiple times, and the cost of financing itself is prohibitive for new investors. There are a few loans that are readily accessible. They are the traditional loans from banks and small-scale bank loans in your area, private lending, and hard money lenders—research to figure out which one is well for the budget you have set.
Rehab
When the rental property is bought, investors must figure out how to convert it into an enviable and practical space for tenants. After these issues are determined and analyzed, the investor will carry out repairs and make the necessary renovations. This could include structural, security and aesthetic upgrades. These improvements will enable the space to let tenants and enhance the property’s value.
A few improvements that offer an excellent ROI (ROI) are:
- Repairing your roof can make a huge difference and is one of the most effective methods to receive your money back on your property.
- Modernized Kitchens Kitchens are the centre of a home, and it’s a feature that can be of great value when upgraded with contemporary finishes and modern appliances.
- Updated bathrooms Bathrooms are smaller, and their labour/material costs are quite affordable. This means that investors can increase the value of their property with minimal effort.
- Drywall RepairDamaged walls can make a home unsuitable for financing. If you notice this issue at your new residence, take this repair as an immediate priority.
- Room expansion properties with impressive square footage but without bedrooms offer an ideal opportunity to increase the size and enhance the property’s value.
- Landscaping Increases the value of your property by adding curb appeal. Simple landscaping projects can be completed at a fraction of the cost or effort, so there is no need to employ an expert.
In the rehabilitation phase, it is crucial not to invest in improvements that are more expensive than what could be derived from rental income. Beware of being enticed by any other additions or upgrades as long as they fit within the budget and will yield an acceptable return on investment.
Rent
Once the property is cleaned up, the investors will decide on the cost of renting it and let the property out to tenants. The rental and other expenses related to renting will become an income stream for the investors. The rent phase of the process typically involves:
- Marketing properties.
- Screening tenants and managing tenants’ turnover.
- Handling maintenance and repair requests.
Refinance
It is much simpler to refinance a house with a resident living there than an empty property. After tenants move into the home and investors begin to develop an outline of how they will finance the home. Refinancing the property with a cash-out refinance is ideal because of its low-interest rate, tax advantages, and speed. Refinancing permits investors to repay the mortgage with the new loan terms, thus taking advantage of the difference in cash.
Repeat
But don’t quit there! Once refinancing is completed, investors can use the refinance cash-out from the first rental property to finance the purchase and renovation of their next rental property. With the knowledge gained from each round, investors can apply their experience to future BRRRR properties to achieve more financial success and increase their investment portfolio by purchasing additional rental properties.
Pros and Cons of the BRRRR Method
As with any major investment decision, many factors must be considered. At the same time, the BRRRR strategy may sound like a secure and solid investment option and make sure to weigh all the advantages and disadvantages before you purchase.
Pros
One of the most important benefits of this BRRRR approach is that it gives you the potential to get a portion or all of the capital from your initial investment. If you follow the BRRRR method and it is executed right, investors can purchase a property that needs repair, then fix it up and rent it out to earn a solid cash flow.
In addition, with these improvements, landlords can attract top-quality tenants who are willing to pay the highest price to rent.
The BRRRR method is a fantastic method to accumulate equity. The equity that the investors earn during the process of rehabilitation can assist them in creating cash flow that is greater than the value paid for the house.
Repeating the process a few times, investors will realize economies of scale when you simultaneously manage and own several properties. The more properties you own will aid investors in reducing their costs overall and spread risk since there are various properties to fall back on if there is a problem.
Cons
The work and repairs associated with rehabilitating the rental property could be extremely expensive and work intense, depending on the condition of the building. The rehab phase involves planning schedules, collaborating with the contractors and handling unexpected issues that could lead to additional expenses. If you’re willing to tackle the hassle, it’ll pay off.
Because the property is a rental investment, investors may need help accessing traditional mortgage alternatives. This is especially the case with quick-term and hard money loans that are frequently used in these types of investments. Investors may have to accept the type of loan that comes with more expensive interest. This is a possibility in the time period when the property isn’t producing any income.
The BRRRR method will require some patience. Along with the time needed to finish all the work, the investors could have this property for a certain extended amount before they are eligible for a cash-out to refinance. Finding suitable tenants to lease the property might take time too.
Conclusion
Does the BRRRR method of investing in real estate seem the right strategy best suited to your needs? If yes, you’ll require an experienced professional to help you locate the ideal property and advise on selecting the most appropriate financing options.
Through Simple Showing, investors can benefit from expert advice from our neighborhood realtors and the chance to save more money by utilizing Simple Showing’s buyers’ refunds. Let us know how we may assist you with our BRRRR method!
