Looking for a smarter way to grow your wealth in real estate investment? You have just landed on the best strategy to help you achieve that and more.
While building wealth in real estate may sound like rocket science to many beginners and experienced investors alike, it doesn’t have to be that way. Armed with the right strategy, you can solidify and scale your wealth portfolio easily. BRRR is a great starting point.
The buy, rehab, rent, and refinance (BRRR) strategy is a popular investment strategy in the real estate world for its proven effectiveness. You may have bumped into this seemingly ridiculous acronym somewhere in your real estate talk and grew curious to learn more.
Well, here is your chance. Read on to find out all you need to know about the BRRR Strategy, how it works, its benefits, and how to get started. By the end of your learning curve, you should be having a clear investment path for your next property.
What is the meaning of BRRR Real Estate Strategy?
Simply put, the BRRR strategy is a faster, more efficient way of maximizing your wealth with minimum capital.
As the acronym states, the strategy essentially involves purchasing property below the market value, renovating the property to boost its value, renting it out to tenants, and finalizing a cash-out refinance to fund additional investments.
Experienced investors use this investment framework to build their passive income over time. To be successful in the strategy, the steps represented in the acronym should be executed in the exact order they appear.
Unlike the conventional way of investing in real estate, this innovative strategy has a special focus on especially distressed properties and the refinancing of the acquired property. It yields faster returns even with less capital compared to saving up for decades to invest later.
So, why not start now and reap the full benefits now rather than wait? Team up with a reputable and reliable lender to gain quick access to fix and flip loans to propel your investment goals.
These short-term loans allow you to close on your property in just under a month and kick start renovations immediately. They are applicable for different types of properties including:
- 2-4 Residential Units
- Single-Family Houses
- Multifamily (5+ Units)
How does the BRRR Real Estate Strategy work?
Already considering this powerful real estate investment strategy to build your portfolio? If you do it correctly, you will be amazed at how much passive income you can amass and start a healthy cycle of buying and owning rental property.
Why? Because borrowing against a renovated property simply means borrowing against its highest property value. This affords you an opportunity to recover most or all of your initial investment.
With that in mind, let’s dive into the finer details of how the strategy works.
The first phase of the BRRR Strategy is the buying phase. This is the stage that determines your final investment outcome. You must therefore tread carefully here.
Purchasing a distressed house might limit your traditional mortgage options especially because performing an appraisal on such a property may be next to impossible. Without a proper house appraisal, some lenders won’t come to your aid.
In other words, a distressed house may not fully satisfy most of the requirements lenders demand. Nonetheless, talking to a lender with multiple flexible financing options might just save the day for you.
Before buying the property, ensure you settle on the right one. Remember this is a heavy financial decision and may have longer-term implications. For the best property deals, leverage Multiple Listing Service, wholesalers, or local real estate agents.
Having found the right property, embark on a deal analysis. This will help you ascertain whether the property you are considering is a reasonable investment deal and its prospects as a rental property. The deal analysis essentially involves assessing the renovation costs, approximating monthly rental expenses, and making sure the yielded rental income will offer a sound enough profit margin.
To ensure your rental property consistently performs well, you may need to source it from the best rental markets. While at it, ensure the purchase price of the house factors in an adequate buffer zone to cover the renovation costs.
You can achieve this using the 70% rule of thumb that estimates the repair costs as well as the after repair value (ARV) of the house. With such an estimation, you can easily set the maximum offer price for the property and leave a decent profit margin for yourself even after renovation.
Generally, you should never invest anything above 70% of the property’s ARV. That means if the property’s ARV is $480,000, what you end up paying for the home shouldn’t exceed $336,000 (70% of $480,000).
The easiest way to accurately calculate ARV is to identify comparable properties in the area you are considering.
Now that the hardest bit is out of the way and you are certain about your investment, you can safely embark on renovations. This is done in two levels.
First off, you should focus on house improvements that make the home code-compliant or functional and livable. Again, nearby comparable houses (same size, age, number of bedrooms, number of bathrooms, building type and condition) can help you avoid overinvesting in the renovations.
Secondly, your focus should shift to value-oriented home improvements. These are the updates that will justify your higher rental rates to tenants. While at it, ensure you don’t overdo it. Make sure the rental income can return the cost of the upgrade.
To help you decide better, perform a thorough cost-benefit analysis and identify home improvement projects with the highest return on investment (ROI). Some of the rehab projects you can consider include:
- Kitchen upgrade
- Bathroom remodel
- Siding and window replacement
- Roof repairs
- Increasing bedrooms
Another consideration to make when deciding what improvements to make is the demographics of the area. Who will be your target tenants? Are they students, young professionals, commuters, or families? You can also research success stories of other flippers in the area and borrow a trick or two from their strategies.
If the house seems too huge for you, split it into its exterior and interior and narrow down your rehab estimates with much clarity. You may further break down the home’s interior into different rooms. For larger rehab projects, hire professional contractors to keep the costs down.
The next stage is the rental phase. You should start planning to find the right tenants before the rehab is complete or once it is fully done. Finding renters for your revamped house is an important prerequisite to refinancing as most lenders only refinance once the tenants are occupying the house.
The rental phase comes with certain critical responsibilities such as screening the renters, selecting the right tenants, handling turnover, as well as taking care of maintenance and repair requests from the tenants. That’s why proper due diligence is imperative when finding tenants for your upgraded property.
To find the right tenant, you can advertise on popular real estate sites, hire a property manager, or rely on referrals from your own network. The ideal tenant should possess certain important qualities including:
- Zero eviction history or criminal record
- Proven record of timely payments
- Good credit report
- Steady income
- Credible references
You can as well arrange to meet your potential tenant, request them to fill out an application, examine their credit report, ask for references, and perform a thorough background check. While at it, ensure their due consent is involved.
Once you land the ideal renter, the next major decision is setting the right rent. Here, you want to make sure the rent is fair enough to your tenant and at the same time yields a positive cash flow for you. Because the rent received will cover your principal, interest, insurance, and taxes in refinancing, maintaining a cash flow of at least 10% would be reasonable.
That means if you expend $1,400 toward covering your principal, interest, insurance, and taxes, the rent should be $1,500. That said, the higher the cash flow rate the better the refinancing options. To fix the right price, you can rely on rental rate comparables (comps).
As you bring in tenants, remember to prioritize retention. Staying in touch with tenants as they move out can help you maintain a stable stream of passive income. Who knows? They might decide to move back in someday when in the area and your excellent customer service might just be the deciding factor.
As soon as you have rehabbed and rented your property, you can start working on a refinancing plan. There are a few critical considerations to make in this phase.
First of all, you should ascertain whether your bank or financing partner offers rate-and-term refinance or cash-out refinance. Between these two, the cash-out refinance works best with the BRRR strategy. It gives you enough liquidity to proceed to the next distressed property, flip it, and rent it out.
Secondly, you should also seek to understand what seasoning period the bank requires. This period indicates the amount of time you must own the property before your bank refinances it against its appraised value.
While initially, most lenders were unwilling to refinance single-family rental properties, you can look for a lender that has a proven record of successful refinancing for different kinds of residential projects.
That said, each lender has its own set of requirements that you must satisfy before refinancing. For instance, you may need a minimum credit score of 620, meet a minimum purchasing price, or present proof of previous successful flips or current ownership of rental properties.
Continue building equity by repeating the cycle over again.
BRRR Real Estate Strategy Pros
Any real estate investment strategy comes with its benefits and risks, and BRRR is no different. Before implementing this strategy, take some time to review its pros and cons and determine whether it is the right fit for your investment needs.
Some of the pros of the BRRR strategy include:
· Building equity
During the rehab process, you have a good chance to build up your home equity. This is simply the current value of your home less your mortgage balance. As your property appreciates in value, your home equity increases. The more equity you build the more wealth you amass in your investment portfolio.
· High returns
BRRR comes with a great potential for higher investment returns. When implemented properly, you can acquire a distressed house for an extremely low price, rehab it, and rent it out for a steady cash flow.
· High-end tenants
Rehabbing your property properly with the right standards for a particular market might attract high-end clients. If the property has additional amenities and features suitable for the tenant, they might be willing to pay more in exchange for the added luxury.
What’s more, a tenant willing to pay extra for the house is more safety-critical. They will more likely take better care of the house and keep the property’s expenses down altogether. This means more cash flow for you.
· Operation efficiency
BRRR can take you to the level of owning and operating multiple rental properties simultaneously. This will essentially help you reduce the costs of running these properties by spreading out your risk as you keep the cost per property down.
BRRRR Real Estate Strategy Cons
On the flip side, this impressive strategy has a few downsides that are not meant to deter you but rather make you a more informed investor who knows what they are up against.
· Expensive rehabilitation
Large rehabilitation projects can prove expensive and cause major headaches as you seek more wealth. Many unexpected issues may also pop up and you must fully equip yourself with the right contingencies before starting rehab.
· Longer waiting duration
With BRRR, you must be a patient investor. There are several waiting periods involved including the rehab phase before placing tenants as well as the seasoning period or the time it takes before cash-out refinance.
Get started with BRRR Real Estate Strategy
Now that you are well acquainted with the ins and the outs of the BRRR strategy, your real estate investment options just went up. Remember this strategy is ideal for property investors looking to build their passive income portfolio from start to finish. In the long run, however, it is much more rewarding.
Ready to take the plunge? Contact Quickline Capital Partners today to learn the different financing options available to you and begin your investment journey.