The BRRRR Method
Whether you are investing in real estate personally or trying to start a real estate investing business, you’ve probably heard of BRRRR. This investment method involves taking a run-down property and investing money to fix it up so you can make a profit on it.
The BRRRR method has been proven to provide a great cash flow, even making it possible to have financial independence through rental income. However, this type of real estate investing isn’t right for everyone. What is this method exactly, and is it right for you?
What is BRRRR?
BRRRR stands for buy, rehab, rent, refinance, repeat. The strategy is best for those who are wanting to grow a rental property portfolio in a quick manner. The process starts with buying a property. It is best to purchase a home that is distressed or undervalued. In most cases, you will need to purchase the home alternative financing, like hard money.
Next comes the rehab. You will need to make all of the necessary improvements to the home before you can do anything with it. Making the improvements will not only get it ready to rent but also add value to the home. This means you can rent for a higher price and make more money.
After the improvements are finished, you can put the house on the market to rent. You will need to choose a price that fits market standard. You will also want to be picky with the tenants you let rent the home. You want people who have a steady income and a record of on-time payments.
Next you will want to do a refinance of the home. The most common refinance in the BRRRR method is called a cash-out refinance. You will need to pay off the original loan on the home before you can use the rest of the money for the last step.
Last comes the repeat step. Take the left-over money from the cash-out refinance and use it as a down payment on your next BRRRR investment property.
BRRRR Benefits
One of the biggest benefits of the BRRRR investing method is that it allows you to grow a rental property portfolio without having to tie up large amounts of money for long periods of time. For example, if you wanted to have five rental properties, you would typically need to have five down payments with a mortgage on each. With the BRRRR method, you are still able to get those five rental properties that you want, but with way less cash than you would need with the traditional investing method.
Due to the fact that this investment strategy uses a cash-out refinance, you are able to pull out your money and invest it again in another property. This allows you to have all of the benefits of a long- term mortgage without having a ton of money invested. When you own rental properties, you also benefit from tax deductions. When done properly, the BRRRR method can increase your net worth, create financial independence, and create a passive income.
BRRRR Drawbacks
BRRRR investing does come with a few drawbacks. For example, if the home goes through an appraisal and is valued lower than you expected, you might not be able to refinance for the amount that you need. This could cause issues with investing in your next project.
Another drawback you might run into is renovations taking longer than they are supposed to. There may be underlying issues in the home that you were unaware of that will need fixed before the proper renovations can continue. When you borrow from a hard money lender, you are going to be paying fees and interest. The longer you are holding the hard money loan, the less money you will be able to make from the property.