Buy, Rehab, Rent, Refinance, Repeat! BRRRR Investors
Real estate investing can be overwhelming, especially when anyone is first starting off and only have a small amount of savings that they expect to stretch that savings as best as possible. Some pessimist may say don’t do it because they feel the return is not fast enough or if you do it wrong you might loose your shirt. Further more tell you to get into Cryptocurrency, blah.. blah… blah. I’m not even going to go there because that’s not what this article is about. But needless to say many strategic real estate investors have built empires simply by investing one property at a time before they were buying 2, 3, 4, 5 at a time, you get the picture. Real estate investing is one of the biggest and highest ROI industries all over the globe. You just need a game plan or you’ll be One and Done soon enough.
If you are going to invest in real estate, thinking about converting it into a “BUSINESS”, you will eventually come to know about a highly growing real estate business model, BRRRR. The BRRRR method has become a widespread practice for investing in rental property. This process focuses on buying distressed property followed by rehabbing, renting, refinancing, and lastly, repeating the cycle.
So, here is everything you need to know about the BRRRR method.
What is BRRRR Method?
BRRRR is the abbreviation of “buy, rehab, rent, refinance, and repeat.” It is important to understand that BRRRR is a process, and these steps should be implemented in this sequence. The BRRRR method is an excellent option for those who want to build a passive income stream.
The process starts with buying distressed property and rehabilitating it. Then, you rent out that rehabbed property to tenants for a higher amount than it was before (unrehabbed). This is called in the industry as “Lease up”. This new and higher rental income helps you earn a higher Net Rental Income after your mortgage and expenses. This new and higher rental income helps you earn a higher Net Rental Income after your mortgage and expenses.
Now with this newly rehabbed property, the natural course of expectation would be that the property should be worth more than what you purchased it for plus the cost of repairs. Real estate investors have been applying the BRRRR method on different types of rental properties, i.e., from 1-unit to 4-unit properties.
How Are Real Estate Investors Doing It? BRRRR Method
Now, the BRRRR method is not as easy as it seems. As an investor, you need to understand how this process works. Here is how real estate investors do it.
The “B” of the BRRRR method stands for “buy.” This is arguable the most important section of the process because it will determine the outcome of your investment. You need to make sure that the property you are buying will make a sound investment and turn into a profitable rental property.
Therefore, as an investor, you will have to do your due diligence by calculating the renovation costs, monthly expenses, and rental income should yield a sufficient profit margin. Many investors rely on a 70 percent or 75 percent rule. That said, the purchase cost and renovation cost should be 75 percent (or less) of the total after repair market value.
For instance, if you buy a property worth $40,000 and the estimated rehab cost is $50,000. Now, if, after the improvements, the fair market value of that property reaches $120,000 or more, then this is a profitable deal. That is because $90,000 is 75 percent of $120,000.
After buying a property, the next step is to start the rehab process. It is better to start is as soon as possible because it saves you the higher interest you are paying during the rehab due to the unstabilized risk. No income + a stabilized property = Risk or at minimum a higher risk, regardless of how short term it may be. This is why your Lender will always ask you about your Experience. Once you have completed the repairs, you can now start generating a Cash Flow from your Investment.
Investors mostly opt for those properties that can offer a high return on investment. Here are some common rehab projects that can offer and justify a higher Rental Income
- Additional bedrooms
- Upgrading the bathrooms
- Drywall repair
- Updated kitchen
- Roof repair
- Cost-effective HVAC system
Once you have taken care of renovations and repairs now is the time that you demand what your property is worth with quality tenants that appreciate your property. However, being a landlord/owner is not an easy thing to do. That said, screening and selecting the right tenant is a difficult task. Furthermore, you need to manage the turnover and have to be active in responding to maintenance or repair requests.
Apart from that, it is equally important to set rentals according to the market and your property. Amidst all this, you have to advertise your property effectively to attract decent tenants.
Refinancing is another very important and highly challenging step in this process. You have to consider different elements such as interest rates, tax benefits, closing, control over your financial timeline. There are different options available for refinancing, such as:
- Community banks
- Conventional banks or lenders
- Private lenders
Your first 2 options may offer some benefits like a slightly lower interest rate but with a major trade-off that may not justify the extra demands and the long underwriting process.
We know sometimes we try and defy the odds and won’t learn until we get burnt. Well, it’s your time, effort and money. So don’t get Burnt! Here are some of the benefits a Private Money Lender like Fort Knox Capital can offer.
- No Tax Returns required.
- Employment or Income verification not required.
- Qualification is based only on the Rental income from your Lease or 90% of the Appraisers Rental Market Value.
- No limits on how many properties you buy, unlike the first 2 options.
- No Red Tape from underwriters.
- Foreign National investors OK
- Unleased property OK
- Faster Closing.
If everything goes as you had planned it, i.e., you bought, rehabbed, rented, and refinanced a property without any considerable issue; then it is time for you to DUPLICATE or REPEAT what you just accomplished. In fact, you need to draft the business plan that will allow you to repeat the process over and over again. When you catch the WAVE you need to hit it hard and smart. Your Business plan should detail your target location(s), locations that will bring you the highest “Potential” rental income, future value, least cost of repairs and the highest or next highest demand for rental housing.
What Are The Risks In BRRRR Method And How To Avoid It?
BRRRR method is a highly accepted strategy, but it also bears some risks. Here are some of them.
1- Purchasing A Property At A Wrong Place
Investors often end up buying a property at the wrong location. When we buy a house for ourselves, we try to find the “best” neighborhood but the ultimate question is What is the best neighborhood for “renters”.
Moreover, people often rush to buy a property if someone is selling it cheap or depressed pricing. But, they fail to understand the fact that there can be something wrong with that property, and that is why the seller may have agreed to sell it cheap. Maybe it’s due to the “unwanted” location of the property?
Therefore, it is better to buy a property where people or investors are trying to gentrify that specific area. Also, it is worth investing in locations that have the potential to grow for good neighbors or neighborly.
2- The Total Cost Of Renovation
Although the cost of renovations is estimated before buying a property, yet you may have to face unanticipated issues. Sometimes, there can be issues that are only identifiable when you start “digging.” For instance, there can be plumbing problems, electricity issues, or even structural problems.
To tackle such issues, it is better to add a section in your budget for “unexpected” expenses. This safety net will give you peace of mind during the project, and this can soften the blow for unexpected costs. Don’t worry, it’s better to add in your unexpected contingency cost since the lender will be glad to set that aside for you. They want you to succeed and not call them at the last hour asking for another handout because you didn’t plan. It shows that you are a Pro!
The BRRRR method has gained immense popularity because of its effective strategy. It helps you grow your real estate business and generate a solid passive income stream. Yes, there are always risks when the rewards are high. However, with proper planning and research, you can reduce the effects of those risks. Nonetheless, BRRRR is a great addition to the real estate industry.