Whether you’re a beginner or experienced real estate investor, you’ll come across plenty of people mentioning the BRRRR method when investing in property, and for a good reason. And no, this is not the BRRRR method that has been deployed by the US Federal Reserve over the past several years.
In this article, we’ll walk you through the BRRRR method, its benefits, and its drawbacks.If the BRRRR method is done correctly, it can be a great strategy for increasing your rental portfolio significantly over a short amount of time; the passive income it provides can be highly profitable.
The BRRRR method wouldn’t be one of the most popular real estate investment strategies if it didn’t work well.
Take a look at the benefits below:
You can own a large property portfolio without having your own cash tied up between them for long periods of time. If you went with the traditional method and got a mortgage on these properties, you’d have cash tied up for many years to come. The benefit is that you don’t need to do this using the BRRRR method.Once you’ve got a tenant in place and the property has been renovated, you’ll now be able to get cash back out of the property using cash-out refinancing, allowing you to invest in another property.
With any investing strategy, there will always be drawbacks; no method is perfect.
A possible negative side to this method is that your property could take longer to renovate, which means more expenses on top of the purchase, shrinking your profit margin.
The longer you’re working on this property, the more those interest charges build upon that original loan used to buy the property. This is why it’s important to get in and out of the loan as quickly as possible.Another downside would be that your appraisal could easily go south, meaning you’ll not be given as much money as expected back in the form of your refinancing. Ultimately this hinders your plan to invest in other properties.
BRRRR is a popular method used by beginners in real estate investing to build a portfolio quickly.
Here’s what to do to get started.
The first and most obvious step is to find a property to buy. Of course, you’ll want to find a property that is somewhat undervalued. An easy comparison of the homes in the surrounding area would allow you to find deals.
Take a stroll around a few neighborhoods for potential investments, or take a look on a listing site. Auction houses are another great option for finding properties at a low price.
Once you find a few potential investment properties, you’ll need to take a deeper look to see if they’re financially viable in the long term.You can use the after repair value (ARV) formula to understand how much you can get from refinancing and the general value of the property if you decide to just flip the home.
Another thing you should be doing is a rent analysis; you’ll be able to determine if the property is suited to being a profitable long-term rental property.Take a look at this insightful video on how to analyze your rental property.
The next step in the buying process is to get the cash to pay for the property; if you’ve got your own cash, you can buy it outright.If you don’t have the cash, you’ll most likely not be eligible for a standard mortgage considering the property will likely require significant renovation and repairs.In this case, you can go down the route of private financing or a hard money loan. These options don’t have as many requirements to be filled, but they’re expensive to pay back, which is why most people try to pay them off as soon as possible.
The sooner you get your rehab phase completed, the better. Most people try to complete this phase by themselves with some help from friends or family. It keeps costs down and means you can get a tenant to begin paying rent sooner, allowing you to pay off the original money loan. The interest payments on these loans can quickly eat into your margin, which is why it’s important you plan out the entire project with precision. It’s important not to get too strung upon making the rental property perfect; the goal is to make it habitable and comfortable for the tenants and to get out of any loans ASAP.
If it’s your first time renting, make sure you’re brushing up on your rights as a landlord and those of your tenant, a good start is this linked resource. You should also be prepared to pay for any repairs you’re liable to fix for your tenant, maybe keep a small fund for such issues when they arise.If you’re wondering how to decide on a price, a very basic way is to reference what other properties are renting for in the local area. There are also a few online tools that can help you determine a fair price. After you’ve advertised your property, it could be a few days or a few weeks before you get your first tenant.
Having a tenant in place brings stability, security, and a steady income; this will then be more attractive for you to refinance the home with the help of a lender.Lenders will have very particular criteria for you to follow, and it’s important you follow these requirements to an absolute T.
This will speed up the process for you; finding a lender is the hardest part of the process.It might also be a good idea to start building a relationship with one specific lender and agent; this will make your life much easier in the long run.
It’s worth noting that banks will only support you with refinance payment equating to 75% of the appraised value of the property, so if you’re looking to use this to buy another property, have a plan if the valuation doesn’t go the way you initially thought.
If you get through the full process without any additional, unexpected costs, then you might be able to supplement the refinancing money, ultimately lowering the loan amount needed for the second property.
As you can probably tell, the process is quite labor-intensive if you’re trying to maximize the profit margin by completing the refurbishments yourself. But, there are other options that are less laborious.
The most common method of real estate investing would be to buy a property that’s already habitable using a mortgage and then pay off the mortgage with the rent you receive from the tenants. Many investors buy multi-family properties, live in one of the units, and rent out the remainder.
One way to take some risk off the table is to form a group of real estate investors and spread the risk and cash minimum across multiple people. If you’re going to rehab the property, it’ll be complete much faster and work out cheaper per person.The issue with that is you have to share the profits with the other investors, but if you own multiple properties together, the rent payments will slowly grow.
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The BRRRR method is popular and can be profitable if done correctly but it still exposes you to a lot of risk. Whether that be unexpected refurbishment or labor costs, these setbacks could quickly eat away at your profit margins. If this doesn’t phase you and you’re happy to take on the responsibility then it’s certainly worth looking into it further.
But, considering it can be quite demanding, it’s not suited to those who aren’t ready to take on that type of physical and financial stress. Like we mentioned above, there are easier options yet, and that’s investing with Parcl. Our blockchain-based real estate trading platform allows you to invest in real estate across the US with less risk and with no cash minimums.
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