According to the National Association of Realtors, the fourth quarter of 2021 saw a slowdown in the housing market. Specifically, 67% of metro areas surveyed recorded double-digit median sale price increases of single-family homes compared to the previous quarter.
If this indeed indicates a slowdown, it may be time to look at real estate as a viable investment option.
While the name sounds frigid, there's a red-hot way to do real estate business! Here’s how to use the BRRRR real estate investing strategy to generate some cold hard cash in the real estate industry.
What Is The BRRRR Method?
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. Essentially, investors buy up properties, rehab what is necessary to make the properties livable and safe, rent out the properties to recoup what they have invested, refinance at a lower rate to reduce the selling price on the property, sell it off (if they so desire), and then repeat.
They can choose to keep the property as a rental property for a while if they want to make some money off it, but selling a property as soon as the market values rise again is a better option. Refinancing the property leads to a cash-out option that provides the property owner/buyer with funds to buy another property that needs fixing.
The profit margins, especially in a seller’s market, are quite handsome, and it's not as tricky as it sounds.
How The BRRRR Method Works
In the 1930s, there were companies called “Building and Loan” companies. You know, like in It's a Wonderful Life. Essentially people wanting to buy and build a new home would come to these companies seeking funds. Other people who had already taken money from the building and loan and were repaying it would have those funds reinvested into the building and loan process for new customers.
The BRRRR Method is very similar to this old building and loan business model, except that it’s a real estate investor borrowing money to fix up and buy a property before turning it into a rental cash cow.
The steps in the BRRRR method are straightforward.
The investor looks for a distressed property but is hopeful of finding a turnkey property. The real estate investor expects that these properties will yield a high return on investment.
Different lending options and loan programs are used to purchase the properties in question. It’s wisest to find low-interest rate loan options and have a large chunk of money to put down at the start. Non-traditional funding sources may also provide you with the financing you need since many traditional mortgage companies may not be willing to help you buy distressed homes or dilapidated properties.
However, you have to be very careful when selecting a loan product to buy a property. Evaluating the rehab costs and weighing them against the interest you will have to repay while fixing the property is essential.
Rehabbing a property is a key component of the BRRRR method. You are trying to make the property livable and attractive to renters. The objective is to choose a house or building with “good bones” and not need too much work to bring it to code.
Before you jump in and buy a property, have it thoroughly inspected by a building inspector so that you know what it will cost to bring the property up to code and what it will cost to make it attractive to renters.
Have a rehab budget in mind and stick to it. If you can manage it, don’t go above that amount, or your profit margin will shrink. To be successful, you have to pick suitable properties for the right price and stay well within your rehab budget.
Examine the local rental market. What are people willing to pay for rent in the property’s location? If you charge too much, you will be stuck with the property for a long time and lose money.
On the other hand, you will lose money if you charge too little to regain what you invested or keep up with the monthly mortgage payment. The monthly cash flow has to be above the mortgage payment but low enough that renters can pay the requested rental price.
Also, make sure that the tenants you choose are suitable, decent people with a steady income, a good credit report, and no history of criminal behavior. You don’t need the property destroyed after already investing so much!
Research the potential renters/tenants thoroughly before accepting their security deposit and first and last months’ rent.
Traditional lenders require a seasoning period of a year or more of continuous payments on a property before you can refinance. So you'll need to wait a few months after you start accumulating the rent.
This is why many property investors have more than one property going under the BRRRR method simultaneously so that each will “mature” at a different time for refinancing.
Be sure you ask for the cash-out option in refinancing. The more rehabilitation and sweat equity, as well as mortgage equity of the home, the more you can borrow.
Repeat this as often as you have a consistent cash flow available to you through the cash-out process on a previous property. The goal is a chain of properties in your pocket, turning out passive income while you rehab your next project.
Pros And Cons Of The BRRRR Method
There are definite pros and cons to consider before you decide to jump into the BRRRR strategy.
When done right, the BRRRR method is very lucrative. The money is passive, so you don’t have to do much to keep the money coming in every month. You can own dozens of properties and have millions in cash reserves which leads to paying off the loans on many of your properties. Then you own the properties outright, and the monthly rental income is pure profit.
It takes a long time and a lot of hard work on your part to get this going. If you can’t or won’t put in the work and the effort needed, you will lose your shirt and end up filing for bankruptcy.
In addition, you have to stay on top of all of your properties and make sure they remain in good rental condition. This can lead to additional expenses if you have poor tenants or overlook something that needs repair during the rehab process.
Potential Risks Of The BRRRR Strategy
Risks often include:
- A sluggish market
- Lack of properties that would work for your intentions
- Overly high loan rates
- Lack of decent tenants
- Tenants who seem great on paper but turn out to be destructive
These are often out of your control, and they can be costly. For example, failing to have a property inspected and appraised before purchasing it creates its expensive level of risk, too, such as tens of thousands of dollars to bring plumbing or roofing to code.
It’s essential to keep your renovation time short. For that reason, don’t attempt to rehab more than one property at a time. Instead, one to two months is the recommended time to get tenants into the property and start making money immediately.
Likewise, your renovation costs should be as low as you can keep them. The property should be up to code with the city and livable for humans. If you’re fortunate, your total cost of repairs for the renovation will be 30% or less of the entire property value.
Appraisal of the property before and after making your investment is critical and probably the most significant risk when doing the BRRRR strategy. You are looking to find a property that will not cost a lot to purchase and rehab either, but who's value will jump high enough to refinance at a later date, for a nice chunk of change.
Time To Fill Vacancies
When a property is ready for tenants, make sure you fill your vacancies within three months or less, preferably within the first month. Any longer than that, and you will lose money. Always keep your vacancy times short to maintain a positive cash flow.
The rent should always be enough to cover the monthly loan amount plus a little extra. It should also be on par with the average rental market in the neighborhood where your property resides.
Be sure to do your homework before you set the rent amount. Otherwise, potential tenants will skip over your listing for something cheaper or more reasonable.
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