Investing in real estate is a popular way to build wealth over time. Real estate offers investors flexibility through various passive and active options, such as buying a share in a Real Estate Investment Trust (REIT) or purchasing a fixer-upper for a bargain and flipping it for a profit.
The BRRRR method is a time-tested approach used by real estate investors.
What is the BRRRR Method?
The BRRR method is a multi-step approach to real estate investment. An investor first buys a property, then fixes it up, rents it out for an income, refinances the mortgage, and uses the profits from cashing out on the mortgage to purchase another property to repeat the process. The acronym reflects each stage of the process – Buy, Rehab, Rent, Refinance, Repeat.
When done correctly, the BRRRR method enables savvy real estate investors to earn income and reinvest it over time. That allows them to build an expansive real estate portfolio with multiple properties. While this may sound simple enough, investors must consider several factors before entering a real estate transaction.
Let's break down the different parts of the BRRRR method along with the pros and cons involved with each step of the process.
There are always several factors a person should keep in mind when buying a home, such as location, affordability, and the property's condition. However, these considerations are even more important for an investor implementing the BRRRR method.
When buying an investment property, it's necessary to strike a balance between finding a bargain — ideally a piece of real estate selling below market value — and one that is a sound investment. You can usually find a fixer-upper at a reasonable price. However, make sure you aren't buying a lemon. If the repair costs exceed the rental income and refinancing, you'll lose money on the property.
Before making an offer on a property:
- Research the local real estate market.
- Start by checking out the best websites for buying and selling homes in your area.
- Compare the property of interest to others on the market to determine whether you're getting a good deal.
- By purchasing a fixer-upper, you will get more square footage of the house in an ideal location and at a bargain price.
- If you have excellent negotiation skills, you may be able to have the seller take care of some of the biggest updates needed — free of charge to you — as part of your deal.
- In a hot seller's market, finding a bargain price on an investment property can be difficult, significantly cutting your future profits.
- Foreclosed homes come with added risks. Depending on how long a home was owned before foreclosure, you may spend more money than it's worth and be unable to examine the property thoroughly before purchase, meaning you could be in store for some nasty surprises.
After snapping up a bargain property, the next step is to renovate your property. Depending on your budget and level of expertise, you may decide to do some or most of the work yourself or hire contractors to get your property ready for renters. Either way, set a budget before you begin work, giving yourself an extra 10% cushion in case you uncover any surprises as you go.
When preparing a home for the rental market, prioritize making repairs that make the home compliant with local regulations, such as having proper ventilation and windows. Beyond that, choose neutral fixtures and finishes while honoring the home's age and build. Finally, avoid customizations that will not appeal to the majority of renters.
- If you have home repair know-how, you can increase your profit margin by taking on most of the rehabilitation yourself.
- Most updates will increase the overall value of your property, strengthening the investments.
- It is common for unexpected issues — and expenses — to come up during rehabilitation. Budget your time and money accordingly.
- If you rely on contractors to complete the bulk of a property's repairs, keep in mind that you will have to plan your schedule according to their availability. Depending on how busy they are, you may have to sit on a property for several months before you start earning an income on it.
Once your renovations are complete, it's time to put your home on the rental market. If you have connections, you can spread the news about the property through word of mouth. You can also use traditional and modern marketing tools to generate interest.
Never underestimate the value of putting a “For Rent” sign up in front of the home and placing flyers at community centers or grocery stores on bulletin boards. You can also place ads in your local newspaper and on social media. In addition, websites such as Redfin and Zillow — primarily known for buying and selling homes — have features for renters. Find out if these platforms are right for you.
- Rental properties provide consistent monthly income that can increase with the market over time, giving you a steady return on your investment.
- You can cash in additional profits on your property when you sell it down the road. Here are tips for the best ways to sell a home and earn a substantial profit.
- It's important to vet potential renters before you accept an application carefully. An ideal tenant will pay rent on time, take care of the property, and communicate effectively. Bonus points if they hope to plant roots and stay for a few years.
- As the owner and manager of the property, you are responsible for all repairs. Make sure to have savings in hand and contractors on speed dial so you can make quick repairs as they arise.
After you have a renter in place and have updated your property suitably, you can start to build equity on your home. This equity, in turn, can be used to refinance the mortgage you used to purchase it. This approach can take a little time, as you need to build up equity first. But once it has grown, you can pursue a cash-out refinancing option and use the cash to invest in another real estate market.
- When it works to plan, you can avoid building up debt to purchase and make repairs on future properties by using your cash supply.
- How much you can get in a cash-out when refinancing depends on many factors beyond your control. Interest rates and the state of the housing market are just two that have a direct impact.
How often you go through the BRRRR method depends entirely on you and your resources. Remember that this is a long-term approach intended to build a portfolio over several years or even decades. This investment strategy is best for those who are patient and able to wait before cashing in on a profit.
The good news is that if you try the BRRRR method on one investment and find it unsuitable, you still have options. You can, for instance, always sell your property after some time and try to earn a profit. However, if you sell your property too soon, you may not have built enough equity to break even, let alone make a profit.
Remember that as the seller, you will be responsible for paying closing costs and real estate commissions, which will cut your profits. Check out this calculator to estimate the sum of those costs.
This article was produced by Wealth of Geeks.
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