When it comes to real estate investment strategies, there are many long and short term investment strategies to choose from. This includes the following:
- Fix and flip real estate investing
- House wholesaling
- House hacking
- Buy and hold
- Traditional rental investment
- Airbnb rental investment
- Real estate investment trusts (REITs)
- Real estate partnerships
Another popular real estate investment strategy worth considering is the BRRRR method.
What is BRRRR method?
BRRRR is simply an acronym that stands for ‘Buy Rehab Rent Refinance Repeat’. A real estate investor begins by buying investment property and rehabbing it. The renovated home is then rented out for a long period, during which the owner uses the rental income to pay off the mortgage, make a return on investment, and build equity over time. When the equity is built up, the investor then refinances the home, buys a second property, and repeats the cycle.
This pops an important question:
What are the pros of the BRRRR method?
- Potential for a high ROI – If you purchase a distressed home for a low amount and renovate it, it can generate a good cash flow over time in addition to benetifing from natural and forced real estate appreciation.
- Building equity – When implemented properly, you can capture up to 30% in equity when refinancing your rehabbed home.
- Scalability – With the BRRRR method, you can start with a very little initial cash investment and slowly build up your portfolio over time. It can easily be your answer to the question how to invest 5k in real estate.
- High quality tenants – If a home is rehabbed to meet or exceed the standards of a neighborhood, it is likely to attract quality tenants. Such tenants will be willing to pay a high rent in return for the available amenities and features, which will lead to good cash on cash return and cap rate.
Wondering how to build a real estate portfolio? The BRRRR strategy remains a feasible – and actually very profitable – investment strategy this year.
You should also check out our video below to learn more about the BRRRR strategy:
So, let us now dive deeper into each of the steps involved in the BRRRR method:
Buy
Since the BRRRR method involves buying a distressed home that requires repairs and renovations, it might be difficult to obtain traditional investment property loans. This is because conducting an appraisal on such an income property is difficult. However, be sure to visit your lender and ask what other options are available. It might be possible to finance the purchase using seller financing, hard money lenders, home equity loans, or private money lenders.
When it comes to finding investment properties for sale, there are several strategies you could use. These include driving for dollars, checking REO listings, checking the multiple listing service (MLS), visiting property auctions, and consulting probate attorneys. The Mashvisor Property Marketplace is another great place to find off market properties like short sales, foreclosures, tenant-occupied rentals, and bank owned homes as well as homes listed by other users of the platform. You can narrow down your search using filters like rental strategy, budget, miles, and type of property. Emails and phone numbers of home owners are readily available on this platform so that you can contact them directly and start negotiating.
When choosing a distressed home to buy, use a BRRRR calculator to estimate the after repair value (ARV) first. This is the estimate value of the property after rehab and repairs are done. To establish the ARV, you could check similar cash flow properties (real estate comps) that were sold recently in the neighborhood. The properties should be similar in lot size, age, number of bedrooms, size, type of build, number of bathrooms, and condition. Use the 70% rule when making an offer on the home. This means that if a property’s ARV is $500,000, then don’t pay more than $350,000 for it.
Rehab
Rehab is step #2 in the BRRRR method
The basic aim of rehabbing should be to make the property functional and liveable. If you have the budget, you could consider making renovations and updates to increase the value of the home so that you can rent it out at a higher rate.
However, the first thing you need to do is to get the rental property checked by a professional home inspector. This inspection will examine the home’s foundation, electrical system, plumbing, ceilings, air conditioning system, insulation, flooring, and roof. Once you’ve established the work that needs to be done, find out if there are permits you need to get to perform the rehab. Once you have the permits, hire a contractor and get to work. Be sure to leave room in your budget for the unexpected.
Rent
Once the rental property rehab is done, you can then set the price for your rental and start looking for tenants. To do that quickly and easily, you can use the Mashvisor real estate investment software. You can find out an estimated rental income for any residential property in the US market based on rental comps from the area. You can sign up for a 7-day free trial now followed by a 15% discount for life by clicking here.
Try different rental marketing channels to find the most appropriate fit for your income property. When screening potential tenants, look at things like credit score, employment, income, criminal record, and eviction history while making sure that you don’t discriminate against candidates. If you don’t have the time or experience required for being a landlord, you could hire a professional property management company.
Refinance
Once you’ve rented out the investment property for some time and built equity, you can begin the process of refinancing. Find a lender that allows a cash-out refinance and check the requirements for the loan. Most lenders will have a maximum debt to income ratio expectation, a minimum credit score requirement, and sufficient equity in the home level. You might also be required to have owned the home for a specific duration before you can qualify for a cash-out refinance.
Keep in mind that the bank will also want to conduct an appraisal of the home. And you might need to pay additional fees such as closing costs out of pocket.
Repeat
The last step of the BRRRR method is using the money from the cash out refinance to acquire a second property. You then repeat all the previous steps in the same order. Be sure to take notes as you go through the process to avoid repeating the same mistakes. Learning from their own mistakes is what sets up successful real estate investors from the rest.
Conclusion
BRRRR investing is still a very viable real estate strategy. Though it comes with its own share of risks, the potential pitfalls can be mitigated via due diligence and proper research. You can learn more about the BRRRR method from real estate blogs, industry magazines, real estate podcasts, and YouTube videos. Finally, leverage real estate investment tools such as Mashvisor to find and analyze BRRRR real estate all over the US.
To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today and enjoy 15% off for life.