If you're interested in real estate investing, you've almost definitely heard of the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method by now. It is a tried and true strategy for creating lasting wealth and accumulating real estate assets. The process looks like this… you flip a distressed property, rent it out, and then refinance it so that you can fund additional property investments. The main difference between BRRRR and other property investment strategies is the refinancing aspect. For those that have the drive, this method offers a great opportunity to build wealth with passive income. While simple, it's not necessarily easy.
The Hard Money Co. will walk you through the ins and outs of this methodology, as well as provide you with some insights that will help get you started.
How does the BRRRR Method Work?
With the right investment property and a strong work ethic, the BRRRR method can be the foundation for a life of passive income in the real estate industry. The basics of the method are as follows:
Buy a distressed property: Use MLS resources to identify distressed properties that have significant potential. If you are just started out, hard money is a great resource because of the ability to refinance with a longer-term loan after renovations. The goal is to find the largest possible difference between a home's purchase price and it's After Repair Value (ARV).
Rehab the property: The property will likely require some work before it is able to be rented. Either perform the work yourself or hire contractors with subject matter expertise to make the property safe for renters. The Hard Money Co. offers financing for this repair work as part of the initial loan.
Rent the property: Part of your rehab work should be to make the property attractive for potential renters. Identify your price point and get to work marketing the rental opportunity. This is essential in order to secure refinancing.
Refinance through cash-out lender: Cash-out refinancing lets you convert the equity you've built in the property into cash. By taking out a longer, bigger mortgage than what you initially borrowed, you can obtain funds to repeat the process. Realistically, these funds can be used for whatever you would like, but to complete the BRRRR strategy you need to move onto the final 'R'.
Repeat the process: Using your funds from the cash-out refinancing, go back to step one and purchase another distressed property
Tips for making the BRRRR Method work:
As we said, the BRRRR method is simple but not easy. Performing the steps in order to the best of your ability will give you the best chance for success.
Not any property is well-suited for a fix and flip or the BRRRR strategy. Success relies on finding a distressed property that needs repairs, but that can be realistically renovated to a habitable home. In most cases, it's difficult to get a traditional loan on such a property, so investors often turn to hard money for their purchase. Hard money allows you to get financing quickly without the many obstacles of other institutional loans. This is especially true for a distressed property that you don't intend to live in.
Talk to a representative at The Hard Money Co. or fill out our loan application to get the process started.
One of the most important things that we consider when providing a loan is the After Repair Value (ARV), which is the estimated value of the property after your work has been completed. A good estimate relies on comparable properties in the area that have recently been sold. Comparison points often include square footage, number of bathrooms and bedrooms, etc. Much of this ARV legwork can be done in the research phase to find properties with return potential. The Hard Money Co. lends up to 65% of this ARV figure, so it is an impactful metric in determining which properties are available to you.
When considering what your rehab effort will entail, most people have too lofty goals. Your goal is to take a distressed asset and return it to market value. You don't need to make it your dream home. The first, and the most important, thing that you need to do is make the property safe, habitable, and up to code. These requirements differ depending on where you live, but this is essential for soliciting renters. After it's up to code, consider the property improvements that will actually increase the value of the property. Updates to the kitchen or bathroom are the most common improvements, but improving things such as appliances or curb appeal can also deliver ARV benefits.
Know what you intend to do before you get started because these repairs can be costly and time-consuming. They need to be a clearly defined part of your investment in order to get the return on investment that you're hoping for. Additionally, you need to consider if you're doing the work yourself or contracting it out. Using contractors will add expense, but will improve quality and repeatability for future efforts.
Once your rehab is complete, it's important to begin marketing your property for potential renters. Lenders typically won't refinance a rental property unless it has had tenants for a number of months (seasoning). Proof that you have a viable income stream is extremely important in establishing a viable Debt-Service Coverage Ratio, and renters are the only way to achieve that.
When looking for tenants, there are a few qualities that will make your life easier.
- Stable employment (income) and a record of on-time payments
- A good credit report
- A clean criminal record and no history of evictions
- Strong references
This information can be gathered either through an in-person interview or through an in-depth application process. Be aware that housing is a highly regulated industry, and you have to abide by a number of fair housing laws in this process.
Determine the rent that you will charge based on a combination of market comparables and your required cash flow on the property. It's unlikely that there is a 'right answer' for the price you set, but know that your decision will have an impact on both the ease with which you can rent the property and the amount you will be able to cash out on refinancing.
The cash-out refinance is a crucial part of the BRRRR method. It is the point in the process where you realize a return on your investment by capturing the equity difference between the purchase price and ARV. There are many avenues for finding a cash-out loan, but keep in mind that this process will be more intensive than your initial hard money loan. You will need to demonstrate cash flow and have a good credit score in order to get in the door. You will also likely only be able to finance a portion of the total value of the property. Because this is not your primary residence, there are different requirements for the loan to value (LTV).
Finally, be aware that there will be costs associated with appraisals, closing, and other fees. These should be generally accounted for when budgeting for your BRRRR project.
The final step of the BRRRR Method is to repeat the process. Your willingness to do so will likely depend on how well these initial steps go. Many find that this process is not for them and elect to sell their property outright and realize their gains, but this is the essential component of creating lasting wealth. The ability to pivot from one project to the next allows you to build equity in multiple properties.
Should You Do the BRRRR Method?
BRRRR isn't for everyone, and that’s okay. Before you get started, make sure that this method aligns with your goals and your abilities. You must be diligent in your assessment and purchasing phase, Methodical in your renovation and rental efforts, and motivated enough to do it again.
It's also not a 100% risk-free endeavor. There can be unseen problems associated with the property. Timing issues related to contractors or the supply chain could lengthen your renovation period. Maybe the rental market softens right when you're ready to start your cash flow. Be aware that these are all possibilities and do what you can to mitigate those risks.
The BRRRR Method, ultimately, is popular for a reason. It’s a tried and true method for producing passive income and building a wealth-generating real estate portfolio.