If you're into real estate investing, you've surely heard of the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method. This tried and true technique is the perfect way to build lasting wealth and accumulate property assets. It works by flipping a distressed property, renting it out, and then refinancing it to fund future investments. What sets the BRRRR Method apart from other investment approaches is the refinancing component. If you have the ambition, it's a great way to generate passive income and become wealthy. Though the concept is simple, it can be quite challenging to execute.
At The Hard Money Co., we can take you through the entire BRRRR Method and give you the essential knowledge needed to get started.
Is the BRRRR Method Right for You?
The BRRRR method can be a great foundation for passive income if you have the right investment property and are willing to put in the work. The process starts with using MLS resources to locate distressed properties with potential. Hard money is a great option for those just starting out because it allows for refinancing 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).
After making the property safe for renters, you can begin to market it for potential tenants. This is necessary for refinancing. After you have built equity in the property, cash-out refinancing lets you convert that equity into cash. This money can be used for whatever you'd like, but in order to complete the BRRRR strategy you need to purchase another distressed property and start the process again.
When it comes to finding a property to fix and flip or apply the BRRRR strategy to, not every property is suitable. Success depends on finding a distressed property that can be renovated in a realistic timeframe to become a habitable home. Traditional loans for this type of property are often not an option, which is why hard money loans are so popular with investors. These loans provide quick access to financing with fewer obstacles than other institutional loans.
At The Hard Money Co., our loan application process takes into account the After Repair Value (ARV). This is the estimated value of the property after renovations are complete, and it is determined by examining comparable properties in the area. Information like square footage, number of bathrooms and bedrooms, etc. are all taken into account. Doing this research ahead of time can help you determine which properties have the best return potential. The Hard Money Co. lends up to 65% of the ARV figure, making it a key factor in determining which properties you can invest in.
When it comes to rehabbing a property, it's important to be realistic with your goals. You want to make sure that the asset returns to market value, not make it your dream home. The first and most important step is to ensure that the property is up to code and safe for habitation. This will depend on where you live but is key for renters. After that, look into what improvements can help increase the value of the property. Common updates are for the kitchen or bathroom, but even adding more curb appeal or appliances can help.
Before you begin, make sure that the repairs are a defined part of your investment goal. This will help you get a return on your investment. Lastly, consider if you will be doing the work yourself or contracting it out. This will add costs but will improve quality and make it easier for future efforts.
Once your rehab is finished, it is important to start marketing your property for future tenants. Refinancing a rental property is usually only possible if it has had occupants for a length of time (seasoning). Having an income stream is essential to creating a viable Debt-Service Coverage Ratio, and this can only be done by having renters.
When searching for tenants, there are certain qualities that will make your life easier: reliable employment and a record of on-time payments, a good credit report, a clear criminal record with no history of evictions, and strong references. This information can be obtained through either a personal interview or an in-depth application. You must also be aware of fair housing regulations in the industry.
The rent rate to charge should be based on a combination of market comparables and your necessary cash flow for the property. There is no exact rent rate, but understand that your decision will have an effect on both the ease of renting the property and the amount of money you will have after refinancing.
The cash-out refinance is a critical aspect of the BRRRR approach. This is where you can benefit from the difference between the purchase price and ARV (After Repair Value). Even though there are multiple sources for a cash-out loan, the process is more intensive than the initial hard money loan. In order to qualify for a loan, you need to demonstrate a cash flow and have a good credit score. Additionally, you will likely only be able to finance a portion of the property's total value, since it is not a primary residence. Furthermore, remember to factor in the costs associated with appraisals, closing, and other fees when budgeting for the BRRRR project.
The BRRRR Method culminates with the repetition of the steps taken. Whether you decide to continue with this process will depend on how successful the initial steps were. Some choose not to pursue this method and sell their property in order to reap the benefits; however, repeating the process is essential for creating lasting wealth. The capability to switch from one project to another allows you to accumulate equity in numerous properties.
The BRRRR Method is not for everyone, and that's totally understandable. Before you begin, make sure that this strategy is right for your goals and your capabilities. To be successful, you need to be thorough with your assessment and buying process, and meticulous during your renovation and rental operations. Additionally, you have to be motivated enough to do it all over again.
It's important to note that this is not a completely risk-free venture. There may be unforeseen problems with the property. Additionally, delays with the contractors or the supply chain could extend the renovation period. The rental market could also be weak when you're ready to start generating cash flow. Be mindful of these potential issues and do your best to reduce the risks.
Despite the potential risks, the BRRRR Method is still popular for a reason. It's a reliable way to generate passive income and create a lucrative real estate portfolio.