There are numerous strategies for making profits by investing in real estate. While many real estate investment strategies are not very effective, the BRRRR method has proven to be a great way of building a real estate portfolio, especially for the beginner real estate investor.
So, What Exactly Is the BRRRR Method?
BRRRR is an acronym that stands for Buy-Rehab-Rent-Refinance-Repeat. The idea of this real estate investing strategy is to help investors build a real estate portfolio with little or no extra capital after buying the initial investment property. It involves buying a fixer-upper house below market value, carrying out renovations and repairs, renting it out, and then refinancing the home to buy the next positive cash flow property.
Though this is not a get-rich-quick scheme, the BRRRR method can help investors earn passive income for many years. This cash flowing real estate strategy differs from flipping homes, a method where properties are renovated and sold immediately. However, just like any other real estate investment strategy, the BRRRR method comes with its own innate pros and cons which you need to look out for.
Related: 5 Top Real Estate Strategies for 2020
The 5 Stages of the BRRRR Real Estate Strategy
Here is a breakdown of the stages of the BRRRR strategy:
The first step of the BRRRR method is to buy a cheap investment property for sale (single family homes, multi family homes, condos or apartments- whatever type you prefer) below market value. Though such distressed homes are cheap, they can appreciate in value significantly after repairs and renovations.
Investors can find a great real estate deal using the different tools from Mashvisor. Mashvisor’s Heatmap tool can come in very handy for predictive analysis. It will help you determine where the most affordable neighborhoods in the city of your choice are while helping you pinpoint areas that also promise a good rental cap rate, cash on cash return, income, and occupancy rate. You can also visit the Mashvisor Property Marketplace to find distressed properties such as foreclosures, short sales, auctioned properties, and more. And then analyze any rental property you find using our investment calculator to make sure it will bring positive cash flow when rented out!
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Besides Mashvisor, you can also find distressed properties through the Multiple Listing Service (MLS), driving for dollars, and real estate agents.
Once you have narrowed down your search to a single property, you need to figure out what maximum price you should pay for it in order to make a good return on investment. Most real estate investors use the 70% rule when purchasing distressed houses. This formula factors in the ‘after repair value’ (estimated value of a fixer-upper after renovations) and the total repair costs. The ARV is important because it will show you if your BRRRR strategy will be profitable. However, the percentage can be adjusted to reflect unique scenarios.
After Repair Value (ARV) x .7 – Repair Costs = Maximum Allowable Offer
You can estimate a home’s ARV by looking at past housing market information and comparable properties in the neighborhood. However, since the future is unpredictable, you could consult a realtor that understands the local real estate market to get a conservative estimate before buying a rental property.
After buying a distressed home at the best possible price, the next step of the BRRRR method is to renovate the investment property to build equity. During the rehabbing real estate stage, you need to ask yourself two questions:
- What can I do to make the home functional and liveable?
- Which repairs and renovations can I make that will boost the value of the home?
You can add value to your investment property by adding an extra bedroom, replacing the heating system or repairing the leaky roof. To increase the value even further, you can invest in cosmetic improvements such as:
- Refinishing hardwood floors
- Repainting the front door
- Adding window boxes
- Adding shutters to front-facing windows
- Removing old window awnings
- Power washing the house
- Planting fresh grass
- Repairing broken gates and fences
- Cleaning out gutters
Besides making a property livable, renovation can boost your returns through forced appreciation. However, avoid unnecessary luxury items such as chandeliers, skylights, Brazilian hardwood floors, hot tubs, high-end steel appliances, and granite countertops which would cost too much.
Related: Real Estate Rehab – 8 Steps to Success
Refinancing your home will be much easier if it is currently occupied by tenants. However, before renting the property out, you need to figure out how much rent to charge for the BRRRR method to work. The 1% rule is a great way to calculate how much to charge. This means that the rent will be at least 1% of the home’s final price. To find out if the rent will generate a positive return on investment, divide the monthly rent by the value of the house. A profitable deal should be 1% or higher. Another way of deciding how much rent to charge is to look at comparable houses in your real estate market.
When it comes to finding tenants, it is very important to screen potential renters first. Check things such as their credit score, financial standing, and criminal records. Having good tenants will make managing the rental property much easier and stress-free.
Related: How to Screen Tenants for a Rental Property: 7 Steps
The ability to refinance an investment property is crucial for a successful BRRRR method. This is because the real estate investor’s aim is to recoup the initial investment to reinvest in buying multiple rental properties. Nowadays, it is not very difficult to find a mortgage lender that will refinance a rental property. However, there are several things to consider when looking for a lender.
First, find out if the bank has a seasoning period. While some lenders are willing to refinance immediately after the home has been renovated, others will consider how long you have owned the house, as well as how long it has been rented out. Usually, the seasoning period is at least 12 months of ownership. Second, find out if the lender offers cash out or only debt payoff. In case a cash-out option does not exist, leave and look for another lender that will help you carry out this stage of the BRRRR method.
After successfully refinancing the investment property and recouping both the repair and acquisition costs, you can start the BRRRR method all over again. Reflect on all the lessons you have learned and implement the strategy more effectively. This way, you can grow your portfolio of rental properties without struggling to save large amounts of capital.
Ready to get started with the BRRRR method? Look for a profitable below market value property with Mashvisor now.