How do you begin with the BRRRR investment strategy?
If you're interested in starting to grow a rental portfolio using the BRRRR investment strategy, here's how to get started.
The first thing you'll need to do is identify a worthwhile investment property to buy. For this method to be successful, you need to find a property that is undervalued or that's value can be significantly increased with renovations. Buy at a discount -- a steep discount. There are a number of ways to buy properties off-market or within the multiple listing services (MLS).
It is suggested you stick to the after repair value (ARV) formula used when flipping homes to ensure the property will have plenty of room for added equity after repair. Always run a thorough rental analysis to ensure the property makes sense as a long-term rental. The BRRRR model is for rental properties, so the ARV formula alone will not suffice.
Once you find the right investment opportunity, you'll need to buy it. That means securing financing. Since the property needs repairs, it's unlikely it will qualify for a traditional mortgage. Most investors use private financing or hard money loans to fund their BRRRR investments. This is a more expensive option for financing but has fewer underwriting criteria than a bank or traditional lender would require.
A hard money loan will also include rehab costs. It's best to have around 20% of the total loan saved for a down payment, and don't forget to budget for closing costs. If you find a great deal, you may not need to put down that much, but it's a good target to have when getting started.
The next step is to rehab the property. Try to complete the rehab as quickly as possible. This keeps costs down and allows you to start earning cash flow from the property sooner. Remember that this property is being held for rental income and may not need all the bells and whistles a full-blown rehab property would require. Make the home safe, nice, and livable.
Once the renovation is complete, you can rent the property. Being a landlord isn't always a cakewalk. Before deciding to become a landlord, do your due diligence on what owning rental property entails and how to be a good landlord.
If you've priced your rental property accurately for the market and renovated it nicely, it should rent fairly quickly. Make sure you advertise in the most effective way and run a thorough tenant screening before renting the unit.
After the property is stabilized with a tenant, and you have several months of rental history, you can start the process of refinancing. Refinancing can be the most challenging part of the BRRRR method, as certain lenders will have specific requirements for the refinance process.
Try to find a lender to work with once a tenant is in place, and find out their exact requirements. This will make the actual refinance process much faster and allow you to refinance at the soonest possible point.
Keep in mind that most banks will only loan a portion of the appraised amount in a cash-out refinance, which is typically 75% or less of the appraised value. Even if you know the property is worth more, they will only lend up to a specified amount, which will vary based on the asset as well as your experience and credit score, among other factors.
It's always a good idea to have a backup plan in case the refinance doesn't work out as intended. A recession limits lending and may make it challenging to refinance, or your appraisal could come back below what you need.
Ideally, the BRRRR investment will go as planned and you will have bought, rehabbed, rented, and refinanced the property without a hitch. If so, then it's time to roll your initial investment into a new investment property. If you did a really great job, you should have additional profit left over that can go into your pocket or be reinvested into your real estate investing business.
How much you can make from the BRRRR strategy?
How much money you make using the BRRRR strategy depends on how good you are at finding the right properties to buy at the right prices. As with any investment strategy, returns, profits, and results will vary dramatically. However, the better you are at finding quality leads, analyzing investments, and managing properties and rehabs, the better your results will be.
There are a lot of moving parts to this investment strategy and a lot of areas for things to go wrong. Doing your due diligence on the individual investment strategies utilized with the BRRRR investing method is imperative before trying to buy a property with the BRRRR method.