Understanding the BRRRR Method in Real Estate Investing
Seasoned investors know that there are many different strategies used to build and diversify portfolios. One is known as the BRRRR method. Some have found success with it, others not so much. But, when used correctly – many investors will tell you that it is a great way to fund further investments down the road.
However, keep in mind that investment strategies are not a one-size-fits-all deal. It is always good to review your circumstances before jumping into something new. So, let’s talk about the BRRRR method in real estate investing. What is it? How can it help?
The BRRRR Method
This real estate investment strategy stands for Buy, Rehab, Rent, Refinance, Repeat. And as these steps suggest, this method is all about investing in a distressed property, flipping it, then renting it out, and doing a cash-out refinance to fund another rental property investment.
It may sound similar to traditional property investment – and it is. However, the critical difference is that the BRRRR method focuses on distressed properties rather than those ready to rent. It also involves refinancing the property to invest in another. Here’s how it works.
Buy a Property
Before you can do anything else, you need to find the right property. Remember, with this investment strategy, you are not looking for a property in pristine condition but rather one that will need some work to make it rent-ready. The benefit here is that you can look at those homes that come in at a lower price initially due to the amount of work they need.
It is essential to have someone familiar with rehabbing properties available to look at the home before purchasing. You want to make sure that there is a good balance between the purchase price of the house and the cost of the work that needs to be done.
Rehab the Property
Once you have moved forward with the purchase, you will need to fix the property. This includes making any repairs necessary to bring it up to code and adding any upgrades that may benefit you in renting it out. Some properties will require more work than others.
Rent the Property to Tenants
When the property has been repaired and looks great, it will be time to start looking for tenants. You will have to set the rental rate and begin marketing the property based on the local market. The idea is to get high-quality tenants on the property as soon as possible since a vacant rental means you are losing money.
Many rental investors team up with an experienced property management team in the area. These individuals are well-versed in the local market and know how to set the rate to get the most from your rental. Further, a property manager will:
- Market the property to get the most significant response.
- Screen tenant applicants to find the best tenants.
- Prepare the lease and maintain any documents.
- Handle any repairs or necessary routine maintenance.
- Perform rent collection.
- Handle walk-throughs, tenant disputes, or complaints.
- Address any eviction issues should they arise.
In other words, for investors looking to use the BRRRR method of real estate investment, spending a lot of time handling the day-to-day aspects of property rental can slow down your portfolio growth. Outsourcing the work to a trusted team can prove incredibly beneficial now and in the long term.
Refinance the Property
Cash-out refinance will allow you to turn the equity in your rental home into cash. This is done by refinancing for a higher amount. The money you can take out can then purchase another distressed property. After all the work you put into your home, it has a much greater value than when you bought it.
Repeat and Buy Another Property
When you make it to this step, you are ready to start again. You have bought a property for a good deal and refurbished it. You have rented it out and refinanced it for a higher amount – getting cash out to start a new one. This method can keep going so that you can build your real estate portfolio into something incredible. You may surprise yourself!
Tips for BRRRR Method Investing
The idea behind the BRRRR method makes sense to many investors. Though it is essential to make sure you can handle the rehabbing portion of the project. Without it, you may find yourself in a pickle, especially not knowing exactly what you need to do to make it happen.
You could think you are getting a great deal only to find out that the amount of work you need to put into it far exceeds the potential value. So make sure you either have the contractor knowledge – or you know someone who can handle it for you. Here are a few additional things to consider:
- It may be challenging to get a mortgage on a too distressed home.
- Research different buying options to prepare you when you find the right property.
- As you rehab the property, have a timeline and a budget set aside – and stick to it.
- Find a lender that offers a cash-out refinance for your refinance, as this is not always an option.
- Pay attention to the qualifications for your refinance to make sure you meet them – and know that you may have to have the property for a certain amount of time before you can proceed.
As a real estate investor, there are many ways that you can create a rental portfolio. Everyone has different goals and plans to make it happen. If you have been looking for a new option – something that may help you to overcome any cash flow problems, then the BRRRR method may very well be an excellent option for you. Just be sure to consider all the factors before you get started.