If you’ve been paying any attention to the real estate market, you are likely aware that there is an intense seller’s market out there.
House prices have gone up all across the country and homes have been selling in record time.
Many people over the last few decades have managed to make decent, if not substantial, passive income through rehabbing homes that need some TLC and either renting them out or reselling them. One of the popular property investment strategies that investors have found success with is the BRRRR method.
Let’s take a look at how to use the BRRRR method and what it entails.
What Is the BRRRR Method?
BRRRR stands for “buy, rehab, rent, refinance, repeat.” This is a property investment strategy that investors use to build passive income over time.
This descriptive acronym outlines each step in chronological order.
The first step is to buy a property that needs some work. They then rehab the property to make it habitable and more appealing to renters. The next step is finding renters for the property, through which the investor can make rental income that helps them pay the mortgage, build equity, and earn profits.
Once there is a sizable amount of equity in the property, the investor can then refinance the property. They then use those funds to purchase a second property and restart the same process.
Now let’s take a look at each of these steps at a more in-depth level.
Purchasing the right property is a critical aspect of the BRRR method. You not only want to make sure that the property is a sound investment, but it’s also important that the property holds promise as a rental.
To make a smart decision here, you’ll need to run some numbers. You’ll want to calculate the estimated cost of renovations, how much you can expect in rental expenses, and how much you can expect to receive in rent. It’s vital that these numbers add up so that you are level with a profit margin that is sufficient.
There are a number of aspects to determining whether a property is suitable as a rental. You’ll want to research other rentals in the area to get a sense of an appropriate price per month.
It is common for investors using the BRRRR method and house flippers to rely on a rule known as the “70 percent rule.” This rule helps them determine what the maximum price is that they should pay for a property in order to ensure that they make a profit. The formula is this: an investor should pay no more than 70% of the ARV (After Repair Value) after subtracting the cost of improvements and repairs.
Properties need to be functional and livable in order to rent them out to tenants. Investors also might choose to make renovations and updates to increase the property value as well as the rental rates.
It’s important to make sure that you don’t make renovations that don’t pay for themselves, regarding how much you can reasonably charge in rent. Depending on where your property is located, the location might not support exorbitant rental rates, even if the property is above and beyond any others on the market.
Looking into the return on investment for each aspect of the renovation is crucial to ensure that this is a solid investment choice. You’ll want to be concerned with both how much certain upgrades can increase the property value as well as how they can justify charging higher rents.
After you’ve rehabbed the property, it’s time to list it as a rental. Screening and selecting tenants is an essential part of this process, as they will determine whether you have a successful career as a landlord or if it’s more like a waking nightmare.
You’ll also have to manage turnover at the property and deal with any repair or maintenance requests the tenants make. It’s essential that you familiarize yourself with the landlord-tenant laws in your state before embarking on this process.
Having rental properties can be great, but there are also a lot of things that can go wrong. If you suffer from bad tenants, vacancies, or rental expenses that are higher than expected, it can make the whole process turn into a bad investment after all.
Now that you’ve successfully bought, rehabbed, and rented the property, you’ll want to start thinking about how and when you’ll refinance. There are two different options that some banks offer, which are to refinance to pay off outstanding debt or to get a cash-out to refinance.
If you’re following the BRRRR method, you’ll want to do the latter.
An important thing to look into is the required “seasoning period.” This refers to how long you will have to own the property before the lender will be willing to consider refinancing. While it can be difficult to find a lender that is willing to refinance single-family rental properties, this is a time when you’ll want to utilize your network to find a lender that fits your refinancing needs.
Finally, it’s time to use the funds from the cash-out refinance to fund your next project. One thing that is to be expected from the BRRRR method is that your first cycle will likely be the most challenging. It is common to encounter mistakes and difficulties along the way, but the experience you gain will help you to make your subsequent property investments go more smoothly.
The BRRRR Method: Is It Your Path to Passive Income?
The BRRRR method has helped many investors build their property portfolio as well as their wealth. While there are some risks associated with this property investment strategy, there is also the opportunity to create a substantial source of passive income over time. Before hopping in, it’s a good idea to read tips for the BRRRR method online to help learn from some of the mistakes that others have made before you.
Are you interested in starting to purchase rental properties using the BRRRR method? You can check out more info on our rental loans here.