While crypto and stocks get all of the attention, true investors know where the money is. That’s why millionaires still agree that real estate is the best investment of the era.
Well, there are few investments that allow you to grow a large empire starting with only 15 percent down. For that reason, real estate can help turn any small-scale investor into an industry giant, but only with the right planning.
Let’s talk about the popular BRRRR strategy to get the most out of your first real estate investment!
What Is the BRRRR Strategy?
BRRRR is an acronym that stands for a series of steps that investors use to try to get the most out of their real estate investments with limited capital upfront.
Whether they are using a loan or not, they’ll typically need at least 15% down on a building, and 20% to avoid private mortgage insurance. Well, 20 percent is a lot on a turnkey investment property, especially when combined with realtor fees, closing costs, and more.
For that reason, investors have developed a strategy for even small-scale investors to build and expand their real estate portfolios for only a limited amount down. Here’s how.
Buy
Of course, you have to buy the property first, but you have to do it right to get the most out of your investment. The property itself and its location are important risk factors that you won’t have much control over after purchase.
Essentially, if the building’s value tanks, so will your investment. Starting strong with a good building can make or break your investment. More on that later.
Rehab
Buying a house that needs some work usually plays out in your favor, but not always. When buying, you want to find a building with “good bones”, meaning that it primarily needs cosmetic updates.
Structural damage tends to cost in the tens of thousands of dollars, and unless you have that, it’s not worth it.
If you’re handy, you can do a lot of this yourself. Regardless, adding an extra livable unit to one floor, updating the floors or walls, repainting, and adding new features to the building shouldn’t be too costly, but they’ll make a big difference to the value of the building.
Essentially, ROI should be the word in the back of your mind when looking at these. If you have to repair the roof, that won’t add much to what a renter is willing to pay, but a new kitchen will.
Rent
Now, many “fix and flip” investors will simply resell their homes at this point, which may yield them a quick $50,000 profit. Who doesn’t want that?
Well, smart investors know that the real money comes from renting. Renters will pay for your mortgage and some extra which is profit. Over the long run this is a great source of passive income.
Crunch the numbers based on rates in your area to see what you can earn.
Moreover, you’ll still have the building after you hit that mark. Under these circumstances, you would earn five times as much in ten years and still have the building to sell for a profit as you please.
For that reason, renting is always a better option in real estate. The income is long-lasting, stable, and you can always liquidate the asset later on.
Refinance
When we say “refinance,” we’re talking about a specific type of refinancing known as a cash-out refinance.
Assuming you’ve saved enough money to pay for a down payment and the necessary repairs and updates (or acquired a bridge loan to do so), you should at least break even and start earning the rent by now.
Well, that’s great for a fix and flip rental, but what separates the BRRRR method is that, once you have tenants, you take out a lump sum with your property as collateral. Here’s what you do with it.
Repeat
Finally, once you have the money for your next downpayment after your cash-out, you can repeat the process all over again.
Ideally, with the supplemental income that you’re earning from your first rental, it should be even easier to buy a third, fourth, and fifth.
The reason this is such a lucrative strategy is that it’s supposed to be the quickest and most affordable way to grow a real estate business. On paper, it’s obvious to see why.
However, like any investment, it doesn’t always work out as planned. Let’s talk about how to be successful when attempting the BRRRR investing strategy.
How to Successfully Use the BRRRR Strategy
Okay, we’ve now defined the terms and we understand how the BRRRR method works in theory. Now, let’s discuss how to put these tips into practice for the greatest success.
Here are some of the best BRRRR tips to follow to maximize your real estate investment strategies!
Buy the Right Property
As we mentioned, the property can make or break your investment. However, there are ways to limit your risk, but only while shopping around for properties.
First, you want to find a building with a sound structure. A thorough inspection is essential, as termites, roof damage, and more can lead to costly repairs.
Second, you want a property that’s either newer or only in need of cosmetic work. If it requires work that you can do yourself, then even better!
Next, you want to look at the location. If the neighborhood goes downhill, so does your investment.
For that reason, we recommend seeking buildings in neighborhoods with less risk. A popular store or restaurant may come and go, but quick access to public transportation, important landmarks, downtown areas, and public schools tend to last.
If you can find a property in need of cosmetic work that’s within range of a significant location, has the right amenities, or is generally desirable, then you’ve scored!
Also, don’t forget to shop around for the right loan. Saving two percent on interest could save you thousands of dollars on your investment, so find the right rental loan for your needs.
If you can, get preapproved for a loan immediately, as this will help you stand out from other investors and demonstrate to sellers that you’re ready to buy.
Save on Repairs
Again, this starts with the property you choose. You should have an idea of what’s needed and a plan of how to address each issue.
The more work you can do yourself, the more money you will save. Labor and overhead costs tend to make up for the majority of repair costs, so if you’re handy, then spend a few weekends getting work done.
However, always factor in unexpected expenses. Few things go exactly as planned, so plan for an additional $5,000 if possible, in case something goes wrong.
Remember, it’s okay to hire help when you need it but you should always look for opportunities that will improve reliability. There are certain upgrades and repairs that anybody can do by themselves, regardless of skill level.
For example, if parking is limited but you have a nice yard, lay down some gravel and advertise that you have extra off-street parking spaces. Basic landscaping, repainting, adding shelves, and more can go a long way.
Rent to the Right Tenants
The right tenants, the right price, the right investment.
Other than the building and the location, your tenants are another major variable that can tank your investment. If one refuses to pay rent, causes serious damage to their unit, or causes any legal trouble, you could lose thousands of dollars.
For this reason, tenant screening is crucial, including credit histories, background checks, and rental histories. References are also very helpful, as you can ask more specific questions about their previous rental experience.
While this isn’t a perfect system, it will help you limit the risk of tenants harming your investment.
Find the Right Refinance Rates
Not only will you need enough for your next down payment, but you will also need money for closing costs, inspections, and more. When you cash out refinance, you need to find the right deal.
If your current lender is overcharging for your loan, look around at different lenders to see your rates. Once you have that established, it may take a few days for the funds to deposit into your bank.
Once they do, get pre-approved for a loan to make the buying stage even easier, and you’ll be all set to repeat the process.
Now, you may want to hold off on the next property until you earn a few months’ rent, and that’s okay. However, to make the time
Don’t Forget to Repeat
Since your plan is to repeat this process to grow your real estate business, we have a few suggestions.
First, keep this goal in mind throughout the entire process. Adding another building to your portfolio (or two, or three) can grow your income exponentially. Also, diversifying your portfolio will lead to more long-term security.
However, if your goal is to build a real estate business, then you should be continuing to save money as you go to help boost your purchasing power.
Always look for opportunities to save money on your first investment property, upgrades, repairs, and more. Set your rents at the right rates, and try to put away as much money as you can during this time.
That way, when it comes time to refinance, you won’t have to take out as much debt. At the very least, you’ll have a cushion to fall back on in case something goes wrong.
Also, write down this plan based on your own financial situation. Investment property prices, rent prices, and everything else vary widely around the country, so crunching the numbers and writing down your own plan will help. You’re also 42 percent more likely to achieve goals that you’ve written down!
How Much Do I Need to Save to Start?
Okay, so now that you know the process, let’s determine how much you need to get started. As we mentioned, 20% down is ideal, but if you’re buying a fixer-upper, then this shouldn’t be too much.
Ideally, you will have the cash or secure line of credit available for the upgrades. In that case, you will need:
- 20 percent down payment
- Money for upgrades (remember labor costs)
- Realtor fees (two to five percent)
- Closing costs
- Inspection fees
Once you have that, the rest can be paid off over time. Take a look at the investment properties in the area where you want to invest and learn about the prices.
Remember to always buy within your means, even if that means buying a two-unit instead of a three-unit. You can always upgrade an attic or basement later on if you want.
If you discover that the “as-is” investment properties in your area sell for $150,000, then you will need $30,000 for the down payment ($22,500 for 15 percent) along with the estimated costs for upgrades.
Find an inspector and real estate agent with experience in investment properties to help you understand the necessary repair costs, as they can vary between a couple thousand and $100,000, and you should be ready to buy!
Again, base these numbers off the market in your area, add them up, and write them down for the best results.
Start Building Your Real Estate Empire
Now that you know how to do the BRRRR strategy successfully, follow these tips yourself to start growing your real estate business today! The sooner you do, the sooner you will be earning that extra income.
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