No matter how much the world of investments changes, you can assume that property investments will always be big. In fact, there are currently over 8 million independent landlords in the US, making it one of the most popular investments in the world.
If you’re looking to get into the game yourself or expand your portfolio, there are plenty of strategies you can learn from these seasoned veterans. Let’s talk about the BRRRR method for real estate investors and see if it’s right for you.
What Is The BRRRR Method?
Don’t worry, we won’t keep you in suspense. The BRRRR method is a popular strategy for real estate investors, and it’s pretty straightforward.
BRRRR stands for buy, rehab, rent, refinance, and repeat. This is one of the most ideal processes you can find in the real estate market, as it offers the highest potential for maximizing your profit and growth.
While there are no guarantees in the world of investments, this method does increase your chances of a high-performing investment. Let’s break it down piece by piece and examine why it’s such a valuable method.
When you’re buying real estate, you have to follow the golden rule of investing: buy low, sell high. You may never sell your property, but you still want to buy as low as possible.
This is the first step in maximizing your investment, and it could be the most important. If you buy something that is under your limit of buying power, you already jumpstarted your savings for the next property and increased your ability to fix up the house.
When you’re buying, it’s important that you have a trusted agent, negotiating power, an inspector, and more. You want to make sure that you aren’t paying more than a property is worth, especially if you will need to be putting work into it. Get the house inspected, make sure you can handle the repairs, and plan accordingly.
Try your best to get pre-approved for a loan or mortgage ahead of time to maximize your negotiating power. Letting a seller know that you can take the property off their hands immediately will help you get the sale.
Depending on how much work will need to be done, you may be able to go pretty low. If there is structural damage, you want to try to spend under half of what you think the house will be worth by the time it’s fixed, as these repairs are costly, even if you’re doing them yourself.
This is commonly known as “flipping” a house. Property rehabilitation can cover a wide range of necessary work, from basic landscaping to replacing entire plumbing systems.
Of course, if you’re handy, you should do as much as you can on your own. If you buy a fixer-upper for a good deal, then you’ll maximize your profit the most by eliminating expensive labor costs.
For superficial fixes and other basic repairs, there are thousands of video tutorials on YouTube and other websites that can teach you how to properly do things. If you get a highly discounted property because it needs all new drywall and an interior paint job, then you’re in luck. Almost anybody can learn how to do that.
Even if you’re not handy, there are plenty of basic repairs you can learn online that will be a lot less expensive than hiring professionals. Don’t touch your roof or foundation if you don’t know what you’re doing, but you can try these fixes on your own as needed:
- Replacing doors
- Hardware (doorknobs, window handles, etc.)
- Laminate flooring
- Patching drywall
- Painting or staining
- Replacing railings
There are plenty of other minor repairs to look into. If you see something that needs to be done and you think it will be easy, look it up! Whatever you aren’t confident in fixing yourself, leave it to the professionals. Just remember how much money you can save on performing minor fixes yourself.
This is arguably the most important one on this list after you buy the property. Rental properties have long been considered the safest investment by millionaires for one simple reason: people need somewhere to live.
If you rent out your property, you’re maximizing its potential for several reasons. If you buy at the right time, holding onto your property will allow it to appreciate in value, rather than stagnate or depreciate. Rather than reselling your property right away and trying to flip it for a quick profit, you’re making semi-passive or passive income in the meantime, while retaining the ability to sell it.
If you are able to hold onto your property throughout your life, you can even use this as retirement income. No matter what, it will be a large boost to your overall income, even while you are paying off the mortgage. That brings us to our next point.
Refinancing a loan is always a smart option but it’s essential in the real estate industry. The best way to go in the BRRRR method is to do a cash-out refinance. This allows you to convert your equity into cash, which will give you a lot more buying power for your next rental property.
In order to do this, you will need to maintain a good credit score, above the minimum of 620 (ideally higher). Once your property reaches the minimum DTI, which is around 50%, contact your private lender about refinancing.
If you neglect this step, you’ll be kicking yourself in 20 years. The best thing about rental properties, especially ones that you are able to rehabilitate yourself, is that they grow like bacteria. All you need is one and you’ll be able to get a lot more.
If you save up your rental income, refinance at the right time, and charge the right amount for rent, you’ll be able to afford your second property within a matter of a few years, depending on several circumstances. If you buy that second one, you cut your time in half to buy your third by doubling your income.
You can carry that process all the way up until retirement and give yourself a steady income every month with a completed mortgage. That’s a big boost to social security!
Is BRRRR Right For Me?
While rental properties are particularly popular among investors, they all have their own preferred method of getting started or continuing their investments. To put it simply, the BRRRR method isn’t for everybody. It’s best to look at your own financial situations and skills and see if it’s right for you. Let’s look at the pros and cons.
The first and most important benefit of this method is maximizing your potential profit and minimizing the amount of time it takes to expand your real estate portfolio. This is the reason so many investors choose to follow this method to maximize their investment from every angle.
Buying a fixable property and negotiating the best price possible, fixing it for as little as possible, renting it out, pulling your equity, and buying another is a time-tested way to get the most out of your investment.
The other huge benefit is passive income. Once you put in the initial work, you will begin to generate income with little work, especially if you have a property manager.
The primary downside to this method is that, like with most investments, there is a lot that can go wrong. The cards have to be on your side for this strategy to go perfectly, and not all of it is within your control.
If you have the home thoroughly inspected, get a serious estimate on the cost of repairs (and a second opinion), and do your market research on the neighborhood for renting, then you’ve maximized your chances of success.
However, inspectors can miss something, new problems can arise, or a neighborhood can go downhill unexpectedly. These are serious concerns that can happen with any real estate investment, so it isn’t entirely unique to this method, but it is still important to understand.
Lastly, the final con is that if you don’t have knowledge or skills in fixing real estate, the “rehab” step will become a lot more expensive. Luckily, there are repairs anybody can do on their own but you will likely have to hire professionals for some of the work, which will cut into your investment funding.
All in all, it’s a perfectly safe investment when you’re considering it relative to other popular investments. It is far more within your own control and predictable than the stock market or others.
What Other Alternatives Are There?
The BRRRR method is not for every investor, and that’s why there are other popular options out there. You may not feel confident in your property rehabilitation skills or be turned off by the risk that comes with a fixer-upper. That’s perfectly okay.
The other most popular method would be turnkey investments. These are properties where all you have to do is “turn the key”, meaning that it was recently renovated and brought up to date before the sale.
These are popular for the limited headache they offer to investors, but the recent renovations will cut your profit by jacking up the price of the sale. However, this is a cut that many are willing to take in exchange for limited problems early in their investment.
It’s also not a bad idea to diversify. Rather than sticking to one method, you could get started with the BRRRR method or a fixer-upper before buying a turnkey investment property. You could even work to finish your basement or put an addition on your existing property for an extra rental unit.
While your options are endless, it’s important to understand that buying a rental property is one of the safest investments you could make and you should get started in any way that makes you comfortable!
How To Get The Most From This Strategy
This strategy is pretty straightforward and consistent but there are still things you can do to maximize your profits and security. For example, we mentioned having some home repair skills.
Taking a class in basic repairs could be considered a sound investment. Not only will you save money when you use these skills every time you try your hand at property rehab, but you will also save as a landlord for your tenants. It’s a marathon, not a sprint, so having these skills early on could save you a fortune over time.
Another helpful tip would be to look for the best loans possible. Read a guide on rental loans to understand what to look for, but keep in mind the importance of this difference. The difference between a 3% and a 5% interest rate on a $300,000 loan is $6,000. Would you spend an extra $6,000 on replacing your doors if you didn’t have to?
Lastly, don’t forget to save up as much of your rental income as possible. Not only do you want to follow the “repeat” step in the strategy, but you will also want to be prepared for unexpected expenses related to your property.
Even if the BRRRR method isn’t right for you, there are plenty of ways to get started in real estate investing and maximize your income month after month. Find what method works for you, stay up to date with our latest real estate news, and look into securing a rental loan for your new investment!