What is the BRRRR method?
BRRRR is a strategy used in real estate that allows someone to buy more properties while using less money. So how do you do this?You must first buy a distressed property, renovate it (also called rehab), rent it out, refinance, and repeat. This is where the acronym BRRRR comes from.
With this method you are able to buy more properties because of how much money you can save. The great thing about this method is, the leftover money could potentially be used to buy more properties if you learn to use it right.
To make the BRRRR method work, you have to first buy a distressed property. When deciding to buy a distressed property, it is important to know how much rent similar properties in the area fetch. With this knowledge you can estimate how much revenue your property can generate To help you make this estimate, the capitalization rate can be extremely helpful. But something else you can use in this situation is the ARV or after repair value. It is utilized for estimating the value of a property after the renovation or the rehab is complete. To find a property’s ARV, you basically compare your newly renovated home to similar homes in the area. Things that should be similar are square footage, bathrooms, bedrooms, home condition, etc.
Something else to note is the 70% rule. Although it is more like a guideline, the 70% rule in real estate says you should not invest more than 70% of a home’s ARV or after repair value. The 70% rule says an investor should pay 70% of the ARV on a home minus any repair expenses. For example, if a home has an ARV $200,000 and repairs cost $50,000, the maximum purchase price would be $90,000. Though the 70% rule is important, that does not mean you can’t deviate from it. It is of course possible to make a good profit while investing more than 70% of the property’s ARV.
Renovate or rehab
The most important renovations are those with many unknowns. Unstable roofs and walls, dangerous levels of asbestos, and dysfunctional smoke alarms, are a few examples. Secondly, think about what in your home can be improved upon. Ask yourself if any room in the house is better or more modern than the others. This doesn’t mean that you have to renovate an entire room but even small details like fresh new paint and clean hardwood floors are great additions. When thinking about this don’t just imagine the inside of the property. Think about the landscape. Try to make it attractive and add new plants if needed. A few bushes and flowers can do a lot for a home. Nicely cut grass and keeping vegetation under control can make the home more welcoming.
The reason you need to rent out your new home is because most banks will not refinance a home that doesn’t have tenants. Which is why renting comes before refinancing in the BRRRR method. Charging a reasonable amount for rent is key to make a profit and to keep tenants satisfied. Make sure your rent is higher than the amount you will be spending on your mortgage and other fees. Also check that your rent is around the same price as similar properties near your home to attract tenants and keep them happy. In addition, you need to find suitable tenants. You preferably want tenants that have a good credit report, no criminal record, a stable employment history, and a clean eviction history.
To refinance using the BRRRR method, you need a bank that offers a cash-out refinance. If you can’t find a good bank that does this, just ask around. This is because you can use this money to buy more distressed properties and continue to grow your portfolio. But before you do this, you will need to meet a few requirements. Having good credit is essential if you want lenders to consider lending to you. Additionally, having equity in the home and having a maximum DTI generally around 50% is key. Some lenders also require you to have the property in your possession for a certain amount of time before you can get a cash-out refinance.
Finally, your goal is to find the highest appraisal price possible for you property. Don’t just get one appraisal and be pleased. Get appraisals from a few different lenders and find the highest appraisal value you can.
The last step of the BRRRR method is to start the cycle all over again. But that doesn’t mean it has to be the same exact way every time. You might do better on some properties than others. So always keep learning, thinking and creating. Ponder over what can be improved upon and what can be made easier. This does not mean cut corners, but try to find ways that require less effort and reap more reward.