The BRRRR strategy is a popular method with real estate investors, but what’s there to know about executing it? Here’s your guide to BRRRR and when to use it.
What is BRRRR?
BRRRR strategy stands for buy, rehab, rent, refinance, and repeat.
The strategy is similar to a buy-and-hold approach to real estate investment in that you’re renting out property for income, but the extra R’s help you gain enough properties so that you can generate a full-time income.
Investors usually look for flip houses, as those are the properties they’re able to purchase with hard money, home equity loans, or cash, then remodel with a significant value boost.
Any investment strategy needs to have math that makes sense, so if the numbers line up for your BRRRR, there’s the potential to generate stable income over the long-term.
For the math to work, you’ve got to find a property that has potential and low value. By making needed repairs, you will add value.
Think like a tenant and look for properties that are near amenities, be it schools, shops, or playgrounds. Take a middle road with respect to affluence: areas that are too wealthy or poor complicate the profit model of BRRRR.
Find your cash source ahead of time so you can move ahead once you identify the perfect property. Flippers cannot get traditional mortgages, so they will need to look for hard money loans or private loans. Cash is always an option.
With rehabbing a home, the sweet spot is with changes that add value but don’t cost a lot. Consider as well what improvements you can make to the landscaping or the home exterior; curb appeal matters when it comes to attracting tenants.
Think about what improvements will make the property functional while delivering a return on investment. Luxury home improvements often cost more than they return in value so they should be avoided when you use the BRRRR strategy.
The next two steps, rent and refinance, allow you to scale up your strategy. Renting comes first because banks don’t like refinancing empty properties. Renting also allows you to start paying down your expenses while the refinance paperwork processes.
The last thing you want is problematic tenants who won’t pay the rent, so screen and check credit. You might want to work with a realtor, who can steer qualified renters toward you. You can also work your personal network, as someone who knows you may be more likely to respect your property.
While the ideal would be renting your property 100 percent of the time, vacancies are possible. So that you aren’t devastated by a short term vacancy, leave some wiggle room in your budgeting to cover unforeseen expenses.
Not every bank will refinance a single-family rental home, so you may need to do your research until you find a suitable bank. Look for banks that offer cash payouts, as you need the cash to fund your next purchase.
Banks that pay off the loan complicate the process, because then you don’t have funding for your next flip and need to find financing anew. Local banks may be more willing to work with you on refinancing, so they could be a place to start.
No matter which bank you move forward with, you’ll want to verify that the bank is lending on the appraised value and not your costs. This way, your payout covers the full value that you put into the home. A good range is 75 to 80 percent of the property’s appraised value; as this gives you enough to move ahead.
The appraisal, which comes early in the refinancing phase, will require an in-person visit from a home appraiser, so make sure you let your renters know to expect this.
As soon as you get the cash payout, you can reapply the strategy by searching for a new property. Then you would rehab, rent, refinance and repeat the strategy as many times as needed until you’ve met your goal with investment real estate.
If you’ve identified strong properties and have rented them out, you should be on your way to stable cash flow with investment properties without having to pay money down, as each successful investment pays for the next.
Are You Interested in Trying out the BRRR Strategy? See If You Qualify
At New Western Acquisition, we help real estate investors find properties, and we’re active in over 33 markets across the country. Fill out our form to see if you qualify. Our agents will reach out to investors who qualify to learn more about your goals and interests. Then you’ll receive properties that are a good match; when you find the perfect fit, you can put in an offer and elevate your investments to the next level.