What is the BRRRR Method?
The BRRRR Method is a strategy used in real estate in which the investor flips a distressed property, rents it out, and then refinances, using the cash-out to invest in another rental property.
This strategy allows for revolving income to continuously invest in new properties, using funds from the previous projects, and can be quite beneficial to investors looking to enhance their portfolio.
Buy a property
The first step of the BRRRR Method is to purchase a distressed property that will take some work. These properties will likely be cheaper so that you can purchase them under market value. You’ll also want to calculate the rough value of the property once renovations are made to make sure that you will get more out of the project than you’re spending on it.
Often, significant damage to the property such as damaged drywall, overgrown vegetation, half-demoed rooms are all things that will make a property easier to buy with cash and may turn other investors off, making it an easier score.
Since you will be purchasing a distressed property that will likely not be up to code, the property’s condition may make it hard to secure traditional financing. A private money loan will be beneficial in this scenario since their lenders are less strict with their requirements for financing.
Rehab the property
The property will need to be flipped and worked on to get it up to code and ready for renters. Renovate the property structurally, make it safe, and improve the aesthetics to get it ready for renters.
After you make the proper fixes to make the home safe and livable, you will want to look at renovations that will increase the value of the home and attract renters. These projects could include:
- Bathroom renovation
- Basic kitchen updates
- Energy-efficient appliance and window installation
- Increase in curb appeal
Keep your budget and timeline in mind during the rehab step to stay on track with the project. How well you renovate the property will affect how high of an appraisal you receive, which affects your refinance that comes later in the process.
Rent out the property
Determine a monthly rental payment and attract renters to the property. This payment should be enough to cover your expenses and generate a positive cash flow for you. To determine what a fair payment would be, look at other rental properties in their area and compare payments.
Refinance
Convert your equity into cash with a cash-out refinance on the property. This means that you would take out a bigger mortgage loan and borrow more money than you owe. You’ll use these funds to purchase another distressed property.
Different lenders may have different requirements for their cash-out refinances so be sure to research those and ensure you’re in compliance.
Buy another property
This is the “repeat” step of the process. Using the funds from your cash-out refinance on the previous property, you’ll buy another distressed property in need of fixes and start the process all over.
It may be beneficial for you to take notes of what worked well and what didn’t so that you can refine the process next time. If you put a routine in place for this method, you can increase your efficiency and your overall success.
How to Use the BRRRR Method
Let’s say you find a property to begin the process of BRRRR. There’s four numbers that you will want to figure out and pay attention to for successful completion:
- Sale price
- Down payment
- Loan amount
- Rehab costs
The sale price of the property is $100,000. You have a down payment of $25,000 ready, so your loan amount will only be for $75,000. You estimate that you’ll need about $20,000 for renovations.
So far you have invested $45,000 between your down payment and the cost of repairs.
Once the renovations are complete, the property appraises for $150,000 and you settle on a rental payment of $1,500 a month for your tenants. A year later, you’re able to refinance with the newly appraised value.
The lender will likely allow you to take out 75% of the appraised value, so $150,000 multiplied by .75 equals $112,500. Pay off the original loan of $75,000 with the refinance amount and that will leave you with $37,500 in cash to use to invest in another property.
Your first property is still building equity and providing income from the rental payments. This provides you with a passive income while you find your next property to invest in and repeat the process.
Pros and cons of the BRRRR Method
There are plenty of pros of the BRRRR method that make it a go-to strategy for investors. BRRRR allows you to increase your passive income, build equity, enhance your real estate portfolio, and repeat as many times as you’d like, meaning that there is unlimited potential for success if it’s something that works for you.
One con is that this process takes more time to see the benefit than other strategies might. You will need to wait for the rehab work to complete and then allow time for equity in the property to build up.
Then you’ll need to wait any required amount of time for the cash-out refinance loan. This time is often referred to as the “seasoning period.” A benefit of working with Avantgarde Lending is the speed. We can close on the deal in as little as seven days, and provide same-day approvals without a seasoning period.
Some investors also don’t enjoy being responsible for tenants and acting as a landlord. If that sounds like you, you might want to consider another strategy since finding and managing renters is an important step of the process. It also may take some time to find qualified tenants to rent the property, and who will be reliable with their payments.
Get Started
As mentioned above, a private money lender can help your BRRRR project succeed. It will be easier for you to secure a private money loan to fund a distressed property rehab than it would be to go through traditional means.
Avantgarde Lending understands your unique situation as an investor and the need for a quick and efficient loan. Contact us to get started on the process today by submitting your loan scenario. If the deal makes sense, we’ll do it. Simple as that. Let Avantgarde Lending help you enhance your portfolio and succeed.
Photo by R ARCHITECTURE on Unsplash
