The BRRRR Method which is an acronym for Buy, Rehabilitation, Rent, Refinance, Repeat.
Different from a conventional Investment Property Strategy. The BRRR Method consists of investing in Distressed Properties and Refinancing the purchased property in order to buy another property.
Benefits
Provides a passive income and a revolving method for purchasing and owning rental property. Increases your rental portfolio; building equity on your properties after the rehabilitation process and repeat cycle for as long as you’re able to maintain a profit or are physically capable of carrying on.
Disadvantages
The costs associated with and work needed to renovate the home to attain Increased Value. Since obtaining a traditional loan may be difficult, you may need to choose a more expensive loan option and/or a riskier loan. With a potential to lose money on the property after renovations are complete. Be patient, time is required for renovations to be completed, time to find good tenants and time required to own the home for an agreed upon period before you are able to Cash-Out.
To use this method correctly, you need to complete the following steps in the following order.
Buy
Purchase of a Distressed Property, in need of renovation and due to condition; it would likely be cheaper to purchase. An appraisal is required by the lender on the property in order to acquire a mortgage. It is difficult to assess the value of this type of property. Likely a distressed property would not meet the specific guidelines required to qualify. Other financing options are available, but typically high risk, and not recommended. Calculate the After Repair Value or ARV to determine the value of the home after your renovations; also keeping in mind the current rental market in the area, and what you could rent it for as is, as well as after its been rehabilitated.
Rehabilitation
Extensive work is needed and you need to renovate the property to make structural, safety, and aesthetic improvements in order to prepare it for suitable renters.
First you need to make improvements to bring the property up to city code safety standards, to make it safe to live in. Next you should look for renovations that will increase the value of the property; re-painting, kitchen-reno, bathroom-reno, making your property more energy efficient and visually appealing within financial reasons. Also Curb Appeal, which is improvements to the exterior, first impressions are based on the front of the dwelling, or what potential buyers see first, whether it’s a picture, or in person.
Rent
Set a Rental Price based on your area rental market and rent out the dwelling. You should take your mortgage cost for the home and ensure you set your rental price to obtain a positive cash flow. An example; $1100/month mortgage, rental price $1800, with a positive cash flow of $600.
It is important to vet your tenant; look for someone who is able to afford the rental price, and will not damage the property after renovations. Any additional costs associated with bad tenants will affect your bottom line; more money you need to put in the home before you get an equity evaluation. You should meet the potential renter in person, get them to fill out an application, or provide some form of ID, ask for reference; previous landlords would be most ideal.
Refinance
Cash-out Refinance essentially converting your properties appreciated equity into Cash. You would need to find a lender who offers cash-out refinance, and you meet the qualifications of the loan. Typically based upon your credit score, and some conditions of how long you need to own the property before you can ‘cash out’.
Repeat
Repeat the process in the same order of steps listed above. With the previous experience, you get an opportunity to learn from past mistakes and adjust accordingly to maximize efficiency.
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