How to Execute the BRRRR Method in Real Estate
Most people would agree that investing in real estate is one of the best ways to eventually retire, and even obtain financial independence early in life. But acquiring multiple properties over time seems like an overwhelming process.
If you were to do it the traditional way, saving up for a down payment each time, it could take you decades to finally earn enough money. Luckily, there’s a better way.
The BRRRR method of investing in real estate can help you acquire multiple properties in just a fraction of the time, without having to save hundreds of thousands of dollars the slow way.
Many modern investors have already reached financial independence with the BRRRR method. Will you be next? Keep reading to discover what the BRRRR method real estate strategy is, and how to do the BRRRR method the right way.
The BRRRR Method Explained
First off, you need to know what BRRRR stands for, right? Buy, rehab, rent, refinance, repeat.
The goal of the BRRRR method is to acquire multiple long-term rental properties as fast as possible. That way, you can start earning a significant amount of passive cash flow in the form of rent, while also building wealth through appreciation.
This process, if done correctly, can allow you to start buying up multiple properties per year, rather than buying one every few years. The old way of investing in real estate is by saving up money for a down payment, every time you want to buy a new property.
But that can intake a really, really long time if you aren’t a doctor or trust fund baby.
Instead, you can save up money for a down payment once, then recycle those funds for every future property you acquire.
How do you recycle tens of thousands of dollars, you may ask? By following each step of the BRRRR method. First, you buy an outdated or even run-down property.
Then, you rehab it to make it desirable to tenants. This process also increases the value of the home, boosting your equity. After this, you can rent it out to start making monthly cash flow.
Then you refinance the property, pulling all of your equity out (essentially getting your down payment money back). Once you have those funds, you repeat the process.
Step 1; Buy
The most important step in the BRRRR process is the buying step. Your goal is to find a property with potential. That means it’s going to be a fixer-upper, otherwise, you won’t be able to add value.
So look for homes that are outdated and need major upgrades. And do your best to get the best deal you possibly can. Negotiating for a bargain is key.
If you were to buy a house that was ready to rent, there would be few updates you can make, so you wouldn’t be able to boost your equity, which is important later on in the process.
Step 2; Rehab
Once you’ve got the house under your control, it’s time to start fixing it up. You can either do this yourself if you’re especially handy and want to save money.
Otherwise, you should have cash on hand to pay for the updates, knowing that you’ll earn this money back soon. Look for the opportunities to add the most value.
Big projects include adding bedrooms, updating bathrooms and kitchens; putting on a new roof, replacing the windows, refinishing the flooring, and fencing in the yard. Cheap upgrades include a fresh coat of paint and basic landscaping.
Your goal is to increase the value of the home as much as possible.
Step 3; Rent
Once the rehab is done, you can rent out the home to long-term tenants. You can either go about this process yourself, acting as the landlord, or you can hire a property manager.
Hiring a property manager is a better option for those who lack time and want to scale their portfolio quickly. If you aren’t spending time screening tenants and responding to maintenance requests, you can focus your time on acquiring new properties.
However, managing a property as the landlord gives you valuable, first-hand experience that can ultimately make you a better investor. It might be worth doing it yourself for at least a year to understand the process.
With a lease signed and a tenant in the home, making rent payments, you can move on to step four.
Step 4; Refinance
Now the fun begins. With an updated property that is already rented out, you can refinance the home. You want to perform a cash-out refinance, to pull out as much equity as you can.
Lenders usually allow a 70 to 80% LTV, or loan-to-value ratio. For example, say you purchased a property for $150,000 and put 20% down, or $30,000. That means your mortgage is $120,000.
You then put $20,000 of work into the property, for an all-in investment of $50,000. The updated property is now worth $225,000, an increase of $75,000. Well done!
Your current equity is about 47% because your mortgage is only $120,000. So if you refinance, you’d have to leave 20% or $45,000 equity in the property. So you’d be able to pull out 27% of the equity, or $60,000.
Not only did you pull your original $50K investment out, but you’ve got an additional $10K as well. You can move on to the last step.
Step 5; Repeat
With cash in your pocket, it’s time to keep the party going. You can now look for property number two. You start with step number one again, looking for a house that needs work, and you repeat the process all over again.
Many investors who learn the process are able to buy two, and sometimes three or four properties per year once they get the hang of it.
Important Tips for the BRRRR Method
In the book titled, Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple, author David Greene says the best way of performing the strategy is by saving up enough money to purchase a property with cash.
Doing so would allow you to buy run-down properties that banks don’t like giving mortgages on. These are often the best deals and will light this strategy on fire. Of course, if that’s beyond your abilities, you can perform the strategy as described above.
Because you don’t need a long-term mortgage the first time around, you can go with a bridge loan, which is easier for short-term opportunities until you refinance. Check out these extra resources if you are going to need BRRRR method financing out of the gate.
BRRRR Your Way to Financial Freedom
Now that you know arguably the best way to start investing in real estate, you have no more excuses. The BRRRR method makes the prospect of owning multiple rental properties feasible for almost anyone.
If you have goals of retiring comfortably or retiring early, this might be your golden ticket.
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