Written by: Christopher Russell
Picture this scenario. You are attending a real estate networking occasion for young and experienced investors. You then overhear someone mention 'BRRRR.' So, if you are not familiar with the term, you might think that they are commenting on the room's temperature. But they are actually mentioning a popular investment strategy. Are you wondering how to build wealth and market your real estate as a long-term retirement plan? It will help if you consider the BRRRR method. It is an outstanding framework representing a blend of passive and active income. Here is how you will make the best out of your investment plan.
The meaning of BRRRR
First, BRRRR is an acronym representing "Buy, Rehab, Rent, Refinance and Repeat." Generally, it describes a framework and strategy that investors wishing to create passive income over time use through renovating properties to 'flip' houses. In simple terms, this acronym represents steps that the investor should implement in the order they appear. And that brings us to these critical orders as discussed below.
The BRRRR method has the first letter 'B' that stands for 'Buy.' Point to note; when going through listings, remember that this is a critical point determining the ultimate investment result. Often, you may encounter a complicated intersection between ensuring the target property represents a good deal and promising to gain an excellent performance as a rental home.
So, you will need to enquire for some stock recommendations like determining the property's current market value and its value after rehabilitation. You will also have to perform an intensive deal analysis, including calculating renovation costs, monthly rental expenses estimation, and verifying the possibilities of the resulting rental income will come with a satisfactory profit margin. To ensure that the rental property you intend to buy and renovate will perform strongly in the market, you will have to research the leading rental markets. Additionally, ensuring that the buying price offers an adequate buffer zone for accommodating renovation costs is essential.
Here, you will have to identify how to make the purchased distressed property functional and livable. Upon satisfying these requirements, you can consider implementing renovations or updates that add value to the property to justify the ultimate increased rental rates. But investors must take caution not to implement excessive upgrades and renovations that might cost more than what the estimated rental income can produce. So, the recommendation is only to choose a home improvement project that will give you a high Return On Investment.
Some of the rehab projects with a high ROI include;
- Roof repairs
- Updated kitchen
- Drywall repair
- Updating bathrooms
- Considering extra bathrooms
Renting takes place when the distressed property's rehabilitation phase is complete. This phase entails screening and choosing potential tenants and managing turnover. It may also include responding to repair and maintenance requests from tenants. And after some time, you will typically determine if your minding due diligence practice was sufficient. But there is also the possibility of things going wrong during this phase, such as bad tenants, vacancies, and high rental expenses. In such scenarios, the property can be at high foreclosure risk. But this should not scare you but instead emphasize the relevance of running the numbers properly before making an investment decision.
The goal is to refinance the property after effectively rehabbing and renting it. After consulting several banks, some will offer to pay off the outstanding arrears, while others will offer a cash-out refinance. And in this case, the latter is the best option. Additionally, it would also help to identify the 'seasoning period.' As an investor, you can also tap into your networks to find a lender fitting your financial requirements when some banks won't be willing to refinance your single-family rental home.
Finally, this phase requires you to utilize the cash-out refinance from your initial rental property to fund the purchase and rehabilitation of a second distressed property. Cash-out refinancing comes with extra benefits like favorable interest rates, tax benefits, and the freedom to control your financial timeline.
While facing the learning curve, you are more likely to encounter some mistakes and challenges from your first BRRRR cycle. The good news is that you can apply that newly acquired wisdom and experience when handling your second, third property, and so on.