The BRRRR strategy is a real estate investment strategy used by investors to build their property portfolios. Florida investors can decide if taking advantage of the strategy is right for them by understanding the pros and cons.
An investment strategy based on BRRRR consists of five steps. The acronym BRRRR stands for buy, rehab, rent, refinance, and repeat.
A fixer-upper property is purchased using cash or short-term financing, then it is remodeled by bringing it up to code and increasing its value using any necessary improvements.
Investors recoup their investment by, finding a trustworthy property management team, renting the property, and eventually refinancing it. They repeat this process for another property.
BRRRR investing enables new and seasoned real estate investors to obtain long-term passive income from their property portfolios without having to invest a significant amount up-front.
How BRRRR Strategy Works
BRRRR investing, if done correctly, can provide passive income and a revolving method for acquiring rental property. The steps are as follows:
A BRRRR strategy begins with the letter ‘B,’ which stands for buy. Remember that this phase is crucial and determines the outcome of your investment when browsing listings.
Property investors and landlords have complicated relationships that intersect between ensuring a sound investment deal and its ability to perform well as a rental property.
We will need to perform an extensive analysis of the deal for a BRRRR method example, including estimating monthly expenses, finding a management team, determining the cost of renovations, and verifying that the resulting rental income will provide a sufficient profit margin.
In the most basic sense, landlords have to identify how to make their rental properties functional and livable. Upgrading or renovating a property that adds value (and therefore justifies higher rental rates) may be considered once these requirements are met.
In contrast, investors must be careful not to spend too much on upgrades that won’t generate enough rental income.
A thorough cost-benefit analysis is needed every step of the way for the rehab phase of the BRRRR strategy, which represents the first ‘R’ of the BRRRR strategy. Selecting home improvement projects that will provide high returns on investment is the best advice for investors.
Your property will then need to be rented out. As most lenders will not refinance a property without tenants, this is an essential step. But don’t rush this step either. Finding the right tenant takes time.
Finding a tenant is also one of the duties a property management group takes care of.
You should also do your research and know the laws of both your town and state as a landlord. Renters should be priced accurately for the market and thoroughly screened before renting.
Having rehabbed and rented your property, you can start creating a plan for refinancing it. If your bank offers a cash-out refinance, instead of just paying off outstanding debt, you want to choose the former of the two options.
The lender will also require a ‘seasoning period,’ in which case they will only consider refinancing against the appraised value after you have owned the property for a certain period.
It is possible to find lenders that will refinance single-family rental properties though investors may encounter some banks that are not interested.
The ideal situation would be that everything went smoothly and you would be able to proceed with the cash-out refinance and use that money as a down payment on your next home, starting over at step one.
As you learn information along the way, make sure you apply it to your finances as well. It is important to document your notes and what you might do differently each time you repeat the process so that you can continue to learn about this method.
Pros of the BRRRR Strategy
Compared to other real estate investment strategies, such as flipping, the BRRRR strategy has some advantages.
You may need less capital upfront:
By using BRRRR investing correctly, you can get started in real estate investing without requiring significant upfront capital.
Passive income in this form is steady:
A long-term portfolio of rental properties that can be rented out can provide passive income. Investment income, royalties, rental properties, or stakes derived from investments that do not require the earner to engage in daily active involvement are examples of passive income.
Investors can use it to build equity:
Paying mortgage results in homeowners building equity, which can be used to get loans or lower mortgage costs. Investors can build equity during the rehab process by utilizing the BRRRR strategy.
Refinancing may allow investors to recoup their investment:
When investors refinance using the after-repair value as opposed to the original mortgage amount, they can recoup their initial investments.
Cons of the BRRRR Strategy
Renovations may be required:
Renovations can be time-consuming and expensive. Investors should be prepared for the unexpected, such as bad plumbing, hidden mold, or structural problems, no matter how they renovate the BRRRR property.
Refinancing may take a long time:
Due to the refinancing bank’s required seasoning period, investors may have to wait up to 12 months before refinancing. As a result, investors will have to wait a year or longer to access equity for their next purchase.
Finding reliable tenants can be difficult:
BRRRR strategy involves renting the property to tenants who pay the mortgage and build equity using the tenant’s rent.
Getting Started with the BRRRR Strategy
Before purchasing a rental property using the BRRRR method, an investor may wish to consider several factors.
Get your finances in order so that you have sufficient money to make the initial purchase and repairs. It is not uncommon for investors to work with a business partner to raise funds and share work.
Also, if the seller’s final asking price is over your maximum offer, don’t be afraid to walk away. Too much money spent on a property can reduce profits and cause the refinancing process and cashout process to take longer than needed.
Lastly, learn where to find homes with BRRRR potential. A home’s reduced price, discount to valuation, and cash-only criteria can be used by investors to search for it on the market.
Final Step of the BRRRR Strategy
To build a passive income portfolio, investors can use the BRRRR strategy. In contrast, the process is much more hands-on and requires you to be more involved, as an investor. The strategy can be very beneficial to those who have the finances and are comfortable taking risks!
Despite the inherent risk associated with the BRRRR strategy, it can be a great investment strategy that, if executed properly, can be highly rewarding. You should make sure you do your research and choose a good property in a good market.
Once you do find a good property, you can count on us to take care of it.
Contact us for a free property management consultation.