The BRRRR strategy is one of many great real estate investment strategies that let you generate passive income and increase equity over time.
BRRRR simply stands for Buy, Rehab, Rent, Refinance, Repeat. Many investors use this strategy in order to build a successful real estate portfolio.
The BRRRR Method focuses on investing specifically in distressed homes and refinancing that property in order to buy another one.
This is one of the key differences between the BRRRR strategy and a traditional investment property approach.
Like any other strategy, this method has pros and cons that are important to consider when thinking about investing.
Steps to the BRRRR Strategy
This method is rather risky if not executed correctly, so it is important to do your research on the strategy. With that being said, if done correctly this can be a fantastic way to generate passive income through real estate investing.
Acquiring a rental property at a discount is the first step on this journey. However, you may be wondering, why a property might be underpriced.
There are so any reasons why a house could be undervalued. It could be because someone inherited the house and just wants to sell it right away or It could be because someone didn't get an appropriate appraisal.
A lot of the time a house is underpriced because it needs work done to it and this is where investors get very interested.
A lot of people do not realize that making some changes to their homes would increase their value of it drastically. Investors who have this knowledge recognize these opportunities and make the most of them.
With that being said, it is crucial to figure out the ARV, or the after-repair value of the property, which is the estimated worth of the property after you make these changes.
The first 'R' simply stands for rehab or renovation. By remodeling real estate properties, investors can raise the rental value of their properties, which will reduce vacancies and boost residents' monthly rent payments.
This means more money in your pocket in the future.
Any upgrades that will bring the house up to code and make it safe to live in should be your first priority. The next step is to determine the types of upgrades that will actually boost value so you have maximum earning potential.
A lot of these changes usually include redoing the kitchen and the bathrooms, or even something as simple as painting the house.
The next step is to find tenets to rent out your newly rented property.
Before you start the refinance process, it's crucial to find tenants for the property because lenders typically won't do so until a property has occupants in it.
It is also very important to find reliable tenants for the property. You want your renters to be upstanding people and not cause any harm to the newly renovated property.
Most successful landlords usually require potential renters to have a good credit history, a steady flow of income, and a solid history of on-time payments.
It's crucial to consider both your tenant's needs and your ability to generate a positive cash flow when setting the rent. The 1% rule simplifies figuring out how much rent to charge.
The monthly rent payment should be 1% of the total cost of the home, including all improvements, repairs, and renovations you have made.
The next step of the BRRRR strategy is to refinance the property. You can begin the refinancing process once you have a dependable tenant and a few months' worths of rent history.
Refinancing a rental property is not always done with the intention of saving money. Instead, the objective is to get cash out of the residence while remaining the owner of it.
You can access the equity in the property by refinancing with a cash-out option. Since you'll have made the necessary repairs, you should be able to access additional equity in the building. To determine the property's new worth following renovations, you'll also need to have a fresh appraisal performed.
To achieve this, you'll need to locate a lender who provides a cash-out refinance and satisfy the loan's requirements.
If everything goes smoothly, you should be able to proceed with the cash-out refinance and utilize the money as a down payment for the next home so you can start this process all over again.
You will continue to learn and grasp this strategy more as you apply it more often, so make sure to take thorough notes and keep track of any adjustments you might make each time.
If you still don't understand this strategy, I recommend checking out this video.