BRRRR a hot approach to real estate investing

According to the National Association of Realtors, the fourth quarter of 2021 saw a slowdown in the housing market. Specifically, 67% of metro areas surveyed saw double-digit increases in the median sale price of single-family homes from the previous quarter.

If this does indeed indicate a downturn, it might be time to consider real estate as a viable investment option.

Although the name sounds chilly, there is an incandescent way to do real estate business.

Here’s how to use the BRRRR real estate investment strategy to generate cold hard cash in the real estate industry.

BRRRR stands for Buy, Rehabilitate, Lease, Refinance, Repeat. Essentially, investors buy properties, rehabilitate what is necessary to make the properties habitable and safe, rent the properties out to get back what they have invested, refinance at a lower rate to reduce the sale price of the property, resell it (if they so desire), then repeat.

They can choose to keep the property rented out for a while if they want to make some money, but selling a property as soon as market values ​​rise again is a better option. Refinancing the property leads to a pullout option which provides the owner/buyer with funds to purchase another property that needs repair.

Profit margins, especially in a seller’s market, are pretty nice, and it’s not as complicated as it sounds.

In the 1930s, there were companies called “Building and Loan” companies. You know, like in It’s a Wonderful Life. Basically, people wanting to buy and build a new home would come to these companies looking for funds. Other people who had already taken money from the building and the loan and were paying it back would have those funds reinvested into the building and loan process for new customers.

The BRRRR method is very similar to this older build-and-lend business model, except it involves a real estate investor borrowing money to fix up and buy a property before turning it into a rental cash cow. .

The steps of the BRRRR method are simple.

The investor is looking for a distressed property but hopes to find a turnkey property. The real estate investor expects these properties to generate a high return on investment.

Different loan options and loan programs are used to purchase the properties in question. It’s wiser to find low-interest loan options and have a large sum of money to put aside initially. Non-traditional sources of financing can also provide you with the financing you need, as many traditional mortgage companies may not be willing to help you buy distressed homes or run-down properties.

However, you must be very careful when selecting a loan product to purchase a property. It is essential to assess the costs of rehabilitation and weigh them against the interest you will have to pay back when repairing the property.

The rehabilitation of a property is a key element of the BRRRR method. You are trying to make the property livable and attractive to tenants. The goal is to choose a house or building with “good bones” and not need too much work to bring it up to code.

Before you jump in and buy a property, have it thoroughly inspected by a home inspector to find out what it will cost to bring the property up to standard and what it will cost to make it attractive to tenants .

Have a rehab budget in mind and stick to it. If you can manage it, don’t go over that amount or your profit margin will shrink. To be successful, you must choose appropriate properties at the right price and stay within your rehab budget.

Examine the local rental market. What are people willing to pay for rent at the location of the property? If you charge too much, you’ll be stuck with the property for a long time and lose money.

On the other hand, you will lose money if you charge too little to recover what you have invested or keep up with the monthly mortgage payment. The monthly cash flow must be greater than the mortgage payment but low enough that tenants can afford the asking rental price.

Also, make sure that the tenants you choose are suitable, decent people with a stable income, good credit history, and no history of criminal behavior. You don’t need the property to be destroyed after you have already invested so much!

Research potential tenants/tenants thoroughly before accepting their security deposit and first and last month’s rent.

Traditional lenders require a maturing period of a year or more of ongoing payments on a property before they can refinance. You will therefore have to wait a few months after you start accumulating the rent.

This is why many real estate investors have more than one property under the BRRRR method simultaneously so that each “ripens” at a different time for refinancing.

Be sure to ask for the cash-out option when refinancing. The greater the equity in the rehab and sweat, as well as the equity in the home mortgage, the more you can borrow.

Repeat this as often as you have a steady cash flow from the process of removing a previous property. The goal is a chain of properties in your pocket, producing passive income while you rehabilitate your next project.

There are definite pros and cons to consider before deciding to embark on the BRRRR strategy.

When done well, the BRRRR method is very lucrative. The money is passive, so you don’t have to do much to keep the money coming in each month. You can own dozens of properties and have millions in cash reserves, allowing you to repay loans from many of your properties. Then you own the properties and the monthly rental income is pure profit.

It takes a lot of time and a lot of hard work on your part to get there. If you can’t or won’t put in the necessary work and effort, you’ll lose your shirt and end up filing for bankruptcy.

Additionally, you need to stay on top of all your properties and ensure that they remain in good rental condition. This can lead to additional expense if you have poor tenants or overlook something that needs fixing during the rehabilitation process.

Risks often include a sluggish market, lack of properties that would suit your intentions, lending rates that are too high, a lack of decent tenants, and tenants that look great on paper but turn out to be destructive.

These are often beyond your control and can be costly. For example, failing to have a property inspected and appraised before buying it also creates its level of costly risk, like tens of thousands of dollars to bring the plumbing or the roof up to code.

It is essential to keep your renovation time short. For this reason, do not attempt to rehabilitate more than one property at a time. Instead, one to two months is the recommended time to get tenants into the property and start making money immediately.

Likewise, your renovation costs should be as low as possible. The property must be city code compliant and habitable for humans. If you are lucky, the total repair cost for the renovation will be 30% or less of the total property value.

The valuation of the property before and after your investment is essential and probably the most important risk during the BRRRR strategy. You are looking to find a property that will also not be expensive to buy and rehabilitate, but will increase in value enough to be refinanced at a later date, for a good deal of change.

When a property is ready for tenants, be sure to fill your vacancies within three months or less, preferably within the first month. Longer than that, and you’ll lose money. Always keep your vacation periods short to maintain a positive cash flow.

The rent should always be sufficient to cover the monthly loan amount plus a small supplement. It should also be on par with the average rental market for the neighborhood where your property is located.

Be sure to do your homework before setting the rent amount. Otherwise, potential tenants will skip your listing for something cheaper or more reasonable.

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