If you’re looking to build wealth through real estate investing, the BRRRR method may be a great strategy. At King James Lending, we help real estate investors achieve their goals through various financing options. In this article, we will provide you with the ultimate guide to the BRRRR method.
What is the BRRRR Method?
The BRRRR method stands for Buy, Rehab, Rent, Refinance, and Repeat. It is a real estate investment strategy that involves purchasing a distressed property, rehabilitating it, renting it out, refinancing it, and repeating the process to acquire more properties.
Buy
The first step in the BRRRR strategy is to purchase a property, which is denoted by the letter ‘B.’ It is crucial to be mindful of this stage, as it sets the foundation for the entire investment outcome. There are several factors to consider when selecting a property that will prove to be a wise investment and perform well as a rental property. To make a sound investment decision, you will need to conduct a comprehensive analysis of the deal. This includes calculating the cost of repairs, estimating monthly rental expenses, and verifying that the resulting rental income will generate a sufficient profit margin. Ensuring that a rental property performs well may require extensive research on the most lucrative rental markets and determining if the purchase price allows for a margin of error to account for renovation costs.
One commonly used approach is the 70 percent rule, which incorporates repair costs and the property’s after-repair value to determine the maximum offer for a property. By using this rule of thumb, investors can ensure that they will earn a profit margin after renovating the property.
Rehab
The second step, represented by the first “R,” is rehabbing the property. To make a property livable and functional, landlords must identify what repairs or renovations are necessary. However, investors must also be cautious about making excessive upgrades that will cost more than what can be produced through rental income.
To ensure a high return on investment, investors should focus on specific rehab projects that add value to the property. These projects include repairing or replacing the roof, updating the kitchen, repairing drywall damage, improving the landscaping, updating the bathrooms, and adding additional bedrooms. These projects are generally low-cost and provide a high ROI, making them ideal for rehabbers looking to increase the value of their rental property. It is important to conduct a cost-benefit analysis for each project to ensure the investment will be worthwhile.
Rent
Once the property has undergone rehabilitation, the investor can move on to the rental phase of the process. This involves activities such as tenant screening and selection, turnover management, and addressing maintenance and repair requests. Over time, the investor will determine if their due diligence practices were effective. Failure to do so could result in vacancies, troublesome tenants, or rental expenses surpassing the income generated, ultimately leading to the property being underwater and at risk of foreclosure. However, this shouldn’t discourage investors from becoming landlords or employing the BRRRR strategy but rather emphasize the significance of accurately evaluating the investment before making a decision.
Refinance
Once the property has been successfully rehabilitated and rented out, the next step is to develop a refinancing plan. When looking for a bank to refinance your property, you should choose a bank that offers a cash-out to refinance instead of one that pays off outstanding debt. You should also consider the seasoning period, which refers to the length of time you must own the property before the lender will refinance it based on its appraised value. Some banks may be reluctant to refinance single-family rental properties, but investors can typically leverage their networks to find a lender that can meet their refinancing needs.
Repeat
After successfully refinancing the first rental property, the investor can proceed to acquire and renovate their second property with the cash obtained. This cash-out refinance provides numerous benefits, including favorable interest rates, tax advantages, and the ability to control one’s financial timeline. Although the first BRRRR cycle can present a steep learning curve and inevitable mistakes, investors can leverage their experience and newfound knowledge to tackle subsequent properties with greater ease and confidence.
Benefits
The BRRRR method offers several benefits for real estate investors, including increased cash flow, equity, and portfolio diversification. It also allows investors to recycle their capital, as they can use the funds from refinancing to purchase more properties.
How to Implement
To successfully implement this method, real estate investors must have a solid understanding of the local market, financing options, and property management. It also requires careful planning and execution to ensure that each stage of the process is profitable.
Partnering with a Trusted Lender
Partnering with a trusted lender like King James Lending can provide real estate investors with access to various financing options, including hard money loans, fix and flip loans, and bridge loans. Our team of experts can help you navigate the financing process and find the best solution for your investment needs.
The BRRRR method is a powerful real estate investment strategy that can help investors build wealth and achieve financial freedom. At King James Lending, we understand the challenges and opportunities of real estate investing and offer various financing options to help investors achieve their goals. Contact us today to learn more about our services and how we can help you implement this method in your real estate investment portfolio.
