You already know that real estate investing is one of the only surefire ways to generate a substantial income. And, you’ve been wondering how you can start building a real estate portfolio now so that you can reap the rewards and retire early. Well, maybe the BRRRR Method is just the springboard you need to reach your goals.
Plus, with current mortgage rates at a historical low, now is one of the best times since the 1970’s to hold real estate with financing (As long as you can find low prices).
Today, find out whether BRRRR is right for you. Here’s what you’ll learn:
- What the BRRRR method is.
- The risks associated with the system.
- A step-by-step guide that explains how to implement.
Are you intrigued? Good — you should be. Now, keep reading.
What is the BRRRR Method?
Despite how it sounds, this system doesn’t have anything to do with the weather. The BRRRR method is an acronym that breaks down a complex real estate investment strategy into five easy-to-digest steps.
- Buy – Purchase a home at a price below market value.
- Renovate – Make renovations to repair or enhance the home.
- Rent – Rent out the home to establish cash flow/income.
- Refinance – Refinance the home for capital to purchase more property.
- Repeat – Find another home to buy and repeat the process.
Using this method, investors can purchase real estate to build out their investment portfolios. Here’s everything you need to know to implement the system for yourself.
Does the BRRRR Method Work?
Yes, the buy, renovate, rent, refinance, and repeat strategy is a legitimate and lucrative way to invest in and profit from the real estate market. Many people use it to start or expand their holding portfolio or to generate cash flow.
In fact, BRRRR has been used since before there was an acronym for it. And, if you check out Reddit or Quora, you’ll find countless anecdotes from investors who have successfully used the method to generate cash flow.
How Does the Method Work?
The BRRRR method can be altered based on your financial situation and personal preferences. Rather than buy, renovate, rent, refinance, then repeat, you may choose to go another route. Some investors opt for a BRRSR (buy, renovate, rent, sell, repeat) while others choose the BRRHR (buy, renovate, rent, hold, repeat) option. These systems can help you generate hefty returns on your investment.
Furthermore, it doesn’t only work for residential homes. You may opt to buy single or multi-family homes, but commercial real estate is another option. You might even consider investing in land that can be rented for livestock, farming, or recreation. In these cases, you can alter the strategy to your liking.
BRRRR Method Risks
As with all investment opportunities, there are risks with the BRRRR method. Costs, value, timeframes, and refinancing details are constantly fluctuating in real estate. So, the BRRRR method comes with all of the usual risks.
- You may fall short on financing your first property.
- There could be unanticipated problems discovered during renovation.
- It can be difficult to find a reliable and knowledgeable contractor.
- You may rent to a bad tenant or have difficulty renting the home.
- Refinancing may fall short of what you need to fund your next property.
But, you may have a smooth experience and come across none of these issues. And, the more you understand about the process, the more likely you are to succeed.
Now, let’s take a more in-depth look at each step of the process so you can learn to implement the BRRRR method process.
Step 1: Buy a Home at a Price Below Market Value
Once you’ve explored the risks of implementing this strategy, you’re ready to learn how to finance your purchase and how to find properties for BRRRR method investing.
How Do You Finance BRRRR?
First of all, this list is not all-inclusive. Many investors think outside the box and find creative ways to finance their first BRRRR home. Use the following ideas as a springboard and make the choice that works best for you.
Keep in mind that you’ll need funding for a handful of items.
- The cost of the home or about 20% for a down payment
- Closing costs and fees associated with title transfer
- Homeowner insurance and property taxes
- Renovations to the home
- Travel costs if purchasing out of state
- An emergency fund for future home repairs
So, with your budget in mind, here’s where you might look for funds.
Personal capital includes your own savings, investments, credit, and loans or gifts from family and friends. Many if not most small businesses and mid-sized ventures are launched using the owners’ personal capital. So, if you have the capital in savings or a retirement fund, you may want to consider using it to finance your plan.
A traditional mortgage will require that you have a down payment, typically 20% of the price of the home. And, if you don’t have the full 20% down, you will be required to pay a monthly fee for private mortgage insurance (PMI). PMI might run around $50 per month, depending on the cost of the loan, and will be paid in addition to homeowner insurance. It typically goes away when a homeowner refinances.
While you may want to try to get into a first-time housing loan like FHA or USDA because of the low down payments and interest, note that these programs have stricter rules. For example, you will be required to use the home as your primary residence for a set period of years. Technically, you can’t rent out a home under an FHA or USDA loan. However, if you later refinance the home under a traditional mortgage, you can do as you please.
Venture capital (VC) is when an investor or group of investors fund a startup venture. While it can be enticing to use someone else’s money, be cautious. Venture capital can be used when you have no personal capital to invest. But, the people who fund you will expect a return. You will have to pay a share of your profits to anyone who extends capital to your business.
And, they may push you to make business decisions you wouldn’t otherwise make on your own. Essentially, VC funding will force you to give up some level of control over your real estate investment strategy.
Business Credit Cards
One of the more creative ways you can finance your first BRRRR purchase is with credit cards. The key is to pull cash out of a low or zero-interest card and use the cash to finance the home and pay for renovations. Sign up for Business Credit Workshop and learn how to get $100K in business credit without walking into a bank.
See Also: Can You Pay a Mortgage with a Credit Card? The Answer is… Complicated
BRRRR Method Examples
Typically, you can’t go to Zillow or Trulia and purchase any home to implement this strategy. The key is to purchase property at a price below market value. This means that you need to get a good deal so that you can turn a profit. So, here are some examples of home purchase situations that might help you get your foot in the door.
Auction homes, bank foreclosures, and unlisted opportunities are usually sold at lower prices than homes listed traditionally. Plus, in these situations, you don’t usually work with a real estate agent so you also bypass that expense.
There are so many factors to consider when purchasing a rental property that determining how much to spend is an entire post of its own. The bottom line is that you need to know there is going to be a return on your real estate investment.
Most municipalities hold auctions to liquidate properties that have been seized. A good place to start is with your local Sheriff department. There’s a good chance that your county has online listings. You will probably be required to walk into the local courthouse and bid on the property, and you may compete with multiple investors.
You’ll hear stories of people purchasing homes for as little as $15K. When these anecdotes are true, the home was likely picked up at an auction.
|Log in to your Business Credit Workshop account to access a list of five legitimate real estate auction websites.|
The enticing part about auction homes is that they are typically inexpensive. Of course, there’s a major risk — when you purchase at an auction, you buy a home as-is. In some cases, your home will need a ton of repairs to be eligible for rent and refinancing. And, many times buyers walk in blindly without a home inspection, so the repair costs can run high.
When a homeowner fails to pay their mortgage as agreed, homes often default back to the ownership of the bank. Like auction homes, you can purchase foreclosures at below market value. While foreclosures aren’t usually as cheap as auction homes, they are easier to find.
The median cost of a foreclosed home is about 7.7% less than traditional listings, according to Zillow. So, while you may pick up a home for 40-50% less than the average traditional listing, foreclosed homes are typically on the lower end of the value scale to start with.
Most banks have foreclosure homes listed on their websites under real estate owned (REO) pages. Do a quick Google search for “REO [Name of Bank]” to deliver a list of homes owned by nearly any financial institution.
Unlisted home purchases are the unicorn of investments, but they do exist. And, wise investors pick them up all the time. Keep your feelers out there to pick up on unlisted opportunities in your network. Make friends with real estate professionals and keep the conversation going to get the most from your efforts. You never know what prices you’ll find.
Step 2: Renovate to Make Repairs or Update the Home
Once you’ve purchased a home and it’s in your possession, it’s time to renovate. You will take a chunk of cash, say $10-15K, and put it back into the home. If the home needs repairs, start there. You need the house to be “habitable” according to the state’s housing standards. And, some updates can instantly increase the value of the home, giving you a chance to rent it for a higher price.
- Increase curb appeal with landscaping
- Fence in the yard or update the fencing
- Upgrade the front door
- Paint the exterior and interior
- Add new carpet or refinish flooring
- Update fixtures, switches, and outlets
- Add shutters or curtains or replace windows
- Get a new garage door
- Replace old countertops
If the home you purchase is already in excellent condition, you could get into some eco-friendly updates like alternative energy or luxury add-ons like jacuzzi bathtubs. But, keep in mind that you will not be living in the home and the more you provide, the more you will be required to help maintain. So, as a landlord, it’s typically best to keep it simple.
Step 3: Rent Your Home to Generate Cash Flow
Now, you have another decision to make: Will you act as a landlord or hire a property management company to rent your home? Depending on where you live, property management might cost $100-150 or around 10% of the monthly rental price.
For this monthly fee, someone else will do the following tasks:
- Price your rent
- Advertise your home
- Find a tenant to live in your home
- Protect you from lawsuits
- Manage emergency repairs
- Provide tax documents
- Create income and expenditure reports
- Perform house visits/ inspections
You need to rent your home at a price that generates enough cash flow to enable you to easily get refinanced — you must show a profit. So, if the fees associated with outsourcing property management take up most of your cash flow, you may want to manage the home yourself.
If you decide to take matters into your own hands, first and foremost, be sure to update yourself on the landlord-tenant laws in your state. The last thing you want is to end up in a courtroom over a dispute because you’re ill-informed.
Here are some resources to help you learn the ropes:
- State Landlord-Tenant Laws | Nolo
- How Much Should I Charge for Rent? | Zillow
- Advertise Your Rental Property | RentPrep
- How to Screen Potential Tenants | Money Crashers
- How Quickly Must Landlords Make Repairs? | The Balance SMB
- Tips on Rental Real Estate Income, Deductions, and Record-Keeping | IRS
If you make it through the reading list above and you’re still interested in managing your own rentals, then you’re probably good to go. Many people consider $100 or 10% of the total home price to be a great deal with everything that goes into the job of property management.
Step 4: Refinance to Get Funds for Your Next Investment
Now, it’s time for you to get the home refinanced so you can do it again. You want some money for a down payment on your next home. In addition, refinancing can help you out in a couple of other ways. For example, if you already have traditional financing, you may be able to move from a variable to a fixed interest rate. And, you may get rid of an existing PMI for a lower monthly payment. These details should be discussed with your mortgage broker or lender.
If you used low or zero-interest credit cards to fund the home purchase, refinancing can give you the ability to pay them off before your interest rates spike at the end of the introductory period.
Ultimately, to qualify for refinancing, you’ll need to be in a good financial situation and have the documents to prove it. Here’s what you need to know.
How can you qualify for refinancing?
Before you submit an application for refinancing on your rental, you need to be able to show that you have the ability to pay back the new loan. You will be asked to prove the following:
- A steady income
- Positive credit standing and FICO score above 620
- At least 25% equity in the home or a 75% loan to value (LTV) ratio
- The payment will be less than 30% of your monthly income
- Your total household debt is less than 40% of your income
In the case that you purchase and refinance the home as a business, the lender may consider your business credit profile.
What information will you need to apply?
Once it’s time to apply, you will want to gather the appropriate documents in advance for a quick and smooth process. Your lender will want to see the following:
- Rental lease and proof of rent deposit paid by the tenant
- HOA agreement and payment amount (if applicable)
- Proof of homeowner’s insurance
- Two months of recent pay stubs (if applicable) and bank statements
- Investment and retirement account statements (if applicable)
- Two years of tax returns
- Your current mortgage statement with payment information
- An official payoff amount from your original lender
- Property appraisal documentation
If you gather all of the required documents in advance, you’ll streamline the process. In the instance of any obstacles, your lender or broker will help you learn how to remedy them.
Step 5: Repeat the Process
Now that you’ve made it this far, you’re ready to do it again. When refinancing is complete, you should have enough money to reinvest in a down payment on your second home. Rinse, repeat, then do it a third time. Eventually, you could have enough rental cash flow to live on and even retire early. So, what are you waiting for?
If you are interested in investing but need to build out your business credit profile first, we can help you access the funds you need to get started. Sign up for the Business Credit Workshop today.