The recent growth of the economy and the strength of the housing market prompts many people to wonder if now is the time to invest. While there are many ways to invest in real estate, the BRRRR method is rising to the top. It’s a good opportunity for people who are willing to put in the time and money to build a long-term line of passive income streams. Here are some things to know about the BRRRR method and how you can implement it.
What Is the BRRRR Method?
The BRRRR method is a set of steps that investors can follow to maximize the money they make from buying, renovating and renting homes. BRRRR stands for:
- Buy: Find a property under market value that poses a good investment but needs rehab.
- Rehab/Renovate: Rehab the home to fix problems and bring the design and style to a modern level.
- Rent: Find a qualified tenant to rent the updated home and start collecting payments.
- Refinance: Get a cash-out refinance to pay off the first loan.
- Repeat: Use the cash from the refinance to help finance the next project.
Within each of these steps might be months of work. At times, that work may be complicated and time-consuming. Over time, however, experienced investors can learn to balance the workload and take advantage of passive income.
What Do You Need to Start Investing With BRRRR?
Although the BRRRR method may sound as though it’s designed for investors with little or no experience, it does take several skills in order to make it work well. Investors who rush into the process — or who don’t realize how much time or money is involved — may struggle to make a reasonable profit from each project. The following tips can help investors understand what tools they should have before they start.
Investors should have a detailed understanding of the best ways to finance the project. Although traditional mortgages may be the first place many investors look, there may be alternatives worth considering, such as a private money loan or seller financing. Private loans often have higher interest rates and other requirements, but they usually process faster.
As a rule, investors should look to finance no more than 70-75% of the property’s after-renovation value (ARV). There are a couple of reasons for this recommendation. You don’t always know how much money you are going to spend on renovations, even if you have experience. You should also finance as little as possible, to protect your future profits and ability to repeat the process.
Investors must know the real estate market, especially in the specific neighborhood. With this knowledge, they can determine:
- Which neighborhoods are up-and-coming
- Properties that have great renting and resale potential
- The best methods to renovate for the people likely to become tenants
It’s typically not enough to hire a real estate agent to provide this information. Investors should have some sense of the trends in each neighborhood, so that they can focus their search on the ones with the most potential.
Every dime spent on buying the property is a dime that has to be recouped from future profit, so a good deal is important. You must be able to negotiate with the seller to accept a price that is fair for the property’s condition. Sellers usually want the highest price. They may be less likely to accept a low offer, especially if they can anticipate another offer. It should be your goal to present an offer that is high enough to be minimally acceptable, low enough to suit your budget and includes other favorable terms that encourage the seller to accept.
The rehab of the property has the biggest potential for problems, but good investors should be able to avoid most issues. Spending too much on expensive upgrades and paying to fix unexpected problems can cut deep into profits. For most investors, a good renovation involves finding a reliable, high-quality contractor. A familiar contractor can evaluate the property, make recommendations and provide a detailed bid on various parts of the rehab project.
Once the property is ready to rent, you need to process applications and choose a tenant. Landlords have guidelines they must follow when advertising, handling applications, signing contracts, collecting rent and more. Many investors choose to outsource this process to a property management software, like RentRedi, that addresses rental property management needs, so they can focus on the next project.
Using the BRRRR method to pave the way for future profits can be a great approach for investors. By following this advice, investors will know what they need before they start.
AUTHOR BIO: Erin Helle of BC Global Investments is a self-made millionaire who achieved financial freedom through real estate investing in less than four years. To date, she has helped over 200 other investors build cash-flowing real estate portfolios.
Infographic Provided By BC Global Investments