The BRRRR Method.
Interested in building real estate wealth? Try BRRRR! No, you don’t need a sweater… in fact, you need a little sweat! Sweat equity that is.
The BRRR method–better known as Buy, Renovate, Rent, Refinance, Repeat–is a way to stack investment properties by building value in one to create funding for another.
In simple steps, here’s what BRRR investors do:
- Purchase a property at a cost they can afford to rehabilitate
- Rent out the newly revitalized property to tenants for an extended period
- Use the rental income to pay the mortgage, earn profits, and build up equity over time
- Purchase a second property through the funding that comes from refinancing the first home
- Return to step one, repeat the actions and slowly build an empire
And, here’s some basic advice on each step of the method:
This might well be the hardest part of the process since an overstep can result in the whole plan losing money. When searching listings, a buyer has to balance property vs income, making sure a property represents a sound investment in a desirable area that promises to perform well as a rental property.
First you’ll need to calculate cost of renovations + estimated monthly rental expenses. Are you able to ask for high enough rental income to cover those expenses and ensure a tidy profit?
A few things to consider for best outcomes:
- Research the lower end of the listings in the strongest rental markets
- Ensure the purchase price leaves enough in your budget for renovation costs
- Verify the rehab work will add value to the home
It’s easy to hit cost-overruns on upgrades. Renovations that exceed what a property owner can produce through rental charges means lost funding. And opportunity. Shoot for livable, functional and clean ahead of elegance and decadence.
Rehab projects with the highest return on investment include:
- Roof repairs
- Kitchen and bathroom upgrades
- Bedroom additions
While extended vacancies, bad tenants, and needed repairs can cut into profits, once you’ve found a trustworthy renter, your income should start to flow.
To avoid the pitfalls, you want to start back at step one to ensure your market is viable. And that the population can support–if not drive–demand for a rental. To stay above water, it’s critical to vet your tenants carefully and leave a cushion for maintenance and repair.
Once your property starts to accumulate wealth and you’re starting to pay down the mortgage, you can devise a plan on how to refinance it. Most banks require you own a property for a specific amount of time before they’ll consider refinancing against the appraised value of the property.
Cash-out options are typically considered the better refinancing situation versus banks that want to pay off outstanding debt. A cash-out refinance offers additional advantages, like favorable interest rates and control over your timing.
You’ll know you’ve made it when you can use the cash-out refinance from their first rental property to fund the purchase and rehabilitation of a second. Return to research mode and weigh your cost-benefit analysis as you decide on your second property.
BRRR can have a pretty steep learning curve at first. As long as you’re careful to make sure mistakes don’t sink you, the wisdom you gain will serve you well with each additional property. As always, do your research. The pride you’ll feel leveraging a freshly rehabbed home into improved property value and steady income from monthly rents just can’t be beat!
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Disclaimer: This blog is not intended to give legal advice. Keep in mind that each state has different real estate laws and that throughout Louisiana, rules, and customs can vary among parishes and regions. If you’re buying or selling a home, please check with your local Real Estate professional or Real Estate Attorney on the specifics of all Real Estate matters.