How does BRRRR Strategy Works-Real Estate Investing

The BRRRR (Buy, Rent, Rehab, Refinance, Repeat) is a real estate investing strategy that involves buying distressed properties in a good location then flip the property to its standard condition and then rent it out, and the cash-out refinancing to fund further rental property investment. 

The difference between conventional investment strategy and BRRRR strategy is you need hard money lenders instead of a conventional mortgage. Secondly, the BRRRR strategy focuses on investing in distressed properties and then refinancing the purchased property to occupy the second property. From my experience, you can buy more than 10 properties under 5 years with 100K which I will talk about later.

If you are a real estate investor and considering this type of strategy. Then you must read till the end of the post as I will be outlining how BRRRR strategy works and some of its pros and cons. 

How does the BRRRR Strategy Works?

If done correctly, the BRRRR strategy can provide a passive income in massive amounts. It is one of the revolving methods to buy and hold rental properties in the long term.  

This method works as follows:

1. Buy a Property: 

The property you purchase should be a distressed property but in an ideal location.  Some work should be done to meet the specifications and prepare for the rental. Due to property conditions, it will likely be cheaper to purchase.

2. Rehab the Property:
Since the property is in worse condition, it may require a good amount of work. In this step, you will renovate the property from structural, safety and aesthetics that will be great for renters.   

3. Rent the Property
Get the rental price and find the tenants. 

4. Refinancing- Consider Cash-out Refinance
With cash-out refinance you convert the equity in your property into cash which you can use to finance more properties. You get the equity with a larger mortgage, borrowing more money than you currently owe. Cash can be used for anything, including buying another property. 

5. Use Funds from Property to Buy another Property
The last step is to repeat, funds from cash-out finance to get another distressed property, rehab, refinance and do the process again.


BRRRR Strategy Cycle


When doing the BRRRR strategy, it is essential that you carry out every step exactly and not exclude any part. For full understanding I recommend you to read every step carefully. 

Buy

The first letter is B which means to buy the property. Make sure you buy a distressed property that requires fixes and repairs. So it will be hard to get a conventional mortgage on the property. Instead, you use hard money lenders to finance your property. 

There are reasons that you cannot get a conventional mortgage because most banks require an appraisal on the property and the current value of the property is difficult to find. 

Depending on the type of debt, the property should pass specific quality standards and distressed properties don't fulfil those requirements. Before you rule out financing completely, ask lenders or convince other investors to do a partnership. You can also use HELOC, financing from your other properties. Mostly HELOC and hard money loans are often risky so I won't recommend these. 

However, before you buy any property make sure that you are getting a decent ROI on your investments. This will require intensive deal analysis, which calculates how much renovations will cost, estimating monthly rental expenses, confirming the resulting income is giving you a handsome amount of cash flow. 
The majority of investors rely on the 70% rule, which states that an investor should pay no more than 70% of the ARV value of a property minus repairs required. 

Rehab

When rehabbing, you need to thoroughly improve the standards of your property, which makes it easier for tenants to live there. Next, you need to determine the type of improvement you need, but remember that you will not be renovating the property the way you do. The impact on your returns. It is better to keep your expenses within a certain range and not be emotionally dependent on your investment. 
 Make repairs to increase the value of your property. I'm talking about attracting tenants and making them emotionally attached to your property rather than its arrangements. Repairs may include updating your kitchen and bathroom, improving curbside appeal, and installing energy-efficient windows, appliances, and other features.


Rent

Next order, it is important to find renters before you refinance the property because positive cash flow over time gives appreciation. Moreover, banks don't refinance the property until you have tenants in it. 
For good tenants, you should look for certain qualities:

1. A-class people, financially stable that pay on time.
2. Good credit records
3. Good background 
4. Ability to be Honest 
5. Good Communicator 

You can find this information by meeting with potential tenants, asking them to fill out application forms, checking credit reports, requesting letters of recommendation, and conducting background checks. Make sure to get their consent and follow all the housing rules.

When it comes to renting, you should treat your tenants fairly. Take into account that it produces positive cash flow and is not overpriced to your tenants. Using a basic formula: Rent-Expenses.
Eg, if you are asking 1500 and your mortgage is 500, then it means you are getting 1000 in positive cash flow. It is better to do CMA, comparable market analysis before buying any property and getting the right price from your tenants.

Refinance

After putting your property on rent, the next step is to refinance. Investors do cash-out refinance because this way you convert your equity into a pile of cash. Which you can use to buy more distressed properties. By doing cash-out refinance you take control of the equity in your property and you turn 2 properties from a single property. 
Although the lender will have their own set of requirements, you must meet the minimum credit score requirements (usually around 620 for cash refinance), the maximum DTI (usually around 50% or less), and home equity. own. You may need to own the property for a period of time before getting a cash-out to refinance. 
Please note that you will also need to undergo an appraisal and may have to pay additional fees, including transaction fees, to make a loan.  

Repeat

The final step of the BRRRR strategy is you go back and repeat all the steps. 
Therefore, if you want to repeat all the steps, it is best to take notes and read them over and over again to form a complete concept in your mind. 



Advantages & Disadvantages of BRRRR Strategy

Advantages

Some advantages include the ability to make passive income, building your portfolio. Create equity during the rehab process as distressed properties are often sold below-average price. If you are a risk-taker then you can do all financing in the form of debt and require no upfront investment.  

Disadvantages 

On the other hand, some negative sides of the BRRRR strategy are the cost, time and work required to rehab the properties. Since it is harder to get a conventional mortgage you need to get riskier and expensive financing. 

This method needs a lot of patience. In addition to waiting for the renovation to complete, you can also wait long enough to own the home before you can get cash to refinance. Also, consider that it may take some time to find a suitable tenant to rent your property. During rehab, you may need to face unforeseen risks like some major repairs that were not found during appraisal. 

Other Options to BRRRR Strategy

If you have decided that BRRRR isn't the right option for you. Then there are options that you can implement and start building your portfolio. 

Beginners:

1. Fix & Flip- This involves buying a fixer-upper house that you can fix and selling it for a profit. 

2. Wholesaling- In this you find a distressed property and take it under contract with the seller. Then find an investor to whom you will sell the property at a profit. You can generate a lot of wealth doing this. If you want to become a wholesaler then I recommend you to join the Wholesale to Millions YouTube Channel. 

3. FlippingA type of real estate investing strategy in which investors buy real estate not to use it, but to sell it for profit.

Skilled:

1. Crowdfunding Real Estate- Buying big apartment buildings as an accredited investor or doing crowdfunding. If you want to become financially independent from real estate. It is better to go for more units, greater than 8 units.  There are a lot of advantages to buying big properties. For more understanding I recommend you to read my other blog on Intelligent Real Estate Investor. 

2. Commercial Real EstateCommercial real estate investing involves buying a building and then renting it out to a business to use as an office, factory, retail store, or warehouse.

Conclusion

BRRRR strategy is easy and can build passive income. But it takes a lot of time and patience to rehab the property, find good tenants and allow for seasoning before doing cash-out refinance. It is crucial to consider the pros & cons before starting your career. If you want to learn more about real estate investing I would recommend you to read my other blogs.



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