BRRRR Method of Real Estate
June 5th, 2023
Buy, Rehab, Rent, Refinance, Repeat (BRRRR): Tips For Each Step
When practicing the BRRRR Method, it’s important to take the following steps in their exact order. Here are a few tips for following each step of the process.
Buy
The BRRRR Strategy relies on you purchasing a distressed property in need of updates and repairs, so it may be hard to get a traditional mortgage on the home. There are a few reasons for this. Most lenders require an appraisal on the property, but the value is difficult to assess on this type of property. Depending on the type of loan you get, the property may also need to pass specific guidelines to qualify. A distressed property will most likely not meet those requirements.
Before you rule out financing completely, talk to a lender to see if you do have any options. It may be possible to use a home equity line of credit (HELOC) or a hard money loan to finance the purchase, but these options can be high-risk and are often not recommended.
When buying a distressed property, it’s important to calculate the after-repair value (ARV). ARV is the estimated value of the home after you renovate or rehab the property. To determine ARV, you compare the planned final result of the home to similar homes, or comparables, that have recently sold in the area. These homes should be similar in size, number of bedrooms and bathrooms, age, type of build and condition.
When deciding how much to offer on the home, follow the 70% rule in real estate. Avoid investing more than 70% of the property’s ARV. For example, if a home’s ARV is $300,000, you shouldn’t pay more than $210,000 for the home.
Rehab
When you rehab a home, the first improvements you’ll need to make are any that will bring the home up to code and ensure it’s safe to live in. Next, you’ll want to identify the types of improvements that will truly increase value. These may include updating the kitchen and bathroom, improving the curb appeal and installing energy-efficient windows, appliances and other features.
Before you start your project, make sure you create a realistic budget and timeline for it.
Rent
It’s important to find renters before you refinance (the next step) because lenders generally won’t refinance until a property has tenants.
When it comes to choosing tenants, you’ll want to look for certain qualities:
A good record of on-time payments
A stable job with steady income
A good credit report
No criminal behavior or history of eviction
Positive references
You can find this information by meeting with the potential tenant, having them fill out an application, reviewing their credit report, asking for references and performing a background check. Of course, you’ll want to make sure you get their consent and follow all housing laws.
When determining the rent, it’s important that it’s both fair to your renter and able to produce a positive cash flow for you. You can determine this by subtracting the total expenses to own the home from the total amount of monthly rent you’ll charge. Let’s say you charge $1,500 per month for rent and your mortgage payment is $800. Barring any other expenses, your cash flow is $700 per month. Look at rental rate comparables to help you find the right price.
Refinance
In the BRRRR method, you do a cash-out refinance on your investment property so you can use the money to purchase another distressed property to flip and rent out. To do this, you’ll need to find a lender that offers a cash-out refinance, and you’ll need to meet the qualifications of the loan.
While the lender may have its own set of requirements, you’ll need to meet a minimum credit score requirement (typically around 620 for a cash-out refinance), a maximum debt-to-income ratio (usually around 50% or less) and have equity in the home. You may also need to own the property for a certain amount of time before you can get a cash-out refinance.
Keep in mind that you’ll also need an appraisal – and there may be additional fees, including closing costs, that you’ll need to pay to do the loan.
Repeat
In the final step of the BRRRR Method, you’ll go back and repeat the previous steps, in the same order as before. If you want to continue to repeat these steps, it’s a good idea to take notes each time you go through the process so you can learn from past mistakes.
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