Last Updated on: 29th January 2023, 11:21 am
Whether you’re just curious to know what the ‘BRRRR Method’ is or you’re on a journey to doing business and property investment, knowing how BRRRR strategy works in real estate business is going to help succeed.
To begin with, let’s define the basics.
What is a BRRRR Method In Real Estate Investing?
BRRRR, which stands for BUY, REHAB, RENT, REFINANCE, and REPEAT is a business and investment strategy to do real estate business with the main goal of being able to buy property without using any of your own money.
But what exactly is a BRRRR method and how does it work? To simplify, BRRRR is defined as follows:
Simple means, to buy a house at a low price. Buying a house at a discount would be a good way to start. But how exactly do you buy your first rental property? There are a couple of things you just have to look for when buying your first rental property, and they are as follows:
A. Which part of town is it in: As far as location goes, you want to actually avoid areas where the rental property is so expensive that the rental income won’t even be enough to cover the mortgage. At the same time, you don’t want to go too cheap because that place might not be able to generate a lot of rental income at all.
Try to find a location where there’s a strong rental market. That means finding out whether or not the rental properties around the area have a high vacancy rate. In other words, you want to look for a location where the vacancy rate of rental property is as low as possible. But why do you need a strong rental market when buying rental property in a specific location? That is because the stronger the rental market in an area, the easier it will be to find a tenant, and the less you have to worry about turnover.
B. What type of property are you buying: Buying your first investment property can be a hard decision especially if you don’t know what you’re looking for. The pros and cons should be taken into account as well to help you decide which property you should go for. It can be a hard decision, so we’ve made a separate article for that to help you.
C. What type of finishes are you gonna want your property to have: Knowing and choosing the right finishes for your home can have a big impact on what it’s worth is going to be. To give you an idea, we’ve listed some of the main finishes work that your home may need, and they may include any of the following:
D. The age of the property: This one’s simple. Don’t buy an old house that has deferred maintenance issues. However, did you know that new home, on average is 10-20% more expensive that a similar updated older home? That said if you know that you can buy an old cheap house, fix it, and still save 10-20% of what you’re gonna spend buying a new one, then go for it.
To rehab the house to maximize the rental rate. This part is probably the most important part of the BRRRR Method.
But how exactly do you start the process of rehabbing your house? The first step is to find a good contractor to renovate your house. It’s a good thing to leverage the skillset of other people. Remember to get at least 3 quotes for every job, which means 3 bids you can compare and go with the one that has a reasonable price.
The list of work that contractors do are as follows:
- Light Fixtures
- Plumbing fixtures
Also, getting contractors can help give you the estimated cost to fix the house, and suggestions on what to fix so you don’t have to figure that out yourself.
But how do you find a contractor to renovate your house? Here are some ways to find a contractor:
- Ask friends, neighbors or family for recommendations.
- Look up contractors on websites like Angie’s List, Yelp, or HomeAdvisor, where you can read customer reviews and see ratings for local contractors.
- Look them up online on Google to see available local construction businesses.
- Local meet-up pages or groups.
To start renting out the house. This is where the money comes in. But before you rush, the following is the list of things to look for when looking for a tenant:
- Good income
- High credit score
- Doesn’t have a recent eviction
- No criminal records
Taking these things into account can avoid a high tenant turnover. And if necessary, try to make a background check to really make sure that you have the best tenant possible. Also, know that good and responsible tenants know that they are in charge of the following task:
- Cutting the grass
- Snow removal
- Gutters cleaning
- Changing the AC air filter
To apply for a cash-out refinance loan to recapture your property cost. Getting a refinance loan will be easier. The bank can just look at your asset, the property that you bought, and because that property was just rehabbed, its value has probably gone up. The bank then, most of the time will have no trouble getting your loan approved.
If you wanna know how more in detail about what a cash-out refinance is and how it works, read here: What Is A Cash Out Refinance In Real Estate Investing?
If in any way you do face some trouble with the bank and your refinance loan was disapproved, there’s always an option to get a short-term loan from a Private and Hard Money lender. If you’re curious about how these lenders work, check out our separate post; Real Estate Financing Private Money Lender & Real Estate Financing Hard Money Lender
To find another property to buy and use the refinance money to fund the purchase.