Oh yes, you heard correctly, BRRRR. The acronym for Buy, Rehab, Rent, Refinance, Repeat is a five-step process used to grow a real estate portfolio quickly.
The idea is to buy semi-distressed properties at a low price, make repairs, rent it, and refinance to fund the purchase of additional properties.
It’s not an easy process, but if done correctly, the BRRRR strategy can provide passive income and is a great way to bankroll a rental property empire.
Let’s break down the steps.
1. Buy
The first step in the BRRRR process is to buy a property below fair market value.
The goal is to buy a property in poor condition that you can rehabilitate to its original state.
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This will take time, and resources, and require you to be intimately familiar with rental housing in your area.
Here are some indicators to take into consideration:
- Location
- Property Value
- Property Condition
- Cash Flow and Growth Potential
2.Rehab
In this step, you will rehabilitate the property to prepare it for renters.
Rehabilitating is different from a renovation which can sometimes include adding high-end finishes.
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Your goal should be to achieve the highest repair value possible without over-improving the property.
Be sure to have all your ducks in a row so you can turn these properties around quickly.
On average, it can take between 2 and 4 weeks to apply for and receive a building permit and up to 6 months to complete construction. Here are some ways to keep your rehab costs down.
- Obtain quotes from multiple contractors
- Consider alternative building products; granite vs. laminate
- Negotiate with suppliers
Rehabilitating the property will help build immediate equity, but only if you carefully budget your rehab cost. You have a greater chance of success if you select properties that need cosmetic or minor repairs.
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Stay away from properties that have significant issues, such as foundation, roof, or structural problems.
3. Rent
Your rehab is complete! Now it’s time to determine the rental price and find people to rent the home.
The rental payment will start an inflow of cash and make it easier to refinance your property.
Focus on making positive cash flow.
The 1% rule is an easy way to calculate how much rent you should charge. According to the 1% rule, the rent each month should be equal to (or greater than) 1% of what you paid for the house, including repairs and improvements.
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4. Refinance
A mortgage refinance enables you to change the terms of your existing mortgage.
A refinance can reduce your interest rate, or shorten your loan term.
In this step, you will take advantage of the home's appreciation and use a cash-out refinance to convert your equity into cash.
Refinancing the mortgage on a rental property typically comes with stricter requirements.
It’s important to know:
- The home’s equity.
- Your debt-to-income ratio.
- Your credit score before you apply.
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This will ensure you meet the loan’s requirements, and can comfortably afford the new mortgage payment.
5. Repeat
In this final step, you’ll start the process all over again.
The cash from the refinance can be used for anything, including the down payment, closing, and rehab costs for other properties.
Keep in mind that if market conditions deteriorate, you may not be able to “repeat,” and the cycle will end until the market recovers.
More tips
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The BRRRR strategy is a revolving method for purchasing and owning rental property, but prospective homebuyers are also using these tips to purchase their first home.
- It's important to note that the best properties for BRRRR newbies are single-family homes and small multi-family (1-4 units).
- Avoid condominiums or properties that have a homeowner association (HOA) and properties designated as historic properties.
- Some HOA properties will not allow you to rent the property, leaving you stuck. With homes designated as historic properties, you may face renovation limitations that could blow your renovation budget.
BRRRR can provide homeowners with a reliable source of cash while boosting their passive income.
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Before moving forward, consider your skill level and how much time you will invest. You’ll find that some projects can be made part-time while others require your constant attention. All investments carry some degree of risk. Always do your research and join us on IG @_dearmoney_ for more ways to build wealth.
