What is BRRRR?
When you hear someone mentioning “brrrr” your first thought might immediately jump to the cold, especially cold Canadian winter. But believe it or not, BRRRR has a different meaning when it comes to real estate investment, and it is actually a fundamental investment process within the industry. If it is executed correctly it can provide passive income as well as a revolving way of owning multiple rental properties. BRRRR is the type of important lesson that anyone going into real estate should know, so read on to learn some more about BRRRR and how you can use it to build your portfolio as a real estate investor.
Buy, Rehab, Rent, Refinance, Repeat
Buy
For this method to work the property, you purchase should be a property that is distressed and needs some work, like a fixer-upper. Additionally, as a result of the condition of the house, it will likely be less expensive than other turnkey properties in the area. This is a great way to get a more affordable property in a desirable location. However, it may be more difficult to get a mortgage for this property as a result of the appraisal process used to determine the property's value. Because of the condition, some lenders might be hesitant to make a loan but do not worry, most financiers will be willing to give out a loan for this opportunity.
When you are buying a distressed property, it’s a good idea to determine the ARV also known as the after repair value. ARV is the estimated value of the home post renovations. To calculate the ARV, you need to compare the desired end result of the house you’re looking at to comparable houses in the area that have sold recently. The houses being used for comparison should be similar in their size, age, type of build and condition as the number of bedrooms/bathrooms. When making the choice to make an offer on a home, do not offer more than 70% of the determined ARV.
Rehab
The first R of BRRRR is Rehab, as the property is distressed, it might need some extensive work put in to get it up to code. In this step, you will be responsible for the renovation of or the arrangement of the renovation of the property. This is to make structural, safety and aesthetic changes to prepare the property for going onto the rental market. When first rehabbing and renovating the home the first thing you will want to do is to make sure the home is up to code so that it is safe for renters to live in. If it is not up to code you will need to make improvements that ensure it is safe for inhabitants to reside in. After that is done you will need to determine what renovations can be made to increase the value of the property such as making updates to the bathroom and the kitchen, as well as dressing up the exterior and installing energy-efficient appliances throughout. This makes the property more desirable to potential renters and increases the rent rates you can charge in the future. First things first though, before starting in on any project ensure you have a realistic budget and a timeline to stick to.
Rent
A key step to making your money back is in this second R, which stands for Rent. At this time you will want to calculate and decide upon a suitable rental price and find tenants looking to rent the house. Before you can move on to the next step, it is important to find possible tenants to occupy the home as sometimes lenders don’t want to refinance a unit until it has been rented out. When deciding on tenants to stay on the property, there are specific characteristics you will want to look for in desirable people and they can include:
Having an established record of making payments on time
Have a steady source and flow of income from stable employment
They should have a good credit score
You will want to look out for no previous criminal behaviour or history of evictions in the past
Check to see if their references are positive
You can discover all of this information by meeting with or calling a possible tenant to vet them out, as well as have them fill out a proper application. Additionally, you can check their credit report, ask for some references from them and do a background check on them to ensure that everything is up to par, so you can have no reason for concerns moving forwards. You need to ask for their consent and follow all the appropriate laws as well of course.
When deciding what the rent price should be it is important to ensure that is a fair enough price for the future renter, but that it is enough to generate a positive flow of income for yourself. You can identify this by deducting the total expenses of renting out your home sans the total value of monthly rent that will be charged. You can check some free resources such as rent rate comparables to aid you in determining the appropriate price to charge for the unit.
Refinance
When refinancing in the BRRRR process you will want to do a cash-out refinance so that you can convert your equity into cash assets. You can gain access to your equity by taking out a larger mortgage on your property, which is borrowing more money than you owe at that current point. This cash money can be used for whatever is needed with the properties, it can even be used to purchase another property. With the BRRRR method this is what you want to do with the money, use it to buy, renovate, flip, rent out and refinance another dilapidated property. To do so you must find yourself a lender who can offer you a cash-out refinance, and as long as you ensure you meet the qualifications for that loan you will be able to cash out.
You will need to meet the minimum credit score requirements to acquire this loan, which is usually about 620. You will also need to have a maximum debt-to-income ratio of about 50% or lower and have equity in the house. There might also be a certain amount of time you have to be the owner of the property before you are able to cash out and refinance it. Additionally, you will require an appraisal of the property which might include additional fees like closing costs to pay before you can take out the loan.
Repeat
Congratulations now you have made it to the last step and will have to start the process over again using the funds collected from the cash-out refinance of the previous property. Use this money to purchase another run-down house and flip it to then rent it out, refinance and purchase another property for the cycle to begin again. The repetition is a great chance to take down some notes from each previous time you have gone through the process so that you can improve and learn from former mistakes.
Remember, before going with any investment strategy it is important to weigh the pros and cons that are relevant to you and your current situation to ensure it's the best option for you. Some of the benefits of the method include generating a passive income, increasing and enhancing your rental portfolio, and continuing to build your equity with each rehab.
For more processes, methods and useful real estate investment tips follow CADMEN Properties.