Whether you're a new or experienced investor, you'll discover that there are many effective strategies you can use to invest in real estate and earn high returns. Among the most popular strategies is BRRRR, which involves buying, rehabbing, renting, refinancing, and repeating.
When you use this investment method, you can put your money into many properties over a short period of time, which can help you accrue a high amount of income. However, there are also issues with this strategy, most of which involve the number of repairs and improvements you need to make to the property.
You should consider adopting the BRRR strategy, which stands for build, rent, refinance, and repeat. Here's an in-depth guide on the new age of BRRR and how this technique can bolster the value of your portfolio.
The traditional BRRRR method is highly appealing to real estate investors because of its ability to provide passive income. It also allows you to invest in properties on a regular basis.
The first step of the BRRRR method involves buying a property. In this case, the property is usually distressed, which means that a considerable amount of work will need to be done before it can be rented out or put up for sale. While there are many different types of changes the investor can make after purchasing the property, the goal is to make sure it's up to code. Distressed properties are usually more affordable than traditional ones.
Once you've bought the property, you'll be tasked with rehabbing it, which can require a lot of work. During this process, you can implement safety, aesthetic, and structural improvements to make sure the property can be rented out.
After the necessary improvements are made, it's time to rent out the property, which involves setting a specific rental price and advertising it to potential tenants. Eventually, you should be able to obtain a cash-out refinance, which allows you to convert the equity you've built up into cash. You can then repeat the entire process with the funds you've gained from the refinance.
Even though there are many potential benefits that come with the BRRRR method, there are also numerous downsides that investors often overlook. The main issue with using this technique is that you'll need to spend a large amount of time and money rehabbing the home that you buy. You might also be tasked with taking out an expensive loan to purchase the property if you don't qualify for a traditional mortgage.
When you rehab a distressed property, there's always the possibility that the renovations you make won't add enough value to it. You could also find yourself in a situation where the costs associated with your renovation projects are much higher than you anticipated. If this happens, you won't have as much equity as you intended to, which means that you would qualify for a lower amount of money when refinancing the property.
Keep in mind that this method also requires a considerable amount of patience. You'll need to wait for months until the renovations are completed. You can only identify the appraised value of the property after all the work is finished. It's for these reasons that the BRRRR technique is becoming less attractive for investors who don't want to take on as many risks when placing their money in real estate.
If you don't want to deal with the risks that occur when buying and rehabbing a property, you can still benefit from this strategy by building your own investment property instead. This relatively modern strategy is known as BRRR, which stands for build, rent, refinance, and repeat. Instead of buying a property, you'll build it from scratch, which gives you full control over the design, layout, and functionality of the property in question.
Once you've built the property, you'll need to have it appraised, which is useful for when it comes time to refinance. Make sure that you find qualified tenants who you're confident won't damage your property. Since lenders don't typically refinance until after a property has tenants, you'll need to find one or more before you do anything else. There are some basic qualities that a good tenant should have, which include the following:
To get all this info, you'll need to first meet with possible tenants. Once they've filled out an application, you can review the details they've given as well as their credit report. Don't forget to perform a background check and ask for references. It's also crucial that you adhere to all local housing laws. Every state has its own landlord-tenant laws that you must abide by.
When you're setting the rent for this property, make sure it's fair to the renter while also allowing you to generate a good cash flow. It's possible to estimate cash flow by subtracting the expenses you must pay when owning the home from the amount of rent you'll charge each month. If you charge $1,800 in monthly rent and have a mortgage payment of $1,000, you'll have an $800 cash flow before taking any other expenses into account.
Once you have tenants in the property, you can refinance it, which is the third step of the BRRR method. A cash-out refinance is a type of mortgage that allows you to use the equity in your home to buy another distressed property that you can flip and rent.
Keep in mind that not every lender offers this type of refinance. The ones that do might have strict lending requirements that you'll need to meet. These requirements often include:
If you meet these requirements, it shouldn't be too difficult for you to obtain approval for a refinance. There are, however, some lenders that require you to own the property for a specific amount of time before you can qualify for a cash-out refinance. Your property will be appraised at this time, after which you'll need to pay some closing costs. The fourth and final stage of the BRRR method involves repeating the process. Each step occurs in the same order.
The main difference between the BRRR technique and the traditional BRRRR one is that you'll be building your investment property instead of buying and rehabbing it. While the upfront costs can be higher, there are many advantages to taking this approach.
To begin the process of building the structure, you'll need to obtain a construction loan, which is a kind of short-term loan that can be used to fund the expenses associated with building a new home. These loans typically last until the construction process is finished, after which you can convert it to a standard mortgage. Construction loans pay for expenses as they occur, which is done over a six-step process that's detailed below:
Each payment is considered an in-progress payment. You're only charged interest on the amount that you end up needing for these payments. Let's say that you receive approval for a $700,000 construction loan. The "base" stage might only cost $150,000, which means that the interest you pay is only charged on the $150,000. If you received enough money from a refinance of a previous investment, you may be able to start the construction process without obtaining a construction loan.
There are many reasons why you should focus on building rental units and completing the BRRR process. For example, this strategy allows you to substantially lower your taxes. When you construct a new investment property, you should be able to claim depreciation on any fittings and fixtures installed during the process. Claiming depreciation lowers your taxable income for the year.
If you make interest payments on the home loan during the construction process, these payments may be tax-deductible. It's best to speak with an accountant or CPA to identify what types of tax breaks you have access to with this strategy.
There are also times when it's cheaper to build than to buy. If you get a great deal on the land and the construction materials, building the property might come in at a lower price than you would pay to purchase a similar property. The main issue with building a property is that this process takes a long time. However, rehabbing an existing property can also take months and may create more problems.
If you decide to build this property from the ground up, you should first speak with local real estate agents to identify the types of properties and features that are currently in demand among buyers. You can then use these suggestions to create a home that will appeal to potential tenants and buyers alike.
For example, many employees are working from home now, which means that they'll be searching for properties that come with multi-purpose rooms and other useful home office amenities. By keeping these factors in mind, you should be able to find qualified tenants soon after the home is constructed.
This strategy also allows for instant equity. Once you've constructed the property, you can have it revalued to identify what it's currently worth. If you purchase the land and construction materials at a good price, the property value might be worth a lot more than you paid, which means that you would have access to instant equity for your refinance.
By using the BRRR method with your portfolio, you'll be able to continuously build, rent out, and refinance new homes. While the process of constructing a home takes a long time, it isn't as risky as rehabbing an existing property. Once you refinance your first property, you can buy a new one and continue this process until your portfolio contains many properties that produce monthly income for you. Whenever you complete the process, you'll be able to identify your mistakes and learn from them before you repeat them.
Interested in new-build rentals? Learn more about the build-to-rent strategy here!
If you're looking to accumulate enough cash flow from your real estate investments to replace your current income, this strategy may be your best option. Call Rent to Retirement today if you have any questions about BRRR and how to locate pieces of land that you can build on.