Top investors swear by this strategy
Imagine attending a real estate investor conference and hearing somebody utter BRRRR…
Did someone crank up the AC in here?! It might sound like they’re cold. But they’re really saying BRRRR for all the right reasons. Believe it or not, it’s a real estate acronym that stands for:
“Buy, Rehab, Rent, Refinance, Repeat!”
Even though eat, sleep, repeatdoes sound a little more tempting, the BRRRR strategy can help you build a decent passive income stream in a matter of months. (Bet it sounds far more tempting now!)
Mastering the strategy
This property investment strategy revolves around buying a distressed or undervalued home, rehabbing it, renting it out, and using a cash-out refinance to buy your subsequent rental property. And…repeat!
Over time, you can build your portfolio of rental properties. Your own little business empire, if you will.
But is BRRRR as easy as it sounds? Certainly not.
It takes a certain kind of personality to implement this strategy. People who aren’t afraid to take risks (because there are risks involved, like any other investment). They also need to be hardworking, business savvy, and have a lot of real estate knowledge are perfectly cut out for the BRRRR strategy.
One of the potential risks you could face is spending money to rehab a property, only to not wind up having rental income flowing in. It’s not uncommon for properties to be without tenants for weeks or even months, depending on the location and local real estate market.
But there are many, many benefits…
Say, you want to purchase six rental properties with the traditional approach. Then you’d not only need a long-term mortgage on each, but also pay a huge down payment for those. (Ouch.)
With the BRRRR strategy, your property portfolio will still eventually grow to include six rental properties, but you’ll end up paying far less cash compared to the conventional method, since each property helps to cover the next one.
That’s the appeal of the BRRRR method!
And since this investment strategy involves the step of cash-out refinance, you’re able to get your money out and reinvest it into buying another property. Or a stock, or a giant gold toilet seat. Whatever, no judgement! Not to mention, you’ll be able to access several tax deductions that come with owning a rental property.
Let’s go over each step involved, in that order:
- Buy: When investing in a run-down property, make sure you include the cost of revamping the property and any overruns. Your estimated rental income should give you a good profit margin on your initial purchase price. Remember, even though it’s a distressed property, you can’t compromise on a good neighborhood—or else you’d face trouble with vacancies. (If you’ve found the worst house on the block, you’re in good shape.)
- Rehab: Rehabilitating isn’t renovating per se. It means getting the property into its original state, thereby making it simply livable and functional. Most real estate investors only consider renovating if it will increase their monthly rental income (and of course, if the market should allow for that).
- Rent: This is the point at which you find reliable tenants with a good credit score, complete with a background check. You need to be extra careful here. Bad tenants or vacancies could drive your property underwater. But good ones? They can help you fund your next investment and provide years of passive income for you.
- Refinance: After rehabbing and renting your property, it’s time to refinance it with a trusted lender. Note that you may be required to own the property for a certain length of time (let’s say six months) before the lender can approve your cash-out refinance. This step is critical, too, as your home appraisal shouldn’t come in low at this point.
- Repeat: Use the cash-out refinance to fund your next acquisition and repeat!
BRRRR! Is that a shiver of joy? Understood. When employed carefully and thoughtfully, this strategy will help you earn financial independence by building a rental real estate empire. And that’s a lot to be excited about.