BRRRR strategy can provide passive income and a revolving method for purchasing and owning rental property. The method works through the following steps:
- Buy a property: The property you purchase should be a distressed property that needs some work to get up to code and ready to rent. Because of the home’s condition, it will likely be cheaper to purchase.
- Rehab the property: Since the property is distressed, it may require extensive work. In this step, you’ll renovate the property to make structural, safety and aesthetic improvements, and prepare it for renters.
- Rent out the property: Determine the rental price and find people to rent the home.
- Refinance the property: With a cash-out refinance, you convert your equity into cash. You access your equity by taking out a bigger mortgage, borrowing more money than you currently owe. The cash can be used for anything, including purchasing another property.
- Repeat: In this final step, you’ll start the process all over again. Using the funds from your cash-out refinance, you’ll purchase another distressed property and rehab it, before renting it out and refinancing that property.
The BRRRR (Buy, Rehab, Rent, Refinance, and Repeat) strategy is a real estate investment approach that involves flipping a distressed property, renting it out and then getting a cash-out refinance on it to fund further rental property investments. Investors that want to purchase a distressed property that would need of updates and repairs, will have a hard time getting a traditional mortgage on the property. There are a few reasons for this. Most lenders require an appraisal on the property, but the value is difficult to assess on this type of property. Depending on the type of loan you get, the property may also need to pass specific guidelines to qualify.
Generally, most investors will to use their own cash, a home equity line of credit (HELOC) or a hard money loan to finance the purchase and any rehab cost. If you use your are using your own funds or a HELOC, we can do a Delayed Financing with in the first 6 months. There are some seasoning requirements so make sure you understand clearly before you acquisition. Anything after the 6 months is treated and a “Seasoned Cash out”.
For those who are using a rehab or hard money loan, the lender will put a lien on the property. Many times investors just want to pay off the construction loan balance and do a construction to permanent loans “Rate And Term”.
- BRRRR investors can create passive income, either as an additional revenue stream or to live off of. You build equity: Buying and holding on to multiple properties means your equity will keep going up while you can keep repeating the strategy and building wealth as you go.
- Rehab can be expensive and time-consuming: Quality renovations usually do not come cheap, or quick. Overseeing the work can be stressful. And depending on the extent of repairs needed, you may need to take out a rehab loan. These loans typically have higher interest rates and can be costly. You have to put in work and time before you start making money.
- There are risks involved. Whether you estimate a home’s post-rehab value incorrectly, overestimate the amount of rent you can charge, or underestimate the renovation budget, there is always a chance you could lose money.
The method can be very lucrative, but you have to know what you are doing. Novice investors may be in over their heads. House flipping is an art, a science, and a passion, and there are plenty of ways you’re acquisition can go wrong.
For more information or if you have any questions, call me anytime at 855-326-6802 or schedule a call with a Loan Specialist.