Okay so what’s all the fuss with BRRR? Is it something that you should consider adding to your investing arsenal or is it a passing fad?
Great questions. Let’s dive in and see if you can use this method to grow your portfolio and help you to build your real estate empire and world domination (muhaha).
What is the BRRRR Method?
First and foremost, BRRR is an acronym for:
Buy, Rehab, Rent, Refinance, and Repeat.
You can think of the BRRRR method as a smart strategy to create a passive income leveraging real estate. The idea is to buy a property, do your rehab to improve its value, rent it out and ultimately refinance. This allows you to borrow against the equity of the property at its highest value. When done properly, this strategy allows you to recoup some or all of the money you invested into it.
The main idea is to leave some money in your investment property while you generate a new source of cash flow for future investments simultaneously.
I would be remiss to not mention this. While this method can be rather effective, there are always some risks involved that you should keep in mind, too.
Buy Your Property
The purchase is probably the most important part of the equation. And one of the keys to making the BRRRR method work is ensuring there’s enough value in the property -- this is absolutely essential. To do this and get you the highest possible margins, you need to consider the ARV (after repair value) of the property you’re looking to invest in. A rule of thumb, aim for 70% or better.
As a refresher, ARV = Property’s Current Value + Value of Renovations
Here’s a quick example:
Maximum Purchase Target = ARV x 70% – Estimated Repair Costs.
Maximum Purchase Target = $200,000 x 70% – $30,000.
Maximum Purchase Target = $110,000.
To make sure you’re getting a good profit on the deal, don’t go for margins below 30%. You want to leave room in your budget for unexpected costs that might eat into your margins. Also, just to be on the safe side, you also want to account for appraisals coming in lower than anticipated.
Time To Renovate
Nice work on the purchase. If you followed the golden rule of purchasing at 70% or better ARV then now it’s time to get into the rehab part.
Obviously the property is a fixer and afforded you the opportunity to get in at a price that should allow you to do the renovations and if you choose, you can flip it for a profit. But, this isn’t about fix and flip deals. Nope, this is about fixing and holding. We’ll jump into more details in the next section.
As you are going through the renovation process of this BRRR investment strategy, you are no doubt keeping a very close eye on your costs. But also, you are considering the value you are bringing to the property. After all, you must make the property rentable.
There’s a fine balance you must strike between cost and value. Obviously there are several factors such as the location, your target rental market (e.g. high-end luxury rentals) but generally speaking you want to be conservative. You want to make sure the property will rent, but you don’t want to overspend on items such as high-end cabinets, appliances, fixtures, etc.
Profit margin. Profit margin. Profit margin. Hopefully you get the point. Keep your eye firmly fixed on your costs.
In case you’re wondering about financing a rehab project, a hard money lender is a great way to get into these types of renovation projects. There are tons of advantages in working with a hard money lender, such as quicker closings, less documentation and so much more.
Rent It Out
Whew, glad the renovation part is over. If you are like me, you might actually like rolling up your sleeves and jumping into rehabbing. Either way, now the fun part begins. This part is very important in ensuring you can get to the next step in the BRRR strategy.
So how much rent should you charge? Obviously you are in this from an investment standpoint so you have to make sure you consider more than covering the mortgage. But you also have to consider supply and demand when it comes to pricing.
A good rule of thumb on how much rent you should charge monthly is .8% to 1% of the purchase price, including your rehab costs and improvements. Again, this is just a guide. Ultimately, it has to make sense financially.
Let’s look at some considerations for positive cash flow with your rental. Make sure you crunch your numbers carefully and consider multiple factors. It's as simple as pinpointing what rental income you can reasonably expect and figuring out what your costs will be to generate that income.
Factor in the following:
Any utilities you are covering
Vacancy (2 to 3 times the monthly rent depending on your market)
Okay, so I’m going to be captain obvious here, but once you have come up with how much rent you’re going to charge, make sure to get the property rented ASAP. You want to minimize the vacancy to keep as much of your dollars in your pocket and not eat into your margins.
There are tons of great resources out there on the web, but make sure you put a good renter in your property. Even though it’s crucial to get your property rented as quickly as possible, it’s just as important to get someone in there that’s going to take care of YOUR investment. Enough said.
Time To Refinance
Wow, you have now purchased a fixer (at 70% ARV or better of course); rolled up your sleeves and renovated (okay, maybe you didn’t, but someone did); calculated the right amount for rent and found your ideal tenant; and now it’s time to refinance.
So why is this part so important? Not only are you trying to lower your interest rate, but this is how you get your cash out -- which of course allows you to do the last step, but more on that later.
That’s what makes the BRRRR method so attractive -- the ability to refinance to get cash out so you can do more deals. By buying at the right ARV, factoring your renovation costs effectively, doing a solid renovation job and putting a renter in the property should all increase the value. All so you can use the cash to fund the purchase of your next fix and flip.
Looking for a quick cash out refinance? Black Label Capital provides cash out refinance Hard Money Loans. Quick funding, less paperwork, and great support.
Rinse And Repeat
I am a huge fan of processes and systems. The more you can make something repeatable, especially if it’s profitable, the more you can grow your wealth.
BRRR is all about processes. And the “repeat” part of this strategy is the key. Think about it: you Buy a property at the right ARV; you Renovate and rehab it; you get it Rented out; you Refinance it; and then you get to do it again and again -- Repeat.
So what are some of the keys to success?
Buy the right property at the right ARV
Stay under budget during rehab
Make sure the property is rentable
Get the property rented out as quickly as possible with positive cash flow
Work with the right lending partner during the refinance
Doing all of the above right will set you up for success when it’s time to refinance. The right lender, especially a hard money lender that wants to be your long-term partner, can make the process as easy as possible.
Is The BRRR Strategy Right For You?
Hopefully you’ve had a chance to see what a great real estate investing strategy BRRR can be. This can be a great addition to your overall strategy for wealth creation.
As with any business venture, having the right partnerships is crucial. When considering the BRRRR method, having a hard money lender who can help you finance the purchase and rehab costs can set you up for success. You want the ability to tackle all of your renovations and get your property rented out as quickly as possible.
Black Label Capital provides 30 Year Rental Loans:
-Rates starting at 5.375%
-LTV/LTPP up to 75%
-Loan size: $55,000-$1,000,000
-Minimum Asset Value $100,000
-Purchase, Refinance, Cash Out
-Min FICO 680
-SFR, 2-4 Unit, Townhome, Condo
-No income documents/Tax Returns Required
-FICO, LTV and PDTI driven rates
We're here to talk about your next deal. Whether it's a BRRR strategy, Fix and Flip, or Long-term Rental -- we're here for you.
Since we are about long-term relationships, we're happy to chat with you about strategies and ways to make your next deal work. We built Black Label Capital on being a true lending partner based on Saving You Time, Working Efficiently and Being Transparent.
Isn’t it time Hard Money became Easy Money?
Let's chat today. I look forward to learning more about your funding needs.