Anyone who owns investment property, or would like to own it, has probably thought about snagging a fixer upper. And they’re “oh so” tempting, especially in popular locations like Orlando!
You buy a “dump” for dirt cheap, do a bunch of work yourself and start renting at premium rates. But did you know that the same real estate investment has more earning potential than that? Many swear by the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) as a great way to build personal wealth. In fact, some of our clients do.
Are you BRRRR curious?
Define BRRRR Please
Finding deals on houses with “good bones” in great locations lie at the center of the BRRRR method. But more than that, property investors treat these rental properties almost like house flips, using industry knowledge and careful accounting. It helps if you know what to look for and where; you can find those diamonds in the rough. And thus, starts the process.
Step 1: Buy
You’ve done your research. You know what to look for and where. You have a budget and understand property values when seeking out a loan. Experts recommend shooting for financing that is no more than 70 percent of a property’s value.
You finally find that diamond in the rough, knowing exactly what you’re getting into and negotiating with the seller. Now comes the fun part.
Step 2: Rehab
Ready to shed some blood, sweat, and maybe a few tears? Right on! The key? Know what you need to do before starting each rehab project (or have some buddies that do for you). Also, make sure you know the right level of amenities to use. No sense spending $300k on a house worth $250k. Unless you plan to deal exclusively in luxury rentals, those high-end features only take away from your return on investment.
Step 3: Rent
Woot! Now this investment property will start to pay off. Getting high-quality tenants who pay premium prices into your rental property makes Step 2’s sacrifices all worthwhile(ish). By determining the right rent rate, you can pay the mortgage and clear some profit each month. Most investors stop here. But BRRRRers take things even further in their plans.
Step 4: Refinance
Having renters already in place increases the odds of banks approving refinancing for an investment property. Refinancing frees up cash, allowing you to continue to build your portfolio with little of your own money invested upfront. Ahead of purchase, know the “seasoning period” (or how long between purchase and refinancing) your bank requires before refinancing.
Also, getting the highest appraisal possible after rehab will ensure the best possible rates and garner higher cash out options.
Step 5: Repeat
With a solid purchase and well-timed refinance, now you have the extra capital to start the process all over again. By repeating this method over and over, BRRRRers can learn from each cycle and continually improve their systems. Each round will bring new lessons and opportunities for improvement. And ideally generate more and more passive income.
Ultimately, investors who use the BRRRR method can stand to grow their wealth with little upstart capital of their own. Of course, they also stand to lose a lot, too. Our advice? Do. Your. Research.
Are You BRRRR Curious?
It’s best to talk to lending experts, real estate and property management advisors (ahem), and other BRRRRers. In fact, start today by talking to leaders in investment real estate and property management in central Florida at The Realty Medics.