Before now, you may not have considered owning rental property. With the costs of real estate these days, you’re probably thinking, I can’t even afford ONE house in the Orlando area! We feel you.
But what if you could put a far less down payment on a rental home in a better market? Then quickly use equity in that house to buy another. And then another. And then another. Pretty soon you realize you no longer need that 9-5 job because you, my friend, have achieved financial freedom.
Have we got your attention? Read on!
What’s the BRRRR Method?
Many swear by the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) as a great way to experience financial freedom and build generational wealth.
Anyone who owns investment property, or would like to, has probably thought about snagging a fixer upper. And they’re oh so tempting—especially in popular locations like Orlando, Florida! 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 investment has more earning potential than that?
How The BRRRR Method Works
Finding deals on houses with “good bones” in great locations lies at the center of the BRRRR method. But more than that, investors treat these rental properties almost like house flips—using industry knowledge and careful accounting. It helps if you know which central Florida properties to look for to find those diamonds in the rough.
For the sake of this article, we’ll say you found your diamond. Ready to jump in?
Step 1: Buy
You’ve done your research. You know where the rent market is strong. You have a budget and understand property values when seeking out a loan, especially when considering distressed properties to rehab. We recommend shooting for financing no more than 70 percent of a property’s value.
You know exactly what that diamond needs to grow into a money-making rental and negotiate an agreement with the seller. Even better, you’re able to do most of the work yourself to save costs. Now comes the fun part.
Step 2: Rehab
Ready to shed some blood, sweat, and maybe a few tears? Right on. The key to BRRRR success? Know what skills you’ll need before starting each rehab project (or have some buddies that do). Make sure you have a list of reputable contractors you can hire for projects you don’t feel comfortable tackling yourself. Also, make sure you budget correctly for the repair costs. Many amateur flippers fail to properly value or underestimate material costs for the rehab, which can quickly wash away the profits.
Also, make sure you know the right level of amenities to use. No sense spending $200k on a house worth $250k. Unless you plan to deal exclusively in luxury rentals, those high-end features only take away do not net enough cash flow in the rental market to justify the investment cost.
Step 3: Rent
Woot! Now this investment will start to pay off. Getting high-quality tenants who pay premium prices for your rental property makes Step 2’s sacrifices all worthwhile(ish).
By determining the right rental rate, you can pay the mortgage and clear some profit each month. Most investors stop here. But BRRRRers take things 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 in-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
If you calculated the numbers correctly, you should have cash flow, add value to the property, and have access to instant equity once completed. By repeating this method over and over, BRRRRers can learn from each cycle and continually improve their systems.
Use your first BRRRR experience as a great opportunity to learn how you can save costs for the next rental home. Each round will bring new lessons and opportunities for improvement. And ideally generate more and more passive income getting you to financial freedom fast.
Putting the BRRRR Method In Action
You researched BRRRR more, asked your significant other for permission, and you’re in. Now what?
Central Florida has dozens of thriving areas, each with their own personality that make them perfect real estate investment areas. So, you should have no trouble finding a project that fits your budget in a location desirable to you.
Do you currently own investment property? If not, do your research and consult with experts well-versed in good investment properties, not just ones with “good bones.” (What the heck does that even mean anyway?)
BRRRR Method Pro Tip: Narrow your search before you start wasting time driving around looking at duds. Partner with an experienced property manager and real estate agent. Investment-focused real estate experts can help you identify the types of projects that fit your portfolio goals.
Understand Rehabbing Costs
If you plan to do any of the rehabbing yourself, please honestly assess your skill levels. Letting your ego take on more than you can actually handle will cost way more in the long run—especially when you need to call in professionals to fix whatever you screwed up to pass building code inspections.
If you know you’ll need help, get estimates from reputable contractors who actually call you back. Skilled friends who owe you a solid also make great contacts…if you can get them to call you back.
BRRRR Method Pro Tip: Knowing your limitations and getting estimates for professionally done projects will save you from yourself and keep you within your budget. If you use a professional, ask questions to see what you can handle for your next rental project.
What Happens When You Refinance
Let’s say you found a diamond in the rough, rehabbed it, and have renters happily living in your new investment property. Sweet! This is where all that aforementioned research comes in handy.
That house you bought for a steal and made strategic improvements to drastically increase in value. An appraisal confirms this. Time to refinance!
BRRRR Method Pro Tip: With a mortgage amount at 75 percent of the new worth, you pay off the previous mortgage. But you also find yourself with a chunk of change to plunk down on a whole new project. Time to begin again.
Repeat this cycle enough times, and you may find yourself with a completely different problem: keeping up! Having a handful of rental properties where you serve as the landlord might be doable as a full-time gig. Having more than that can quickly become overwhelming, especially if you also hold a full-time job.
BRRRR Method Pro Tip: Building wealth for the future shouldn’t mean killing yourself right now to do all the things. Remember: “All work and no play” makes Jack burnt the hell out and a lousy family member and friend. Don’t be like Jack. Consider the value of a good property manager.
How Can A Property Manager Help Me BRRRR?
I Didn’t Sign Up to Landlord
You don’t want the headaches that come with landlording? Nobody said you had to! Depending on the level of support you want, you may never even have to meet your tenants. And those middle-of-the-night emergency calls? The property management company takes them.
Property managers can also handle advertising, screening and placing tenants, lease signings, rent collection, tax paperwork, and ongoing maintenance issues.
Wait, you ask what happens if you buy a house in Orlando but you don’t live in Orlando? The house won’t move and neither will you. Solution: A great property management company can get all the dirty work done for you.
Ultimately, investors who use the BRRRR method 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.
Do not buy a big, expensive house with the plan to spend a large budget to rehab the property, thinking it will generate a high monthly rental amount. It won’t. Remember your market, identify your potential tenants, and formulate your plan focusing on those variables.
Also, talk to lending experts, real estate, and property management advisors (ahem), and other BRRRRers. Then you can ultimately decide if the BRRRR Method makes sense for your financial situation.
The Realty Medics Difference
A good property manager can give you back your life and make that investment property much less stressful. The Realty Medics call that rental property peace of mind. Plus, as a full-service realtor, we can help you continue to expand your BRRRR property portfolio.
Want to learn more about how to BRRRR in the Orlando area? Talk with leaders in investment real estate and property management in central Florida at The Realty Medics. Call us today at 321-947-7653 or complete our online form.