Hello, Hamilton Real Estate Investor!
Do you love sharing with other real estate investors?
I absolutely do, and in my experience, it can be fulfilling at times 🙂
A married couple reached out to me about a property, their first foray into real estate investing.
They’ve located a property they tell me is below market value, and they’re unsure if it will have cash flow since their city does not allow short-term rental, nor does zoning allow duplexing.
As a geek of real estate, I let them know short-term rentals are banned, so anything less than 30 days is a NO, NO. Above 30 days is allowed.
I explained to them how our personal portfolio is constructed to cash flow so it may scale. Â
Negative cash flow does not suit our goals, and we would not have been able to build a portfolio of 11 properties otherwise.
Our plan is to always have positive cash flow as determined by our goals, and this is where I find a lot of new investors miss. They don’t know enough about what types of investments are available and just buy whatever is marketed to them, often pre-construction condos, since they pay agents the highest commission and builders have massive marketing budgets. Â
Unfortunately, condos and many single-family homes negative cash flow a couple hundred dollars. That’s fine for some investors if rents go up and equity gains are there, but that’s a lot more risk than a duplex that’s in demand from both buyers and renters.
The married couple thanked me profusely for sharing my experience as they don’t know anyone with my level of experience, and I was honoured to help. They’re going to proceed with the investment and have a better understanding of their best and worst-case scenarios.
If you are planning to dive into the world of real estate investing, you need a plan.
With such a wide variety of tricks and strategies available, figuring out which investment method is best for you can be difficult. While there are no one-size-fits-all strategies, there are certainly a few that come close.
Of those methods, one that often holds the spotlight among long-term real estate investors is the BRRRR method.
This method is praised for the cycle it creates and its ability to help both new and old investors expand their portfolios at a faster rate. This quick turnaround time makes the strategy more attractive.
So, what is the BRRRR Method of real estate investing? How can it help you achieve long-term success as an investor?
Let’s take a look.
What is the BRRRR Method?
BRRRR stands for; Buy, Rehab, Rent, Refinance, Repeat. In essence, the focus of this strategy is to buy properties that allow you to quickly build equity in order to use that equity to continue investing in further properties.
When followed correctly, this method is known to help investors maximize the return on their investments while also converting that return into additional sources of cash flow. Of course, to properly achieve this result, you must first understand each step of the process.
Buy
As you would expect, buying a property is the jumping off point for the vast majority of real estate investment strategies. However, it is important to consider which properties you purchase while using this method.
The BRRRR method starts by finding and purchasing properties that require noticeable updates or repairs. That way, you can see the greatest return from step two.
Depending on the state of the property you plan on purchasing, it may become difficult to get a traditional mortgage. This is because most traditional lenders require an appraisal before financing your mortgage.
If the house is in obvious need of repairs, it can be challenging to determine the overall value of the property.
If you cannot get a traditional mortgage, you may still be able to qualify for an alternative or private lending option. Otherwise, you may be able to obtain a hard money loan or use a home equity line of credit (HELOC) to finance your purchase.
Just be careful because these options do come with higher interest rates and assumed risk.
Finally, it is often advised that you should not offer more than 70% of the after-repair-value (ARV). That way, you can ensure that the equity you build in the home later is not eaten away by the efforts made to build it.
Rehab
After you have purchased the property, it is time to get to work. Depending on the property’s needs, you will have to complete any updates or repairs that the property requires before you can carry on to the next step.
After completing any obvious repairs necessary to make the home tenant-ready, it is time to focus on updates to increase the overall value. This can include fresh paint, improved light fixtures, new appliances and a refreshed yard to add to the curb appeal.
Then, once you have decided what work needs to be done, try to set a specific budget and timeline to get the work done. That way, your expenses do not go over the ARV of the property, and you do not spend more time with the property sitting vacant than you planned for.
Rent
After all of the work is completed, it is time for you to find a tenant to occupy the property. During this step, you have two key factors to consider, setting your rental price and finding an appropriate tenant.
First, when determining how much you will charge for rent each month, you need to consider two things; what would be a fair price for your tenant, and how much do you need to charge to generate a positive cash flow?
After all, you do not want the property to lose money.
When setting the rent, start by calculating your monthly mortgage payments and any other recurring expenses, then compare that to local rent prices and aim to price your property in a way that covers your costs while remaining reasonable compared to other properties.
Then, it is time to find a tenant.
Make sure you perform a detailed screening process to ensure your tenant has good credit, a stable job and consistently makes their rent payments on time. However, when doing this, you need to make sure your screening process abides by local laws and regulations.
Refinance
Once you have built up a reasonable amount of equity in the property, it is time to move on to the refinancing step of the method. More specifically, what you need to do is called a cash-out refinance. This way, you can use those funds to continue investing.
The conditions to qualify for a cash-out refinance will vary between lenders. Still, for most lenders, they will require you to maintain a healthy credit score and a low debt-to-income ratio on top of the equity you have built in the property.
Some lenders may also require you to own the property for a minimum amount of time before they will let you refinance.
Refinancing also requires you to get a new appraisal to confirm the new value of the property, which you will need to pay for. So be sure to have enough money saved up to cover the appraisal fee and any other legal or closing costs.
Repeat
Finally, it would not be the BRRRR method if you did not do it all over again. Once you have the cash from your refinance, it is time to use those funds as a down payment to buy more property and keep the cycle going.
This step is also a good time to reflect on any difficulties you had during the process so that you can plan to avoid them in the future.
So, do you think the BRRRR method is right for you? Let us know in the comments!
If you have any further questions about this strategy or would like some more information, please do not hesitate to reach out and contact us with your questions.
In the meantime,
Happy Investing Everyone
Erwin.
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