There are a lot of things to get acquainted with within real estate Investing especially if you are someone new to this endeavor. To take advantage of the ROI on rental property in the real estate industry, one must know the cuts and ends including the strategies that blow the competition away.
One of the most common approaches that seasoned investors use is the BRRRR Strategy. Contrary to what you are thinking when you hear it, BRRRR is not the kind of comment you say when the room is too cold.
To say the least, investing in this industry is challenging enough but having knowledge of this strategy will take your real estate investment acumen to the next level. Let us dissect.
What is BRRRR strategy?
BRRRR is an abbreviation of Buy, Rehab, Rent, Refinance, and Repeat. This method is described by investors as the strategy that allows them to have an income source that is passive over time.
By the acronym alone, you already will know the milestones you have to reach for every property you are to acquire.
First, an investor buys a property. Second, they proceed to rehabilitate it by doing some renovations or touch-ups to bring it back to a rentable condition. Then comes the rent part, where you bring in long-term tenants who will sign a lease agreement with you.
Once you have a steady income from rent acquired through your tenants, the refinance part will kick in, where the rental income will be the one to pay for the mortgage or at least earn an income from it.
The investor then proceeds to the repeat stage by acquiring a second property that finances the first when you get to a point where an ample amount of income is realized. And then you do it all over again. Pretty easy, right? Let us dive even deeper.
Buy
In this phase, purchasing a property is the easiest. But the challenge that comes from this milestone is finding a property in the first place. Keep in mind that this stage is extremely important as it demands careful analysis of the pros and cons, the location, and the cost of initial renovations to get to the second phase.
One tip we can give to investors is, to take all the time you need to arrive at a purchase decision. Do all the necessary computations when it comes to renovation and touch-ups for you to arrive at a comfortable amount of rent you will ask from the tenants.
Most of the investors use the 70% rule as a guide, where the sum of the purchase and repairs cost must not exceed 70% of the after-repair value (ARV). This rule requires careful estimation. It does not guarantee clear-cut profit though, but what it does is that it gives the investor some elbow room to adjust for unforeseen or unaccounted expenses at the time of estimation.
This phase will also determine your overall investment outcome. Therefore, before signing that deed of sale, be 100% sure that you have made all the necessary effort in assessing the property.
Rehab
After successfully purchasing a property comes the Rehab phase. It is an indispensable part of the method because realistically, there is no property bought that does not need renovation.
The success factor of this phase is that the property must get to the basic point where it is livable and already useful. Investors who are in this phase must keep in mind to “add value” to the property so you have more reasons to set a competitive price when your tenant inquiries come in.
To name a few some of the vital repairs to carry on are roofing, drywalls, electric lines, water lines, bedrooms, and kitchen rehab. If you still have some wiggle room, you can add landscaping in rehabbing your property.
Carrying out these actions will surely increase the value of your property and will allow you to command higher rent prices because you have solved future pain points of tenants who will use the property.
Take note though, to be moderate in spending for upgrades as the ARV will inevitably tell how much you are going to rent the place to keep your ROI intact.
Rent
This is not yet the best part, but this phase will indicate if you are on your way to achieving your following milestone. Taking in tenants is an exciting process as you will start to receive payments depending on the term of your contract.
Stay focused in managing the phase though, because it still entails screening eligible tenants, acting when it comes to repair requests, and making sure that turnover is kept at a short period just in case a tenant will end their contract before the agreed period.
This phase will surely take much of your time because you will need to build a healthy relationship with your tenant and look after their requests. It is vital to remain immersed in your goal.
Refinance
Once you have successfully managed the renting phase, it is time for you to move on to the refinance phase. Start by looking for banks that have this kind of method set up. When you let a bank refinance your property, you are asking them to pay off the remaining mortgage in your first property for a new one.
The parties will now be between you and the bank. Still perform due diligence in this part as some banks require a determined period that you own the property before agreeing to refinance your mortgage.
Some banks may reject a single-family rental property though, so another way to do it is by tapping into your network of investors who can shoulder your refinancing need.
Repeat
And then we get to the last phase of the BRRRR strategy which is repeat. The investor takes out another loan to finance the purchase and repairs of the second property. The term is called cash-out refinancing. It offers many advantages in favor of the investor such as lower interest rates and tax benefits. In addition, the time it takes for you to get one is short.
To maximize the gains of our investment, time is of the essence. This last phase offers another chance to investors who want to dive into their second or upcoming properties.
Take note of some of the disadvantages though, because entering cash-out refinancing will surely increase your amortization and you might need to do some ample adjustments to your cash flow.
Conclusion
When you are a newbie investor in real estate, it is vital to acquire knowledge of the strategies seasoned investors use as these will serve as a guide for your succeeding steps. By knowing the BRRRR strategy, it will be easier for you to plan your actions and more importantly, determine if you can reach the milestones and get to know where you are in your investment goals.
Story by Robin Salvador
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