Today’s economy is quite difficult: the cost of living is rising while wages remain relatively stagnant. It can feel impossible to make ends meet, which is why many men are turning to tried and true ways to build their wealth – especially ones that put their handyman and financial management skills to the test.
If you’d like to find way creative ways to tackle student debt, save for retirement, or simply upgrade your lifestyle, you may have explored buying rental properties but find the concept too daunting. The industry can feel incredibly intimidating, but thankfully, there are plenty of guides to help inform your strategy – and one of those is the BRRRR method, which gives you a path toward success.
What is BRRRR in real estate? Put simply, it is a five-step process to investment. You’ll buy, rehabilitate, rent, and refinance a home, and then repeat the procedure using the money you get from a cash-out refinancing. BRRRR requires you to accurately identify promising properties, plan to get them into habitable shape, maintain a steady tenancy, refinance when appropriate, and then do it all over again. However, it can be made much simpler if you follow these tips.
Buy Foreclosed or Auction Homes
Foreclosures are often an excellent way to get a home, as they are generally cheaper; you can also more easily get financing for them than a house at auction. You may also be able to find a short sale, which is when the borrower sells their home at below market price and has the remaining balance forgiven.
Many people shy away from auctions because they think that they always need cash in hand – and while it’s true that many auctions and sheriff sales will only accept cash bids, many will allow you to bid on a home with the assumption that you can get financing. You’ll need to find a lender who will work with an auction home, so do your research carefully: don’t assume that every auction, or every lender, will be able to work with you.
Know When to DIY and When to Rely on Contractors
Rehabilitating the home for tenancy is the next step of BRRRR, and it requires you to think carefully about what you’re willing to perform yourself and what should be left up to professionals. Professionals should always deal with wiring, water or fire damage restoration, plumbing, and foundation problems; even if you have a construction background, you may be legally obligated to work with a licensed contractor to meet building standards.
However, things like replacing flooring, installing cabinetry, setting up appliances, changing out doors or locks, and patching up damaged drywall can be tackled by nearly anyone with patience and the willingness to put in a bit of effort.
Attract Good Tenants by Developing Prudent Rent Rates
Deciding on a rent rate can be challenging: you want a competitive rate that in line with other properties of similar size, but you also want to make back the money you spent on the property to get it into good shape.
Perform market research to identify what is the going price for rents in your area, then strive to be somewhere in the middle based on properties that are similar to your own. You may consider sweetening the deal by waiving pet fees, which can entice more applicants.
It’s important that you vet tenants carefully by looking at their rental history and checking their references; don’t simply assume at first glance that they will take care of your property.
Know When to Refinance
The longer that you hold your first property, the more money that you will receive from a cash-out refinance, which will provide you with the difference between the home equity and your current mortgage. You’ll also get a better interest rate, which will further lower the cost of your original property as you work to rehabilitate another one.
While there’s no magic number as to how long you should hold your property before refinancing, you should consider how much it will cost to put a down payment on a new property and bring it back up to standard, using estimates from what it cost to rehabilitate your first BRRRR acquisition. You’ll want to have at least this on hand, if not more, when you refinance.
Remain Proactive and Watch for Good Properties
BRRRR is meant to be repeated, so you should be aware, even as you’re working on your first property, that you will eventually replicate the process using the knowledge you have gained from your first go-round. As such, pay close attention to your market and be open to a good deal on a new property and maybe even use an npv calculator to determine the value of a possible investment before finalizing any deal. Watch your home equity and develop a threshold for when you’re ready to jump on the next opportunity; this will help determine your budget for your upcoming building rehab.
Both patience and a willingness to take risks are key elements of a good investor; become familiar with how much it costs to renovate a property so you can walk into an auction with a good idea of what you will spend. BRRRR helps you take a long-term perspective on investment, which will serve you well as you develop your portfolio and prepare to enjoy exponential growth of your wealth.