If you’re interested in getting involved in the world of real estate investment, one of the best ways to start building your empire is by following the BRRRR Method. The term was coined on a real estate podcast called BiggerPockets, and it’s really nothing new. People have been investing in properties, restoring those properties, and then refinancing on those properties for centuries. However, the BRRRR Method gives beginners a great step-by-step guide to getting involved with real estate investment.
As a personal anecdote, one of my former bosses uses this exact method and has made hundreds of thousands if not millions of dollars from it. It’s also really not all that complicated, and it’s something that anyone can do if you’re able to obtain the upfront capital. You can start investing in real estate as a source of supplementary income, and it may very well become your primary career in a few years. This article will detail exactly how you can do just that.
The BRRRR Method consists of five parts that each correspond to a letter in the title. Buy. Rehab. Rent. Refinance. Repeat.
Step 1: Buy
The BRRRR Method requires that you buy a distressed property that is in need of rehabilitation. The difficulty here is that distressed properties are often difficult to get appraisals on, which makes it difficult to get a mortgage loan. Still, you should talk to a lender and see if you can secure financing before you completely rule it out. You can also look into using a HELOC or a hard money loan to finance the purchase, but these can carry far higher levels of risk than traditional mortgage loans.
When deciding whether or not to buy a property, it’s important to think about how much you’re going to have to pay for the property as is, how much you’re going to have to spend on rehabilitation, and how much the property will be worth after rehabilitation. Once you get an estimate of how much the after-repair value will be, you probably shouldn’t invest more than 70% of that value in the property.
Step 2: Rehab
When starting the rehabilitation process, the first things you should focus on are things that need to be brought up to code and things that will make the house safe to live in. After that, you want to focus on things that are going to significantly improve the value of your home. These will usually include things like bathroom or kitchen renovations, improving curb appeal, and installing appliances.
Step 3: Rent
Once your property has been sufficiently rehabilitated, it’s time to start renting it out. This is also very important for refinancing on this property because lenders typically won’t allow you to refinance on a property with no tenants.
You want to find the best tenants possible, meaning people with good credit histories, stable jobs with steady income, positive references, and no criminal record. You can get all of this information by asking potential tenants to fill out an application and performing a background check on them.
When setting your rent, you want to make sure that you’re covering your expenses and earning income. For example, if you’re paying $900 per month on your mortgage, you should probably be charging at least $1,500 per month in rent. You also want to make sure you’re fair to the renters.
Step 4: Refinance
When using the BRRRR Method, you’ll need to do a cash-out refinance on the property. Once you find a lender that offers cash-out refinancing, you’ll need to make sure you meet a set of requirements that usually include a certain credit score, debt-to-income ratio, and potentially length of ownership.
If you meet all the requirements for your lender, you’ll get a loan that you can use to purchase another distressed property.
Step 5: Repeat
Once you’ve gotten your cash-out financing, you can use that to purchase another distressed property and start the entire BRRR Method over again. The more times you’re able to repeat the process, the more income-earning properties you’ll accumulate, and the more passive income you’ll have to pad your bank account.