The BRRRR method is a very successful real estate investing strategy. Like any strategy, it is a plan of action designed to invest in real estate rentals without using up all your savings.
The plus point is that you can invest in more than one property at a time, ensuring more tax benefits, more equity from getting a good deal, more cash flow, and more diversification.
BRRRR stands for Buy, Renovate, Rent, Refinance, and Repeat.
fix and flip loans, BRRRR method
To start with, buying and repairing a property requires a considerable amount of money.
Even if you’re taking fix and flip loans, you have to make a down payment of 20% of the value of the property.
This is an expensive undertaking.
But with the BRRRR method, you can buy many rentals without needing a huge sum of money.
“In BRRRR method, you needn’t invest a huge sum for buying rentals.”
The BRRRR method is a great option for fix and flip investors looking to earn high returns on their real estate investments.
Well, let’s break it down for better understanding.
The rule of thumb is to buy a property you can fix and rent/sell for a margin. Investors using fix and flip loans will look for a good deal on a rental property, make repairs to it, and sell at a profit.
When buying, you can use the 70 percent rule to determine the maximum buying price. After repair value (ARV) plays a key role in this decision.
Maximum Buying Price = (ARV x 70%) – Value of repairs
The next step involves renovating and repairing the place. Think about the buyer’s perspective. You need to consider what factors and improvements will add the most value to the property.
Most flippers usually begin with the repairs that are essential to make the property habitable and functional. This makes renting it out easier.
Now that the house is livable, you’ll want to rent it out.
This will not only start an inflow of cash from rent payments, but also make it easier for you to get a lender to refinance your property.
“For investment through BRRRR, the rule of thumb is to buy a property to fix and rent/sell for a margin.”
Most lenders are hesitant to refinance a property that is not occupied. In this case, appraisals can be made and lenders will refinance your property so that you can invest in other properties. Refinancing allows flippers to pull out their investment in the property and still retain a good profit.
Once you pull out your investment, you can use the money to find the next property to buy and repeat the entire process.
When you use the BRRRR method of short term financing, your property is treated as a short term flip i.e. most flippers take home equity loans, private money or hard money loans, and borrow cash.
Their objective is to make the property habitable so that they can rent it out to tenants. You can then arrange for refinancing to pay off the fix and flip loans and turn the property into a long term source of positive cash flow.
But before you make a go for it, you need to do the math. So let’s evaluate the advantages and disadvantages of the BRRRR method.
Less Money Down Requirement
fix and flip loans, BRRRR method
You don’t need a lot of money to invest in every rental purchase.
This means you’ll be paying very little money out of your pocket.
Higher Returns on Investment
Since you have to invest less cash out of your pocket, you are more likely to get a higher return on investments.
You Can Buy More Rental Properties
Under the BRRRR method, you don’t need to pay the entire value of the asset. You can build equity and buy more rental properties because you have more money available for investment.
Lowers Risk
Not all real estate appreciates at the same rate. More properties mean more equity and thus, a diversified portfolio. This reduces the risk since you have multiple cash flow options.
“There are fewer risks and more options for cash flow in the BRRRR Method.”
If you’re using hard money loans, then repaying this short term loan can prove expensive, and it adds a financial burden to your cash flow.
fix and flip loans, BRRRR method
There is a high risk in case the property appraisal does not meet your estimates.
There is also the possibility of failure to find a bank for refinancing.
You have to factor in the seasoning, that is the period from the purchase of a property to its refinancing. Banks can take up to 6 months from the original purchase date before they refinance your property.
Renovating and repairing the property can be a stressful undertaking. You have to deal with contractors, delays, and risks of major repairs that were unnoticed at the time of appraisal.
The BRRRR method is a powerful way of investing in real estate. It allows you to capitalize on the appreciation of your property while ensuring you have a positive cash flow in the long term. However, this strategy requires careful calculation and the ability to spot a good deal.
Need more information about the BRRRR method? Contact us at (631) 465-2161 and speak to our hard money lending experts at Gauntlet Funding.
Tags: Bridge Loan Lenders New York, Bridge Loans, Construction Lenders, Financing Expenses, Fix and Flip Loans, Real Estate Investing, Real Estate Financing
