Buying real estate is a time-honored investment that can provide long-term passive income while increasing its value. Land lasts, as the saying goes, and is something that can produce profits for decades. The difficult part is deciding which properties will make the best investments for reaching your financial goals.
As an investor, you may have considered flipping houses, a practice made famous by numerous television shows. To flip a house, you buy one that needs renovation, fix it up, and then sell it at a significant profit. A closely related investment method is BRRRR or Buy, Rent, Rehab, Refinance, Repeat. For many investors, the BRRRR method has provided long-term, steady passive income that allows you to expand your real estate investments.
BRRRR Method Basics
Every successful real estate investment method contains some variations, but the BRRRR method relies on the following five steps:
- Buy: You should purchase a distressed property because the price will be lower and the potential for a profit higher. You will have to invest in a renovation to get it ready to rent.
- Rehab: This step will take some time and investment money. You have to make the property safe and attractive for renters.
- Rent: You will look for solid renters who will lease the property at the right price.
- Refinance: You will complete a cash-out refinance on the property, which allows you to convert your property equity to cash. You will be able to get this cash by taking out a bigger mortgage for more money than you owe.
- Buy: You will use the cash equity to buy another property and begin the process again.
Using the BRRRR method correctly can help you acquire numerous investment properties that can provide excellent long-term profits. The key to this success is in the financing and refinancing.
Financing BRRRR Deals
Your initial financing for a BRRRR deal will probably be a short-term loan meant to buy and rehab the property. Initial financing for BRRRR deals can come from several sources. The most common include:
- Conventional Bank Loans: These loans generally require a 20% – 25% down payment with an interest rate that is close to what you’d pay for an owner-occupant loan. And while you will be buying a distressed property, it cannot be in such bad shape that the bank will be forced to pass on the giving you the loan.
- Local Bank Loans: Your local bank is more likely to work with you on the terms. You will probably have the same down payment as with a national bank, but a local bank may be flexible on the debt-to-income ratio and on mortgage limits.
- Hard Money Lenders: This group specializes in financing rentals and house flipping efforts. You’ll pay more for these loans, but they often include funds to complete the necessary rehab.
- Private Lenders: You can often find lenders from among your friends, family, or business partners. The terms of these deals depend largely on your relationship with the lenders, but they often include financing for the property rehab.
With the BRRRR method, the initial financing is important because you need enough to carry you through the purchase and rehab. But the BRRRR method won’t work unless you also have to focus on the refinancing step.
Refinancing BRRRR Properties
Refinancing your property is essential to the success of the BRRRR method. You must be able to take advantage of the cash equity in your property. There are two main ways to refinance:
- Conventional financing: You can refinance in the same way that you financed – using banks or private lenders. This strategy will cost you less because the interest rate will be lower.
- Commercial finance: This method specializes in your type of investment project, but you will pay higher interest rates.
Pros and Cons of the BRRRR Method
Like any real estate investment plan, the BRRRR method has advantages and disadvantages. Some of these include:
BRRRR Method Pros
- Little Money Down: If you find the right property, you will pay very little out of pocket to get started.
- High ROI: Because your initial investment costs are so low, the potential for a high ROI is excellent. You could easily see a 25% cash-on-cash return on top of your increase in equity.
- Increase Equity: Because you will be rehabbing a distressed property, you will build significant equity almost immediately.
- Repeat Success: Once you’ve successfully gone through the process once, you should be able to recreate it faster and more easily – bringing in more and potentially better profits.
BRRRR Method Cons
- Expensive Rates: Your initial short-term loan may come with high-interest rates, leading to expensive carrying costs. You may even find yourself with a negative cash flow during the initial repayment stage.
- Exceeding the Rehab Budget: You can easily exceed even a carefully planned budget for a distressed home when unexpected repairs become necessary. Also, a longer rehab time leads to higher carrying costs.
- Low Appraisal: Despite your best efforts, your appraisal after rehab may not be high enough to build the equity needed for a successful refinance.
- Refinance Wait: Even after a successful rehab and rental, your lender will probably make you wait 6 to 12 months to refinance. That may leave you with a gap between your short-term loan and your refinancing funds.
As with any investment, you need to carefully weigh risks versus potential rewards. BRRRR is not the right investment choice for everyone.
Finding Properties Suited for the BRRRR Method
Looking for distressed properties can take a lot of leg work. You can, of course, search your own town or city for potential investment properties. As a real estate professional, you should already have an extensive network with realtors, mortgage brokers, and property insurance agents. But the most efficient and effective way to find BRRRR properties is by using an online database such as ProspectNow.
The ProspectNow Advantage
Finding excellent real estate investment opportunities can be difficult if you do not have the right tools. Time is truly money when you want to use the BRRRR method to create long-term passive income and further property investment opportunities. That’s why using ProspectNow is an excellent choice for property investors.
ProspectNow is an efficient way to gather information on promising commercial and residential properties, many of which would be good BRRRR prospects. Our database has 42 million commercial listings as well as over 100 million residential listings, virtually guaranteeing that you will find the kind of distressed property that works for BRRRR. ProspectNow will help you find in-depth information about properties that you can rehab, rent, and refinance throughout the United States.
Remember, you can easily get information about the property owners as well as the property’s listing status, location, taxable value, and tax liens by using our database. You can put your BRRRR plans into action from the comfort of your home or office.
ProspectNow is your source for information on commercial and residential properties. Contact us today for a free trial so you can begin using the BRRR Method, build equity, and invest in more properties.