The BRRRR investing strategy is used by both novice and experienced real estate investors. BRRRR stands for Buy, Remodel, Rent, Refinance, Repeat and that is basically what this strategy entails.
BRRRR involves finding homes in the pre-foreclosure stage (also known as distressed properties), flipping them before renting them out, refinancing the property, and moving on to make another investment.
You need to buy a distressed property that requires certain repairs or additions to bring it up to code. These types of properties are usually cheaper to purchase but are considerably difficult to mortgage. You might need to get a home equity line of credit, a hard money loan (also called a rehab loan), a private loan, or use seller financing.
It is vital to note the after-repair value (ARV) when buying a distressed property. This is the estimated market value of the property after it has undergone repairs and is now ready for sale. You can estimate the after repair value of a property by looking at comparable properties, that is, houses that are similar in square footage and overall features to the property you want to buy.
As a general rule, avoid investing more than 70% of the ARV on a distressed property. That is, you should avoid paying more than $280,000 on a property with an ARV of $400,000
You’ll need to make adjustments to make your home safe and convenient to live in. First, you should bring the house up to code, if it isn’t already. Then, you can focus on updates that add to the home’s value. Yet it is vital to work within a realistic budget and schedule.
Since lenders prefer to refinance properties that are already rented out, you should already have renters before you try refinancing. Make sure to screen your tenants carefully before renting to them. The rent should be fair to your renters while also giving you enough income to pay for the mortgage and operating expenses. The property should be ready for an appraisal when your lender decides, so make sure the property is in its finest shape whenever that is.
Refinancing allows you to convert your home equity to cash. When refinancing, you should choose a lender that offers cash-out loans so you can use the cash to buy another pre-foreclosed home. You’ll need to borrow on the appraised value of the home instead of the initial amount of the loan to use the BRRRR strategy. Your mortgage lender should be willing to finance the loan as soon as the property is brought up to code and rented out.
Cash-out loan requirements vary from lender to lender. Typically, this includes a minimum credit score of about 620, as well as a maximum debt-to-income ratio of 50% or less and a percentage of equity in the home.
Finally, you do it all over again. If you’ve followed the steps carefully, you will have a positive cash flow property in your portfolio with next to nothing down. You can use the cash from the refinance to buy another fixer-upper, flip it and start the process again.
Document every step of the process if you’re planning to repeat it so you can learn from any mistakes you make. You should not attempt to implement the BRRRR strategy without doing enough due diligence.