Updated: May 4
Newbie investors often ask: “What is the BRRRR method in real estate”? We will answer this question for you. Learn how to use BRRRR to profit.
Definition of BRRRR.
How BRRRR works.
Learn tricky BRRRR methods.
Learn buying tips.
Understand how to value distressed rental properties.
Learn Rules of Thumb to determine the purchase price.
Learn how to finance BRRRR properties.
A real estate expert provides a simple definition in its “Understanding the BRRRR Method of Real Estate Investment”. Briefly, BRRRR means:
In essence, the BRRRR method in real estate investments involves buying a distressed property, rehabbing it, renting it out, and using refinancing to cash out to buy more rental properties.
The two main differences between a conventional rental property investment are that the BRRRR method focuses on distressed properties and refinancing to buy another one.
How the BRRRR Method of Real Estate Investments Works
Done the right way, you can reap the benefits of passive income in a revolving manner for buying and owning rental properties. Here are the 5 important steps.
1. Buy a distressed property: To buy low and sell high distressed properties are the cheapest way to go.
2. Rehabilitate the property: Distressed properties need working on to get up to code. You must make improvements to the property’s structure to make it safe. Also, to make the interior functions safe (like stairs, balconies, electricity, etc.). Next, focus on aesthetic improvements inside and outside. Finally, make it appealing and functional for renters.
3. Rent the property: Unless you have experience as a landlord and pricing the rental market you must hire a professional property management company. If you are in San Diego County, we recommend contacting the WeLease Property Management Company which can help you determine the best rental price and do everything a landlord must do to save you time and money. Contact WeLease before you are ready to seek renters.
4. Refinance to cash-out: Convert your equity into cash. Accomplish this by taking out a larger mortgage to borrow more money than you owe. This gives you extra cash to take the next step.
5. Buy another distressed property: Start the BRRRR method all over again.
Understanding the Tricky BRRRR Methods
The above simple explanation of the six BRRRR steps is just that, a simple explanation. Follow these tips to make your experience profitable.
Buying Tips for a BRRRR
A problem with buying distressed properties is the necessity to make extensive repairs and updates.
A broken-down house is difficult to get a traditional home mortgage. That’s because lenders require an appraisal to determine its value. Most distressed properties are valued so low they don’t qualify for a typical mortgage.
You will need to get financing using other methods or lenders. Two options include:
These two options are high risk. To take on these risks you must perform valuations of the BRRRR method for the specific distressed property you are considering.
How to Value Distressed Rental Properties
Buying distressed properties requires performing certain valuations. Let’s explore these.
Calculating the After Repair Value (ARV)
An ARV is an estimated value of the distressed house after you complete the rehab and renovations.
How does the completed home compare in value to other similar close-by homes recently sold?
This requires doing a Comparative Market Analysis (CMA) of nearby recently sold homes. Avoid comparing apples with oranges. The comparison uses homes similar in:
Size (square feet);
Number of bedroom and bathrooms;
Type (style) of construction;
Rules of Thumb to Determine Purchase Price
Several investment rules of thumb exist to help you decide on your top offering price to buy a distressed house. These include:
70% Rule: This rule sets your top offer at 70% of the property’s ARV. For instance, a house’s ARV is $200,000 means paying no more than $140,000 for it.
Other rules to quickly size up a rental home are explained in this blog post: “2 Rules of Thumb to Size Up Deals Quickly” explaining the 2% and the 50% rules.
When rehabbing a house, you first need to bring the house “up to code” which means making it safe to live in according to local building codes.
Then, you need to decide what types of improvements can increase value? Things like modernizing the bathrooms and kitchen, and creating “curb appeal” so the home looks appealing to drive-by renters.
Other important improvements include new appliances, installing energy-efficient windows, and other attractive features.
You must create a realistic budget before starting your rehab project. Also, a realistic timeline to complete your rehab. Failing to do these two things can make the difference between a profit and loss.
You can’t refinance until you show rental income. Yet, finding good renters is a hassle. The types of qualities to look for in potential tenants are:
A good credit report;
Great record of past on-time rent payments;
A steady job with good income;
No history of eviction; and
Positive references (especially from past landlords).
The best way to start with gathering this information is with a good tenant application form.
Don’t buy a standard online form or you will miss out on valuable information. Also, most states have different laws requiring what types of questions your application form can ask. Don’t end up getting sued for housing discrimination because of an illegal question.
Your housing application form must give you the right to do background checks on each potential tenant. This includes getting a credit report and getting contact information from references.
Here are some important blog posts provided by WeLease to learn about credit reports, background checks, housing discrimination laws, and the right questions to ask:
Tip: Determining the rent requires the right price to attract tenants and enough to produce a positive cash flow for you. Determine this by:
Adding up the total expenses for owning and renting the home;
Knowing the monthly rent, you will charge; and
Subtracting the total monthly expenses from the monthly rent.
For example, assuming your charge $1,400 rent per month while your mortgage payment and monthly expenses are $700. Your cash flow is $700 a month.
With the BRRRR method, you refinance for a cash-out so you will have money to make your next purchase.
Your lender will have its requirements to qualify for the refinance loan. Typical loan qualifications include your:
Credit score – usually a minimum of 620 for a refinance cash-out;
DTI – your Debt-To-Income (DTI) ratio at a minimum of 50% or less;
Equity – you have in the home; and an
Appraisal – including the rental income and value of the home.
At last, you are ready to repeat the BRRRR process.
What Is The BRRRR Method In Real Estate – Conclusion
Now that we answered your question: “What is the BRRRR method in real estate”? Let’s sum it up.
BRRRR stands for:
Buying distressed properties;
Renting them out;
Refinancing to gain cash; and
The benefits of doing a BRRRR includes:
Your ability to earn passive income;
Build equity after the rehab;
Repeat the process; and
Increase your rental portfolio.
Thinking of Doing a BRRRR in San Diego County?
SoCal Lifestyle Realty provides you with experienced Realtors to help you find the best-distressed properties throughout San Diego County.
We can help you by introducing you to experienced BRRRR lenders and general contractors for the rehab.
Contact us before looking for distressed properties in San Diego County so we can save you time finding the best fit for your BRRRR needs.