The BRRRR Strategy: Step By Step
We’ve briefly discussed how the BRRRR method works as an investment strategy. In the sections below, we’ll break down each step a bit further.
Step 1: Buy A Property
The first step of the BRRRR method is buying a rental property. Ideally, the property you buy will be affordable and in need of rehabilitation. After all, the more equity you can build with your renovations, the more profit you’ll make on the investment.
When choosing a rental property to buy, it’s important to consider the purchase price of the property, the amount you’ll need to spend on rehabilitation, and the expected value of the home after the work is done. Determining these three figures can help you decide whether a property is a good investment. To find the after-repair value of the home, look at comparables in the area to see what they’ve recently sold for.
Another thing to consider when choosing a property is how you’ll finance it. Most of us can’t afford to buy a rental property in cash, meaning a mortgage is likely necessary. And not only must you consider how you’ll finance the property itself, but also how you’ll finance the renovations.
Step 2: Rehab The Property
The next step of the BRRRR method is rehabilitating the property. Ideally, you would have considered what updates you’ll make and how much they’ll cost before you even buy the home. That will help the process to go more smoothly after the purchase is finalized.
In all likelihood, the home you purchase to rehab is distressed, meaning it needs a lot of work. For that reason, you must pay close attention to ensure the home is safe to live in and everything is up to code.
When identifying potential improvements, focus on those that will increase the home value the most. Projects might include renovating the kitchen or bathroom, adding a bedroom, or improving the home’s curb appeal.
When it comes to the renovations themselves, you have two options. First, you can do the work yourself if you’re able to. Second, you can hire someone to do it for you. The second option will be more expensive but will also help to ensure the job is done right. Of course, you can also do a combination of those two things and do some of the simpler work yourself while hiring out some of the more complex projects.
At the end of the day, the most important thing is to ensure that you’ve successfully increased the value of the property (ideally by more than you spend on the rehab).
Step 3: Rent Out The Property
Once you’ve completed the rehab, you can find a tenant and rent out the home. Before renting it out, you’ll have to choose an appropriate rental price. You can do this by looking at comparable properties in the neighborhood to ensure you’ve priced yours competitively.
You’ll also want to take steps to ensure you choose the right tenant. The goal is to make passive income from the property, and you can only do that with a tenant who takes care of the property and pays their rent each month. Look for applicants with a strong credit history, steady employment and a good track record of paying their bills on time.
Step 4: Refinance The Property
One of the benefits of renovating a distressed property is that you have the potential to significantly increase its value. And the equity you’ve built up in the home can be used for other investments.
One of the most important steps of the BRRRR method is using a cash-out refinance to convert some of your home equity into cash. Often it takes homeowners years to build up enough equity for a cash-out refinance, but with the increase in the home’s value from the renovations, you can do it more quickly.
The only catch is that some lenders may require you to have your loan for 6 – 12 months before you can use a cash-out refinance.
Step 5: Repeat The Steps
In the final step of the BRRRR method, you can use the money you got from your cash-out refinance to invest in another property. Some investors use the BRRRR method over and over again. In that case, they would take the money from the cash-out refinance and buy another distressed property to rehab.
Of course, you aren’t limited to just repeating the process with the BRRRR method. You can use the money from your cash-out refinance, for any other investment or even for personal use.
