What is the BRRRR Method and How Does it Work?
Investing in real estate is one of the top ways to earn passive income in 2021. But if you don’t have a large amount of capital, you may think it’s not the method for you. If you’re tired of watching real estate investors make hand over fist in profits and you want in, read on.
The BRRRR Method is a real estate investment method that anyone can leverage and help them earn passive income.
The BRRRR Method refers to buying a distressed property (cheap), fixing it up, refinancing it, and repeating. Before you know it, you’ll have a passive cash flow that all started because you invested in a distressed property.
You don’t need experience or a lot of money. All you need is the drive to do well, make money, and find the perfect properties.
Here’s how it works.
The BRRRR Method Steps
- Buy: To invest in real estate you must buy property. With the BRRRR method, you buy a distressed or undervalued property. This may be a short sale or foreclosure. It could even be a vacant property. You buy it for less than the area’s average market value leveraging a private or hard money lender to fund your purchase. You don’t need great credit or crazy qualifying factors because hard money lenders focus on the property and its ultimate value.
- Rehab: Once you own the property, rehab it. This could mean major renovations to bring the home up to code, make it livable, and fit in with today’s trends. It could also mean making minor repairs to make it livable, but not focusing on the home’s cosmetics – it depends on the market you’re in. A local real estate agent should be able to help you decide how much to invest in it.
- Rent: Here’s where the income starts. Find renters, sign a lease, and start earning cash flow. Do your research. Find out the area’s average market rent and know what renters want in the area. Do your due diligence screening applicants before signing a lease. Do a background check and make sure the applicant has a history of paying rent on time (and isn’t a criminal). Calculate your cash flow. This means the money you’ll keep after paying all expenses (mortgage, real estate taxes, and homeowner’s insurance). Don’t forget maintenance and repairs are your responsibility too.
- Refinance: Once you have tenants situated in the house for a few months, refinance. You’ll need a hard money lender for this step too. Since you’ll have equity in the home (assuming it’s worth more now that it’s renovated), you can take a cash-out refinance. In other words, you tap into the home’s equity, take the cash, and pay the new mortgage payment. Make sure the new mortgage payment still leaves you with cash flow.
- Repeat: Now that you have money from the refinance, use that equity to ‘repeat’ or buy another investment home. The first time is usually the hardest because it’s unchartered territory, but once you catch on, it becomes a lot easier. Keep in mind that each renovation will be different, though. Some may happen quickly and others take longer and cost more money.
Benefits of the BRRRR Method
The BRRRR Method is quickly gaining popularity and it’s easy to see why:
- Cash flow: Once you rehab the home and find tenants, you should have a decent cash flow. Do your homework and make sure the area’s average rent will more than cover your mortgage payment, taxes, and insurance.
- Building a rental portfolio: Starting a real estate investment portfolio seems impossible. If you don’t have a lot of money, buying houses doesn’t seem realistic, but with the BRRRR Method it is. By continually using each home’s equity, you’ll always have the funds to buy your next investment.
- Equity: When you buy a home for less than the average market value and immediately fix it up, it’s like earning instant equity. The home will be worth more after you repair it and since you paid much less for it, the difference is your equity, aka instant equity.
- Leveraging hard money lenders: When you leverage a hard money lender you don’t have to put it in any of your ‘own’ money. You borrow the funds to buy the house. Once you rehab it and earn equity, you still haven’t put ‘your money’ into the home. When you refinance, you tap into the equity, taking the difference out and starting again. You do this repeatedly and never use your own money.
How to Tell if the BRRR Method is Right for You
Determining if the BRRRR Method is right is a complicated decision. There are many factors to consider, but the BRRR Calculator helps. Input your numbers and see your potential financial returns to tell if it’s right for you.
The BRRRR Method is right for both beginning and experienced investors. Since you don’t use your own funds (for the most part) anyone can use it and keep rinsing and repeating to build a large investment portfolio.
Are you Ready to Grow your Real Estate Investment Portfolio?
If you’re ready to take the plunge, start today by securing the financing necessary to buy your first property. That’s how it starts – one property that you buy for less than the market value, fix it up, rent, refinance, and repeat.
With the right support, any investor can start growing a profitable real estate portfolio. If you’re ready to make the most of your real estate investments, find a hard money lender that will provide you with the funds to get started. Don’t think you don’t have enough money or experience – everyone has to start somewhere and the BRRRR Method makes it easy for anyone to start.