BREAKING DOWN THE BRRRR METHOD
One of the most popular investing methods in real estate today is BRRRR – Buy, Rehab, Rent, Refinance, & Repeat. BRRRR is one of many strategies you can use to start your journey in investing. I actually began my career in real estate using this process. I was able to establish myself and advance my career with this method. I still use this method ‘til this day, however, it’s not the only strategy I use for investing. Being that I’m more established than what I was when I first started investing, the BRRRR method is not the only way I conduct business. I don’t refinance every property I purchase, and I’ve learned to take advantage of the capital that comes with flipping properties and doing other construction jobs. B is for BUY B is the most important part of this method because it starts the process and sets the tone of your investment – buying. When buying a new property ask yourself, is this a good deal or a bad one. Before you can even agree to a deal you first need to know exactly what kind of property you’re looking to acquire. Do you want a single-family home, duplex, triplex, quadruplex, or other? Once you know what it is, you’re looking to acquire you can begin to look at properties and doing your due diligence to make sure you get the very best deal possible. When it comes to making a good deal, you can use the 70% rule. The 70% Rule dictates that you should pay no more than 70% of the after repair value (ARV), minus repair costs. ARV is the estimated value of a property after all repairs are complete. You can estimate your ARV by running comps in your area. "Comps" is a short word for comparables. Comparables are simply similar homes that have sold in the area that you are looking to buy or sell your property in. Another thing you should consider when buying a property is what the rental income would be in that particular neighborhood. R is for Rehab When you begin the rehab process for a property the first step is estimating construction cost. You should always overestimate the repair cost – it’s better to be safe than sorry. I recommend leaving a 10 – 15% contingency budget for any unforeseen expenses. If you don’t spend that contingency money guess where it goes?? (IN YOUR POCKET!) When creating your budget do not forget to factor in permits, this can raise the cost of your project. You’ll need to pull a permit if your rehab includes rewiring, plumbing, or adding a deck. Basically, you'll need a permit for things that require a certain level of skill. You can learn about permits at your town’s Municipal building. Most Municipalities require a blueprint drawing when pulling a permit. Your architect can provide you with this; prices will vary, but DO NOT forget to include this into your budget. During the rehab phase, I recommend making all major repairs. For example, if the plumbing of your property will need to be repaired in a couple years, I suggest not waiting and just completing the work during your initial construction. I do it this way because waiting to do repairs once tenants have already moved in can end up causing you more money, and you also run the risk of repairs getting out of hand and damaging your property … which is even more money out of your pocket. SMART INVESTORS PROTECT THEIR INVESTMENTS. Lastly, know how to maximize rent. Key appliances and essentials like dishwashers, garbage disposals, or even washer and dryer hook-ups are great ways to increase your rent, which in turn increases your profit margin. Many investors get distracted when rehabbing a home because they’re designing the property as if they’re going to be living there themselves. Please, please, pleeeease, leave all emotions out of the rehab process. You may find yourself taking on unnecessary projects and spending unnecessary money from your budget. You want materials that look nice, but most importantly you want materials that are going to last! Keep in mind, if you are your own GC, you’re going to pocket all of the money you save during rehabbing, so be wise. R is for RENT Once all construction is done you can now focus on finding a tenant to occupy your property. You have 2 options, making your property Government Subsidy Programs, or you can put your property on a private market. Here’s the difference between the 2: Government Subsidy Programs: Your property will have to be inspected by the city. Rent is automatically deposited. Private Market: You’re responsible for finding tenants and collecting rent payments. Regardless of how you decide to rent out your property, you’ll still have to do screening and take applications. I always require 3 months of rent upfront when signing a lease with a tenant. First month’s rent, last month’s rent, and a security deposit. This keeps me financially covered in case I may have to evict the tenant. As a landlord, it’s important to understand the eviction process in your township. Be sure to educate yourself with leases and the details that go into a lease. You’ll also need to educate yourself on rental license requirements and rent suitability licenses. R is for REFINANCE This is the part when you pull your money out. Refinancing is the process of replacing an existing mortgage with a new loan. Refinancing grants you access to cash and leverages the equity of your property. The max loan amount of the property value that banks let you pull out generally ranges between 70-80%. This leaves you with 20-30% equity built into that property. This phase of BRRRR gives you the money to reinvest. During the refi process, you want to make sure that your margins are good. For example: If you pull out 70% your mortgage payments could $500 OR If you pull out 80% your payments could be $600 You want to make sure that your rent is covering your mortgage payments AND you’re maintaining a profit margin. If you don’t need to pull the entire 80% out, DON’T. R is for REPEAT The money you get from the refinancing phase is what allows you to repeat the entire BRRRR process, and before you know it you could have a real estate empire. Repeat also means that you need to repeatedly educate yourself and fine-tune your skills. You should always be finding ways to improve your process while creating an actual database that you can always refer back to. Your database can assist you when it comes to estimating the cost, creating a project timeline, and so much more. As I stated at the beginning of this post, BRRRR is a great start for investing. The more you invest using this method, the more you’ll begin creating a blueprint of your own. If you know anyone interested in becoming a real estate investor send them this article, you never know how it could change their life.