The BRRRR Method and Hard Money Lending

by | Feb 10, 2022 | Investment Strategies

The BRRRR Method: Your Real Estate Investment Powerhouse (Here’s How to Maximize Returns)

If you’re interested in real estate investing or you’ve been doing it for a while, you may be familiar with the BRRRR method and have used BRRRR loans. This method involves several steps that can give you a rather lucrative return on your investment if you do things right. When it comes to using the BRRRR method and hard money lending, how can you stay on top of your game? Read on to learn more about this real estate investment method and how it can help you get more from your hard money loan.

The Basics of the BRRRR Method

In recent years, the BRRRR method has become the talk of the real estate investment world thanks to Brandon Turner, of Bigger Pockets, who coined the term. This practice isn’t actually new, but the acronym makes it much easier for investors to remember and put the entire process into practice.

Take Michelle. She found a distressed 2-bedroom for $150K in a rising neighborhood. With $50K in smart rehabs, it appraised at $280K. Her refi gave her back the initial cash AND put profits in her pocket. Now that rental pays her a cool $1800/month! This makes the BRRRR method tangible.

Let’s break down what these letters mean, and then dive in deeper to discover how each step in the process can help you get more money from your investments. First, the letters in the method stand for Buy, Rehab, Rent, Refinance, and Repeat. The main idea is to leave some money in your investment property while you generate a new source of cash flow for future investments simultaneously. You can think of the BRRRR method as a smart strategy to create a passive income using real estate. While this method can be rather effective, there are always some risks involved that you should keep in mind, too.

Let’s take a closer look at the basics as well as how using a hard money lender to buy and rehab your investment properties can help you get more deals done at a much faster pace. Using hard money lenders can also help you maintain your cash position and improve cash flow.

Buying

In order to make the BRRRR method work for you, the value of the property that you buy is crucial to your success. To determine the best value possible, the purchase price and the cost of renovation together should be equal to or less than 70% of the ARV, or “after repair value.”

To get a good profit, you should never aim for margins lower than 30 percent since there won’t be much room left in your budget for any unexpected costs like possible repairs and other emergencies. You also want to maintain a decent margin in case the property you buy appraises lower than you anticipated. This margin rule is known as the 70% Rule among experienced real estate investors. If you buy investment property according to this rule, the purchase price and rehab costs combined should be equal to or below 70 percent of the total amount of the after repair value, or ARV.

One other reason investors using the BRRRR method abide by the 70% Rule is that most conventional lenders won’t loan more than 75 percent of the property’s total value. However, a hard money lender will often loan up to 80 percent loan to value. If you choose a standard conventional lender, your margins may be lower, but it can also guarantee a higher return when you go to refinance.

Using a hard money lender for your purchases is wise since they’ll finance the acquisition and cost for repairs in one loan. The repayment terms are shorter than a standard mortgage, but Hard money lenders get it. They look at what the property COULD be, not just a dusty credit report. Decisions happen in days instead of weeks, letting you snatch up that bargain before a slow-moving buyer can.

Renovate

After you’ve purchased an investment property, you’ll need to perform some renovations to make it a profitable venture. The fix and flip process makes it easy to buy a property that needs some work at a low price, fix it up, and then “flip” it for a profit. In this instance the “flip” entails holding onto the property to rent it out. More on this later.

Remember when you renovate, think strategically! Every dollar spent needs to add at least two in value. Fancy finishes are fun, but a fresh exterior and updated kitchen bring the biggest bang for your buck.

Rent

The rent part of the BRRRR method is where you’ll start to see a profit from your purchase. So, how much should you charge your tenants for rent based on the amount of money you spent? Ideally, the rent should be greater than or equal to 1% of what you paid for the home including all renovations, repairs, and other improvements.

The perfect tenant pays on time, every time, and treats your property like their own. Sure, you want that rent check, but a nightmare tenant eats away at your profit way faster than a short vacancy will.

Refinance

The refinance portion of the BRRRR method is extremely important since there are a lot of nuances involved. Your goal when using this method is not just to get a lower interest rate although that’s certainly an added bonus.

The point of using the BRRRR method on a refinance is to get a cash-out deal. Watch those interest rates! If your new mortgage payment skyrockets, that rental income might not cover it anymore. Always have an exit plan if the market shifts on you.

Repeat

The “repeat” part of the BRRRR method is what makes this real estate investment strategy lucrative. Once you’ve bought a property, renovated it, rented it out, and refinanced it, you can start the process all over again. Sure, the BRRRR method is about quick wins. But the true magic is how it compounds. That first rental throws off cash, letting you grab deal number 2, then 3…that’s how serious wealth is built.

Benefits and Risks

As with any form of investing, there are both benefits and risks to using the BRRRR method. In terms of benefits, this strategy can bring you a decent amount of cash flow every month with very little work required from you.

Okay, I’m not gonna lie – this ain’t for everyone. You gotta roll your sleeves up and get okay with a bit of calculated risk. BUT, when it works…

Make Real Estate Work for You

If you want to use real estate as part of an overall investment strategy, consider BRRRR method hard money lenders who can help you finance the purchase and rehab costs in one lump sum. Perform all renovations and rent out your property quickly to start seeing positive cash flow. With the right strategy and cash-out refinancing, you can create an impressive real estate portfolio that will bring you passive income for years to come.

Wanna see if the BRRRR method jives with YOUR goals? Let’s chat! Every investor’s journey is different, and we’re here to help you find the right path.

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