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.
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.
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.
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 ARV or “after repair value” of your investment property should be higher than or equal to 30 percent of the purchase price and the cost of renovation together.
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 it’s easier to obtain the financing you need quickly so you can get started as soon as possible.
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, you want to try and do as much as possible for as little capital as possible. Otherwise, you could end up overspending and lose out on your profit margin.
A hard money BRRRR method lender is a great way to finance your renovation projects. These types of loans fund much faster than conventional-style loans, and they require less documentation so you can get started on your renovations right away.
Keep in mind that certain renovations have a higher return on investment than others. Don’t spend a lot of money on expensive finishes like lavish countertops or high-tech features. Instead, focus on the major components of the property that will bring you the most return.
Some examples of smart renovation choices include adding a wood deck to the outside of the property or replacing the roof or garage door. Remember, the goal is to put your money into the home in a smart way that will bring you more return later when you go to refinance. You also want to make sure that renovations are done quickly so you can rent out the property and start getting some cash flow.
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.
Once you’ve set a rent amount you’re happy with, you should market the property as aggressively as possible. The shorter time you’re without a tenant, the better, since you’ll have less negative cash flow.
You want to ensure a solid tenant as soon as you can so that you’re able to see the money start to come in. After the tenant starts to pay their monthly rent, you can explore the refinance process and repeat the method to continue the cash flow on more properties.
Remember that there can be some pitfalls and accidents along the way when it comes to renting property. Do your best to find reliable tenants that you know will pay on time, every time.
Market your newly renovated property so that it’s appealing to the renters in your specific market. Focus on the new upgrades you’ve made, and make sure that you’re not “under-charging” for rent so you’re getting the right amount of capital to continue with the remaining steps of the BRRRR method.
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. By renovating the property, its value should have increased (if not exponentially, as in hot markets like Seattle). This means you’ll receive cash for the equity you have now built into the property thanks to your hard work and renovations. You can use this cash to fund the purchase of your next fix and flip.
If you need cash fast, you can also use a home equity line of credit whenever you need to. However, cash-out refinances will give you more flexibility in what you do with your money. If you do a cash-out refinance you’ll get a lot more money in your pocket since the renter is currently paying the cost of the mortgage in addition to a bit over that amount.
Be very aware of what your new mortgage payments will be with a cash-out refinance. If they end up being higher than what you currently pay, you may need to raise the rent in order to cover the difference. You’ll also need to have an appraisal if you’re doing a cash-out refi.
The appraiser will want to see material improvements made to the property since you first purchased it. That’s why doing smart renovations are so crucial to your success since you want the new appraisal to be higher based on these improvements.
Most banks also have a “seasoning” period that they require before they’ll refinance your property. This means that you may have to wait for a period of up to one year before requesting a cash-out refinance. If you purchased with a hard money lender, you might not have to worry about this seasoning period.
Banks don’t want to lend you more money than the most recent sale price or appraisal of the home, and most will only refinance based on whichever figure is lower. Keep this in mind when you refinance, and try to keep your property rented for about one year before you move onto the next one whenever you can.
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.
The key to repeating this process is to make sure that every rental in your portfolio is bringing you solid, positive cash flow. You’ll also want to make sure that your properties aren’t just holding their value, but that their value is increasing. If you don’t have a higher LTV when it’s time to refinance, you won’t get the capital you need to purchase a new property.
If you play your cards right, BRRRR hard money loans can make things easier. These lenders will give you the money you need for the fix and flip property you want at a faster pace than most banks. They also usually require less paperwork for a more streamlined process.
You can build a very nice real estate portfolio quickly if you use the BRRRR method in a smart way. Over time, you’ll build more equity, bring in more cash, and learn how to fix and flip properties in a way that gives you the most return on every single investment.
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.
You also won’t need to wait to save your money for a down payment and money for repairs for each of your properties. After you’ve saved the cash to buy your first rental property, you can start using the equity and money from refinancing to finance the remaining ones.
Get to know your market and make sure you’re choosing a property that will be easy to rent out. You should also choose properties that are easy to rehab and will bring you the best return on your investment right away.
Of course, there are also risks with the BRRRR method including the fact that your property might not appraise when you’re ready to refinance. When the market sees a downturn, you might also have to “sit” on your property longer until things are back on an upward trend.
If rehab and repairs are not for you, this may not be the best method to make money on real estate. You have to enjoy performing repairs and working with numbers to make sure that your rehab projects are within your budget.
Finally, remember that you’re stripping the equity in your properties down to around 25 percent every time you refinance. This is to ensure that everything is highly leveraged, but it’s also not ideal if your ultimate goal is to sell each one for a profit later.
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.
For your hard money lending needs, be sure to visit our website to find out more and contact us today with any questions you have about your financing requirements.