The Do's and Dont's
BRRRR Loans
There’s a method in the madness when it comes to acquiring BRRRR loans. We're here to help talk you through the steps of the BRRRR real estate method as well as what not to do.
What is the Real Estate BRRRR Method?
The BRRRR method is a real estate investment strategy. FIRE Realty Team explains the 5 steps.
Step 1: Buy
The buying phase is the first step and where BRRRR loans could play their role. We want to identify a solid, sweat equity property to fix up and make nice. We at FIRE Realty Team try to make this part simple. Look for an ugly house, confirm there is plenty of sweat equity and focus on the execution.
Many tend to get caught in "analysis paralysis" during this step trying to find a perfect BRRRR. Easier said than done, don't get caught up in perfection. Follow the fundamentals and practice.
Step 2: Rehab
This is the make-or-break phase. Finding and managing contractors is tough, as is picking out the highest-return-on-investment items to update. Do your due diligence and pick reputable contractors. The most simple, high-return-on-investment items are paint, flooring, fixtures, and hardware. Make sure the kitchen and bathrooms are clean and nice.
Don't get caught up in cute. On a rental-grade BRRRR property, it probably doesn’t make sense to purchase that $500 chandelier. Pick out something from the local hardware store that matches the colors of the house and call it a day. New and nice is better than fancy and expensive. The person we are trying to impress most is the appraiser at the bank. They are looking for quality and features (size, beds, location, etc).
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Step 3: Rent
Now that the place looks nice, it should command top-market rent and you will start bringing in income! Take solid pictures, write up an enticing description, get it posted for rent, and find a reliable renter.
Step 4: Refinance
Call your Mortgage Broker, and they will do a “cash-out refinance,” paying off your first loan or simply giving you a check reimbursing you for the capital you have in the deal. They will literally hand you a check, and this is your new “loan.” Since the property should now appraise much higher than when you purchased it, this new loan should be enough to pay off your first BRRRR loan and reimburse the rehab costs.
Step 5: Repeat
Now, go do it again. The BRRRR real estate method compounds ROI. As you might expect, doing the BRRRR method multiple times increases that growth opportunity. This is why you want to narrow in on an easy and sustainable approach so that you can repeat the process and fine-tune your portfolio.
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What Not to Do
BRRRR Method Real Estate
Don’t get caught up in the BRRRR method being a result of infinite ROI and pulling out 100% of your money. That’s great and would be a perfect BRRRR. However, it’s important to remember that the BRRRR method is simply a method for compounding your ROI. Every dollar pulled out compounds ROI, but it’s not necessary to pull out every penny.
Oftentimes, we prefer “softer” BRRRRs that are smaller rehabs, where we don’t plan on getting every penny out because these types of deals are easier to find, easier to rehab, and simply more sustainable to repeat. Check out a great example below.
BRRRR Method Example
These numbers are simplified, but this is likely a very high ROI with only $5k left in the deal. MANY investors pass on a deal like this because they want a perfect BRRRR. It’s likely that with cash flow and your day job, you can pretty easily recoup this $5k and be able to complete your next deal.
The alternative is waiting and waiting and never buying because you just can’t find that perfect BRRRR. Real estate investing is about taking that first step and continuing to move forward.
Non-BRRRR Method
Purchase: $70k
20% down: $14,000
Rehab: $10k
Total cash tied up in deal: $24k
BRRRR Method
Purchase: $70k
Rehab: $10k
ARV: $100k
Total invested: $80k
Total cash out amount: $75k (20% of $100k ARV)
Total cash tied up in deal: $5k
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