What is the BRRRR Method?
BRRRR stands for “Buy, Rehab, Rent, Refinance, and Repeat.” Like other forms of real estate investment, it can be a lucrative endeavor to add to your portfolio, but does require certain considerations. Read our article to determine if the BRRRR method is right for you.
The BRRRR Cycle of Investment
The BRRRR method is fairly straightforward. Investors begin by buying the right property-namely, a property that requires a certain amount of renovations and repairs. This is the “rehab” part of the method. Once the property is fit for tenants, the investor Rents it out and makes mortgage payments using the rental income until they generate enough equity to do a cash out Refinance. This cash can then be used to purchase another property and begin the process all over again (the “Repeat step).
How to Succeed with the BRRRR Method
The BRRRR system can be a great way to generate a revolving source of passive income, but it hinges on several factors:
Financing for Property Renovations
BRRRR entails dealing with distressed properties. You will be able to buy these properties cheaply, but renovating them will cost you. You may need to have liquid cash on hand or secure additional financing in order to facilitate updates and repairs to the property.
That being said, it can be difficult to qualify for a traditional mortgage on these types of properties, since most lenders will require an appraisal and be unwilling to loan any more than what the distressed property is currently worth. Alternative sources of lending, such as hard money lenders or a fix and flip loan may be your best bet in addition to a mortgage for what the property is worth as-is.
Finding the Right Tenants
An empty property is no good to you. In order to recoup your investment, you need to have tenants lined up and agree on a fair rent amount. You want to generate some cash flow, but you will have a hard time finding a tenant if you go too far above comparable rental units.
You also want to ensure you have the right tenants occupying the residence. In general, you want to have tenants that are looking to rent long term, have a good credit history, a steady job, and no history of evictions. You may also want to have certain terms in place for pets, tenants who smoke, or other factors that may cause premature wear and tear on the residence.
Qualifying for a Refinance
In order to proceed to the Repeat part of the BRRRR method, you will need to qualify for a refinance. First and foremost, you need to find a lender that offers a cash out refinance. You will then need to meet their requirements, including credit score minimums (at least 620), equity in the property, and an appropriate debt to income ratio (50 percent or less, in general). In some cases, you may also be required to own the property for a certain amount of time before you qualify for a refinance.
Potential Drawbacks of the BRRRR Method
The BRRRR method requires patience. Just locating the right properties and closing on them takes time, not to mention the weeks or even months of rehab that may be required. You may not see a ROI for some time. There is also the possibility that you will not qualify for a refinance high enough to allow you to buy another property, which compromises the whole method.
If you are unwilling to spend the money and time rehabbing a property, or you are unsure if you will qualify for an adequate refinance, you might consider alternative investment strategies. The traditional route of purchasing a home in good condition, for example, may be a better option, since you can rent it out much sooner than a distressed property.
BRRRR Loans in Colorado
Pinetree Financial Partners lends on all sorts of real estate investment projects in Colorado. Whether you are looking for a fix and flip loan or need money to rehab a property as part of your BRRRR method, we can help. Contact our office or go online today to get started.