By Russell Barneson
By Russell Barneson
The BRRRR Strategy is widely considered the most efficient form of investing in real estate, and has 5 distinct steps. Buy, Rehab, Rent, Refinance and Repeat.
Identify undervalued and distressed properties in an area with a strong rental market.
Ideally these properties will need fixing up, giving you excellent potential to add value to the property.
After selecting one property that fits your criteria, you will be ready to apply for a bridge loan.
Many real estate investors will use a specialized type of loan called a fix and flip loan to fund the purchase of the property.
These loans will often time also finance 100% of the construction costs.
Depending on the lender and the strength of the real estate market, you will need between 20% and 30% of the purchase price as a down payment and can find a hard hard money lender to provide the remaining capital.
Private lenders are commonly used to fund this strategy, but be sure to lookout for these hard money scams.
Once you have finalized the purchase, it's time to start adding value by fixing up the property. You must make the property livable and appealing to future tenants.
Having a great contractor is essential to completing this objective. A great rehab can substantially increase your rental prices and in effect increase the value of your property.
After the Rehab is looking spiffy, now is the time to put it on the rental market and advertise to prospective renters.
Be sure to screen your tenants to avoid problems such as damage, non-payment and vacancies.
Getting the units rented will stabilize the property and will help for the next step of the process.
Once the units are rented and you've owned the property for 6 to 12 months, it's time to transition from your hard money loan to a traditional 20 to 30 year fixed loan at a lower interest rate.
If you are a first time home buyer and your credit score is subpar you could consider using an FHA Loan.
Assuming you have good credit and the units are rented out and cash-flowing as expected, the bank should appraise the value of your property for more than the purchase price, due to your excellent rehab job.
The bank should give you a loan to value between 70% to 80% of the new appraised value, and at a significantly cheaper rate than your original hard money loan.
Since the bank has now appraised your property at a higher value due to your rehab, you'll now have more equity in the property that is eligible to be pulled out.
This is commonly known in the industry as a cash-out refinance. And you can now use this excess capital as a down payment on your next property.
As you become more knowledgeable of the market and establish stronger relationships with contractors, lenders and realtors, this process will become easier and more profitable.
Hopefully this article helps to clarify the benefits and risks of the BRRRR strategy. If you have any questions or comments be sure to let us know.
Disclaimer: Crescent Lenders, DBA CrescentLenders.com ("CL") is a California licensed broker under California Bureau of Real Estate License No. #01792267. Regardless of this license, CL considers itself a “finder” for purposes of applicable laws and regulations (California Business & Professions Code § 10130, et. seq.).