Whether you are new to real estate investing or are simply looking to improve your real estate portfolio, you have likely heard about BRRRR loans and may be curious to learn more. If you are considering your hard money options, we want to help.
As a real estate investor, staying on top of your game is essential for cashing in big. If you take the right steps and do them correctly, you will have the capital you need and will be able to get ahead of other investors.
The Basics of the BRRRR Loan for an Investment Property
Over the last few years, the BRRRR method (buy, rehab, rent, refinance, Repeat) has gained attention in the investment world for its ability to improve your real estate portfolio. This acronym was coined within the last few years, even though the practice is not new.
New investors have found the acronym makes it easier to understand what BRRRR loans are all about. Let’s break down each letter to better understand BRRRR loans and how they can benefit your need for capital.
1. B: BUY
2. R: RENOVATE
3. R: RENT
4. R: REFINANCE
5. R: REPEAT
BRRRR loans are a clever real estate investment strategy that leaves some money in your investment property while you improve your real estate portfolio for future investments. If you are unfamiliar with this loan method, we are here to break everything down for you and help you better understand how we can help.
After you understand the basics of BRRRR loans, you can contact us right away to get pre-approved. In its most basic form, BRRRR loans will help you complete real estate deals faster, which means more profit for you.
BUY
One of the most important steps of the BRRRR method is buying. The value of a property is going to be your most important consideration. Consider the after-repair value to ensure you are buying a property with the highest value potential.
The after-repair value, or ARV, should always be 30% or higher than your loan purchase price. Never buy a property with an after-repair value of less than 30% because this will leave very little capital for unexpected repairs and other costly issues.
Experienced investors know this method as the 70% rule. Advanced investors understand that when they buy investment properties, the property purchase price and rehab costs should be equal to or even below 70% of the after-repair value.
Another reason so many seasoned real estate investors use the 70% rule is that traditional lenders typically will not loan more than 75% of the total value of the property.
Hard money lenders like us can help you finance the purchase price and cost of repairs in one loan. Although the loan terms are shorter than traditional bank loans, a rental loan is much easier to obtain from hard money lenders, allowing you to start your investment strategy right away.
RENOVATE
No matter which type of real estate property you add to your real estate portfolio, some degree of renovation will be involved. While some real estate investors fix and then flip, you will need to avoid the flip part when using the BRRRR strategy of real estate investing.
It is important to remember that when you renovate a property, you must choose renovations that do the most to increase the property’s value while using as little capital as possible. If you overspend, your profit margin is going to tank.
A hard money BRRRR strategy lender can help you finance your renovation projects through convenient loans. BRRRR loans require much less documentation, and they fund significantly faster. With this hard money loan, you can get started on your renovations right away.
Instead of focusing on lavish renovations that will add very little value to your property, keep your rehab costs focused on the property’s major components. Renovating these will bring you the highest return on investment.
Some of the smart renovation ideas you should consider include the following.
- Adding a wood deck
- Replacing the roof
- Replacing the garage doors
Renovations need to be done quickly so you can rent out the property and begin receiving a positive cash flow each month. Renting your property to the right tenants is essential for your bottom line.
RENT
Next, you are going to want to rent your property. If you are typically a fix and flipper, renting your properties will be a new frontier. You will need to charge rent based on the amount of money you have spent on the property.
The rent amount should be equal to or greater than 1% of the total loan amount you have spent on the property, including the purchase, renovations, and repairs. Choosing the right rent amount is essential to creating passive income.
Once you have decided on the optimal rent amount, it’s time to start marketing your property aggressively. To avoid negative cash flow, you don’t want to go long without a tenant. The sooner you find a tenant, the better your profit becomes.
When the right tenant has moved in and is paying rent, this will create passive income, and you can start exploring your refinance options to repeat the process. To avoid unexpected pitfalls, choose the best tenant possible by vetting them carefully.
REFINANCE
The refinance portion of the BRRRR strategy is essential, and there are a lot of variations for refinancing. Many real estate investors think they need to pursue loans with the lowest interest rate possible. Although this is undoubtedly advantageous, this should not be your focus with the BRRRR strategy.
Refinancing a rental loan with the BRRRR method aims to get as much cash as possible out of the deal. Since you have renovated the property, it should now have a higher value. Thanks to your hard work and dedication, you should receive a nice chunk of change for the equity you have built into the property.
Although you could also seek a home equity line of credit, you will receive more cash with the cash-out refinancing loan option because your renter is paying the mortgage.
Your refinance payments should never be higher than your mortgage loan. If they are higher, you will likely be forced to raise the rent on your tenants, which could make them want to move.
You also need to understand that a cash-out refinance loan will require an appraisal. You may need to wait a year before pursuing this investment strategy because some banks require a loan “seasoning” period.
A bank will not give you more cash than the recent purchase price or appraisal amount. The bank will typically provide you with cash for the lower of the two. Ideally, you should try to keep the same renter for at least a year before applying for a cash-out refinance loan.
REPEAT
The repeat part of the BRRRR method is what makes it so profitable for investors interested in real estate investing. Once you have bought, renovated, rented, and refinanced, you get to do it over and over again as many times as you like.
The most important element of this process is to make sure you choose every single property carefully and ensure it is offering you a positive cash flow. The properties you own should not only retain their value, but the value should also be steadily increasing.
If you are a wise investor, BRRRR hard money loans will make this process much easier and less stressful. A hard money lender can give you the cash you need to renovate your properties much faster than bank loans. The streamlined loan process typically requires less paperwork, documentation, and closing costs.
By using the BRRRR method wisely, you can begin to build a nice portfolio of investment properties. And, you can do it quickly.
As you gain experience using the BRRRR loan method, you will be able to build more equity and bring in more cash. As you learn to fix and flip or rent, you will gain experience in the methods that will give you the greatest return on your investment each time.
EXAMPLE LOAN SCENARIOS
Benefits and Risks of the BRRRR Method for Rental Properties
No matter what type of investment and loans you pursue, there will always be rental loan risks. We want you to be aware of the risks so you can mitigate them as much as possible. You also need to be mindful of the benefits you can experience with the BRRRR method.
Benefits
- You experience positive cash flow every month with very little work.
- You will not have to worry about saving money for down payments and repairs for your investment properties and rental properties.
Make sure to research the loans carefully and learn about the real estate market in your area. Choose the best properties that have the highest potential to create passive income.
Risks
There are also risks involved with the BRRRR method. The following are some of the risks involved.
- Your property may not appraise for as high as you think.
- If the market downturns, you may have to sit it out until an upswing occurs.
- Rehab and repairs are not for the faint of heart.
- You are stripping the equity down each time you refinance the loan.
MORE EXAMPLE LOAN SCENARIOS
Real Estate Investors Should Seek Pre-Approval Right Now
A hard money lending company should be committed to helping you make real estate work for you. A solid BRRRR hard money lender can help you get loan approval for purchase and rehab costs in one lump sum.
All you need to do is perform the right renovations as quickly as possible and then rent out your property for a positive monthly passive income. Using the right real estate investing strategy and choosing the proper loans will allow you to create a spectacular portfolio.
Get the pre-approval process started today. We are here to help you during your real estate investing journey and will be happy to answer any loan questions you may have. With a BRRRR hard money loan, you can make your money work for you.