You wouldn’t be alone if you ever felt that buying a rental property is just too expensive and overwhelmingly complicated to deal with.
But what if there was a way to repeatedly buy homes simply by recycling your initial investment?
Real estate investing using the BRRRR technique has been successfully used by investors for a really long time.
And it’s not that complicated or expensive. It’s even possible to start with no money at all.
Read on to learn exactly how successful investors are able to break into the rental property game, and stay there, by repeating this process over and over again.
Contents and Quick Links
Step 1: BuyThe very first step is to research and make an offer on a home. This can be a single family home or multi-unit property. Note: If the property is more than four units, it is considered a commercial property. Under four units and it is a residential property. Commercial loans are often different, therefore I’m writing this with the assumption that the property is 1-4 units. The key to this strategy is to purchase below market value. If a home has been sitting for sale because it is ugly and needs some work, that’s good! Foreclosures and auction homes are ideal as they are often below market value. Once you make the offer you will be able to have a full inspection to ensure that the home is structurally intact and repairs needed are within your budget.
Buy below market valueFor this strategy to work, you want to aim for 70-75% of the after-repair value of the home. This means that if a similar home, in good condition, in the same neighborhood would sell for $100,000, you want to spend no more than $70,000 – $75,000 to purchase the home. If it needs repair, the cost of the repair should be included in this amount. Repairs might mean a new roof, flooring, paint and some landscaping. Rehab projects vary greatly, just make sure that the cost (and time) of all repair is factored into the purchase price.
How to financeFinancing a BRRRR will be unconventional, since the end goal is to refinance it through a traditional lending institution. Options include:
Borrowing private moneyThis could be from another investor, a friend or a family member. Private money is money borrowed from another individual. The terms of the loan will depend on the individual lending the money. Why would someone lend you money? That all depends on the deal you find and how much return you anticipate. If someone has $75,000 sitting in a savings account earning 0.5% interest and you offer 5% interest, they just might take you up on the extra earnings.
Borrowing hard moneyHard money is borrowed from a business rather than an individual. There are certain terms to the loan such as shorter time frame before the loan is due in full, higher interest rates (often much higher), and higher loan fees. The loan is usually based on the deal rather than your credit worthiness. If you default, the business takes the home.
Seller FinancingIn this case the owner of the home would act as the bank or lender and collect monthly payments and interest from the buyer. If the owner owns the home outright and doesn’t need to collect the value of the home right away, they may choose to earn interest. For instance, the owner asks $100,000 for the home and agrees to finance for 10% interest with $5,000 down payment and balloon payment after 12 months. As the new owner, you would transfer title to your name and make payments to the old owner. After 12 months you would owe the entire purchase price plus the 10% interest.
All cash purchaseIf you have enough cash saved up, this is an ideal way to buy a property. Other options include borrowing your own money from your 401k and paying yourself back with interest later.
Step 2: RehabNow that you have purchased the property (for roughly 70% of the after-repair value), it’s time to fix it up. Rehab funds will come from the loan you used to purchase the property, or cash you have set aside for this purpose. Of note: It’s important to allow for extra costs that arise during the rehab. Construction costs almost always go over budget and you want to be prepared for the extra expense should it arise. It’s important to consider two things when planning the rehab.
- What is required to bring the property up to rental standards for the area? You don’t want to overspend and make the home nicer than the comparable rentals in the area because you won’t find renters that will pay the premium cost. Put in the work needed to bring it up to standard for the market. For example, adding high end fixtures and hardwood floors doesn’t make sense when standard fixtures and laminate flooring adds the same value.
- What can be done to add value to the home? For instance, if the home is a two bedroom, one bathroom and it is inexpensive to add another bedroom and bathroom during the construction, the overall value of the home will go up. It will rent higher and appraise higher later.
Step 3: RentOnce the property is in move-in condition, it’s time to rent it out. You can manage this yourself or hire a property manager to do this for you. Some things to keep in mind as you are looking for the right tenants is that during the refinance period you will want:
- To demonstrate that you have long term tenants by having a minimum of a one-year lease in place
- Have reliable tenants that pay on time every month
- Have clean tenants so that the property looks nice during the appraisal
Step 4: RefinanceNow that you have purchased the property, fixed it up to move-in condition and added value by cleaning it up, and you have stable tenants, you’re ready to start the refinance process. Your goal is to find a bank that will lend on the appraised value of the property, rather than how much money you have invested. Shop around, talk to other investors in the area and see if they know which banks are willing to do this. Small credit unions are often good options. The refinance conditions will vary from bank to bank. Typically they will:
- Require a seasoning period of around 6 months, meaning you need to have owned it for six months or will have rented it out for a full 6 months before qualifying for a refinance.
- Provide cash back up to 70-75% of the appraised value.
- Include loan fees typical of standard home mortgages or a little higher.
- Have interest rates typical of a non-owner occupied mortgage, a little higher than those offered for a mortgage for a home you would purchase to live in.
Step 5: RepeatNow for the fun part! Assuming you purchased the home for roughly 70-75% of after-repair appraised value, and you acquire a cash-out refinance for 70-75% of the actual appraised value, you just pulled all your money back out! If you purchased will all cash:
- You recieve all of your money back, minus appraisal and loan fees. If you factored fees into the purchase price already, you have all your money back!
- You will repay the loans and interest with the cash out refinance. This is why it is important to factor in the full cost of the loan during the purchase of the home.
- You can pocket the money and continue making payments to the owner with the money you collect in rent every month from your tenants.
- Just ensure that you are prepared for the balloon payment when it is time to pay the loan off in full. If it is 10-years down the road, you will can pull more cash out of the home with the appreciation or you can sell the home, pay off the loan and have enough cash left over to move on to your next investment purchase.
Does this sound too good to be true? Are you wondering what the catch is?
While this method has been around for decades, it relies upon the ability to qualify for a cash-out refinance. There have been times when banks just weren’t willing to provide this type of loan.
Thankfully, we aren’t experiencing one of those difficult times.
This process is as simple as I have made it out to be. I just finished my first rental property purchase using this very technique. Here’s a review of the BRRRR strategy:
STEP 1: BUY
Purchase a 1-4 unit property at below market value. The hard part here is finding a great deal. Thankfully, you’ll want to add value to the property by fixing it up, so ugly homes that no one wants are perfect!
STEP 2: REHAB
Take that ugly home, hire a contractor, and make it pretty! The more creative ways you can come up with to inexpensively add extra value to the home, the better! Just don’t go overboard, make sure that every dollar you put in results in more than a dollar of value back out.
STEP 3: RENT
Once that ugly home is fixed up, someone will want to rent it! Acquire a great tenant that signs a one year lease and keeps the place tidy.
STEP 4: REFINANCE
You’ll want the property to remain in good shape because you’ll want a bank to give you a loan for 70-75% of the current, after-repair value of the home. During the process of determining the value of the home, the bank will hire an appraiser (at your expense) to provide an estimate of what it is worth. This will be based off of comparable homes in the area, what it rents for and the repairs/improvements you made to the home.
The bank will then provide a loan directly you to. You’ll use this money to payoff any loans you used to acquire the property and pay for the rehab. Then you can use the remaining money left over to…..
STEP 5: REPEAT
Repeat the process all over again!
- Take a look at How To: Analyze Your First Rental Property.
- Use a real estate app or website to look up a nearby home for sale.
- Use the steps to analyze the home as a potential rental property investment. I can almost guarantee that it won’t pencil out as a good investment, unless you live in an amazing area. If that’s the case, send me a message so I can get in on that!
- Run through the process a few more times until you are more familiar it.
- Now, get a little more creative and look for foreclosures, auction listings or even Craigslist postings. Look for homes in the area that have sat on the market for a long time. These are the homes that are more likely to sell for below asking price and below market value.
- Run the analysis on these homes. When you find one that makes sense, consider making an offer!
If you don’t think you’d be ready to make an offer quite yet, here are some valuable resources to learn more and build up enough knowledge to move forward.
*This post contains affiliate links. For more information, see my disclaimer page.*
- BiggerPockets.com is an amazing resource for all things real estate investing. You can ask questions within the forum, network with other investors and find local meet-ups in your town. There is also a great blog and podcast.
- While there are a number of great real estate books to choose from, the two I found the most helpful for starting out are both by Brandon Turner and published by BiggerPockets.