Investing in real estate can help you generate additional income and give your family greater financial security. One popular approach is the BRRRR Strategy.
How It Works
The BRRRR Strategy is a five-step process (Buy, Rehab, Rent, Refinance, Repeat). To be successful, you’ll have to follow the steps in order and understand the risks associated with each.
The first step is to buy a distressed property. It might be a house that doesn’t meet building codes and needs significant aesthetic upgrades before it can be rented out.
The next step is to rehab the property. You should start by addressing any safety issues, such as structural defects and outdated electrical wiring, to get the building up to code. Then you can focus on aesthetic improvements that will make the house more appealing to renters.
Once you’ve made repairs and spruced up the property, you can rent it out. You should research local rates for similar properties and set the rent at a fair rate that will attract tenants. Before you agree to lease the property, check a prospective tenant’s credit, criminal background, and references, in accordance with state and local laws.
After you’ve rented out the house, you’ll do a cash-out refinance. You’ll take out a new mortgage with a loan balance that’s higher than the amount you owe. That will allow you to access some of the equity you’ve built up and receive a lump sum.
The final step is to repeat the process. You’ll use money from the cash-out refinance to purchase another distressed property, then rehab it, rent it out, refinance the loan, and buy yet another property.
Benefits of the BRRRR Strategy
Following this process can help you generate a steady stream of passive income. You might decide to reduce the number of hours you work or quit your job altogether, or you might prefer to keep working and use your extra income to pay off the mortgage on your residence, take more vacations, or save for retirement and your kids’ college tuition.
Downsides of the BRRRR Strategy
Although many investors have found success with the BRRRR real estate investing method, others have not. Understanding the problems that can crop up along the way can help you avoid them.
First, you’ll have to find a distressed property at a reasonable price. If it doesn’t meet a lender’s requirements, you might be unable to get a traditional mortgage. You’ll need to make improvements that will raise the house’s value and that can be completed fairly quickly.
Mortgage lenders generally won’t approve a refinance for a rental property unless the owner has already lined up tenants. Finding qualified renters can be difficult and time consuming. You’ll have to meet a lender’s other refinancing guidelines and pay closing costs.
Is BRRRR Right for You?
BRRRR is one of many real estate investing strategies. Consider the pros and cons of this and other methods to figure out which is best for you.
