Many beginner investors can benefit from the structure provided by a tested investment strategy. If you spend enough time in the real estate investment space, you’ll likely hear about the BRRRR, or at least of the BRRR process. The method of investment and the acronym ascribed to it have both grown in popularity during the last few years. So, let’s jump right in and discover what a beginner investor can take away from this method.
What Is BRRRR?
The popular investing method we’re learning about describes 5 simplified steps for approaching a distressed investment property:
- Rent out
This method is popular for a few reasons. It provides a simple and profitable process you can follow. Along the way, the IRS also rewards you with tax benefits when you follow the process through.
The idea behind BRRRR is simple enough. You find a property with potential but in dire need of rehabilitation and transform it into a highly profitable investment. But as you likely know, this process involves a lot of paperwork and due diligence to ensure it works.
How Does BRRRR Work?
Buying A Property
The first step is finding a property that has the potential to land you a healthy return. For this to work, you need to find a property that is undervalued right now or that has the potential to become far more valuable with future improvements.
It’s easier to succeed if you can buy an ideal property at a discount. Many BRRRR practitioners try to buy properties off-market and on multiple listing services.
When you’re looking for a home to flip, you can stick to the after-repair value (ARV) formula. It’s critical to always go through a thorough rental analysis procedure to make sure it’s a worthwhile investment. There is always an element of risk when purchasing a property, and even successful investors will usually use private financing, hard money, or bank loans to finance their purchase.
Rehabilitation is the process by which you make your investment property a worthwhile rental property. Successful investors try to make rehab quick and efficient so it can start producing cash flow ASAP. Just remember to make the property safe and comfortable, with all the amenities a tenant would need.
Being a landlord and investor is often where your job’s stress will really kick-off. The important thing is being able to attract and keep quality tenants. Tenant screening is important, otherwise, you risk being stuck with a time-consuming mess.
During the rental phase, you can expect to have to spend more time managing your property. Tenants will use your amenities and may ask for repairs during their tenancy.
Refinancing Your Loan
The refinancing process starts once you have an established cash flow or the propertie’s value has increased significatly after the rehab. The purpose is to recapture as much money you have invested into the deal for the next one by doing a cash out refinance.
Different lenders will have different refinancing requirements. So, start the refinancing process once you have tenants in place and a reliable cash flow. This will broaden the range of refinancing options you have and land you better deals.
Keep in mind that this step is often the most difficult. When economic conditions are unfavorable, banks and other lenders apply more restrictions to themselves. You may end up finding it harder to get an ideal refinancing loan. So, make sure you have a backup option available.
Repeat The Process
If everything went as you’d planned you can repeat the process. Ideally, it went off without a major problem and you now have extra cash you can keep or reinvest into your real estate investment business.
Benefits Of BRRRR
When executed without a hitch, BRRRR gives you a great way to acquire property and increase your wealth. Your success will depend on your ability to execute each step of the process efficiently. So, make sure you start by doing your homework on all the available properties. But go the extra mile with each step. Don’t leave anything you to chance.
Real estate investments allow you to claim several tax deductions. If you can gain your REP (Real Estate Professional) tax designation, you can claim even more deductions. Passive losses are also tax-deductible. Should you sell a property, you can also pay capital gains tax, which is lower than income tax most of the time.
Unfortunately, it’s hard to excel at BRRRR when you’re competing with multi-million dollar investment firms. It takes a lot of money to scale a BRRRR investment business. It also takes a respectable amount of expertise. This is why rich and well-connected investors and institutions are dominating the BRRRR space. You will also need to secure financing unless you already have the cash.
The well-off are dominating BRRRR with several advantages unique to real estate. But that doesn’t mean there’s no hope for beginner investors. Just expect to end up fighting an uphill battle if you have ambitions of building a BRRRR empire like the ones that have already made it.
It can’t be overstated how difficult this process can be, especially for beginners. Mistakes can be merciless. Buying the wrong property or accepting a deadbeat tenant can stall or ruin the BRRRR process.
You can avoid problems like these, but it takes work to avoid these mistakes. This is why larger well-established investors do so well at BRRRR. Every step is accounted for by professionals with good, tested processes.
Is BRRRR The Right Method For Me?
If BRRRR sounds intimidating to you, that’s a good sign that you should think harder. Laying out each step is easy, but you have to be certain you have the time, money, and stress tolerance to:
- Do your research and purchase the right property
- Thoroughly rehabilitate the property (this is a profession in itself and costs a lot of money)
- Advertise your property and screen all applicants
- Go through the refinancing process and compare all your options
- Stay busy with all of these steps perpetually
So, only you can answer whether BRRRR is a good method for you. You can, of course, cut one R from the equation and follow this tested method on a smaller scale. For beginner real estate investors, BRR or BRRR can be a very realistic and rewarding option.
Hi, I’m just an inspired recent real estate beginner investor named Miguel Rivera from a modest town neighborhood called Pigeon Hill in Aurora, Illinois, the City of Lights! I have 3 years in so far investing in real estate and excited to continue to walk my chosen path to reach my ultimate financial goal of living off my rental income before I reach 35 years old! Driven by infinite growth potential and guided by my mentor, I managed to get started and make it work with just a modest salary, practically no education in the field, learning and applying some key habits. This website is a collection of all things that I have learned so far that I wish can help other recent real estate investors! Click here to view more about my story.