If you’re interested in getting into real estate investment, you will hear about the Buy, Rehab, Rent, Refinance, and Repeat (BRRRR) method. When done correctly, this method will allow you to make most, if not all, of the money that you invested on the property back in a short time.
This investment strategy can be used on fourplexes if you can afford it, allowing lower regular expenses on a property compared to one to three-unit properties. When someone moves out of the dwelling and your property has a vacancy, your income will not go down to zero like it would with a single-family home. Instead, you will still have income coming in from your other two units while you look for a new tenant.
What is the BRRRR Investment Method?
The BRRRR method is a real estate investment strategy that many real estate investors recommend. However, several steps are necessary to make your entrance into the real estate investment world as smooth as possible. With that in mind, this is what you need to know about each step:
The first step is to purchase a property that needs some upgrades and repairs. The property purchase can be made either by paying in cash, using a private home loan, or using a government-backed loan. However, to improve your investment’s potential return, you must conduct a fair amount of research when buying a property. Ensuring that you get the best deal possible in the property you’re trying to rehab.
When you find a property and purchase it, you will begin the rehab process, which, if done right, will address any potential upgrades and repairs on the property. Also, it would be best if you got the home looked at by an inspector who will recommend repairs and upgrades to things like:
- Replacing drywall that is damaged
- Bathrooms that need an upgrade
- Roofing repairs
- Installing new carpet or paint
- Landscaping overgrowth affects the property’s appeal
- Replacing kitchen appliances that are not working properly
- It can build bedrooms or units for single-family residences, duplexes, triplexes, and fourplexes.
Once the repairs and upgrades get completed, they will increase the property’s value.
After the property goes through the rehab process, you will begin to look for renters. This step requires that you screen potential tenants by making sure that they will afford their monthly payments. Finding the right renter will take some work, although you must make sure that you’re not too demanding since no one is perfect.
Also, an appraisal must be done on your property once the tenant moves in. You will, of course, have to notify the tenant when the appraiser is visiting their property. Moreover, it will also be beneficial to you if the unit is looking clean and organized by the time the appraiser shows up.
Once a tenant has lived in the property for several months and you have built an acceptable amount of rental history, you will be able to start the refinancing process. This process will require that you find a lender who will offer a cash-out refinance since most real estate investors recommend it. After the refinancing on the property, the money you borrow must be equal to the appraised value for the BRRRR strategy to work.
After you finish the process, you will take everything you learned and the cash you have taken out, and you will be able to start the process all over again. You can also even build a system that implements all the lessons you learned in your previous BRRRR cycle. Moreover, implementing past experiences will enable you to make the process easier and better for future tenants.
One obstacle with using the BRRRR method is that it requires that you fund not only the purchase of the property itself but the repair and upgrade costs. These costs can be high, and unless you’re an amazing saver, it might be a bit too much to afford. Thankfully, there are government-guaranteed loans that can cover the cost of rehabbing a property while also offer several benefits; these programs are:
203k FHA Loans
An FHA 203k loan allows you to buy a home and finance the repairs with the same benefits offered by FHA home loans. These benefits include:
- Low 3.5% down payments
- If the down payment is not affordable, you can get the money as a gift from a friend or family member.
- The seller can also cover closing costs.
- FICO scores of 580 also qualify, with some lenders going even lower.
However, FHA 203k loans can also cover repairs and upgrades to properties purchased and used for the BRRRR process. These upgrades and repairs are:
- Remove all health and safety hazards.
- Add units or bedrooms to a property with a limit of up to four units.
- Update property accessibility for disabled residents.
- Replace appliances that might be malfunctioning.
- Change carpets, paint, and landscaping.
VA Rehab Loan
The VA Rehab Loan is the VA’s response to the 203k FHA loan. However, this loan is for veterans, active-duty service-members, and surviving spouses of deceased military members. Moreover, the loan offers some of the best benefits available like:
- Zero down payments
- Low monthly costs
- Low-interest rates
- No mortgage premiums
- No prepayment penalties
Eligibility requirements for the VA Rehab loan are no different from the requirements for the regular VA home loan. Nevertheless, rehab loans meant to finance the repairs and upgrades to a property; including:
- Repair doors, windows, roofing, and gutters.
- Improve Insulation
- Treat and get rid of mold and lead paint.
- Upgrade the property to meet accessibility requirements for disabled veterans.
Both the FHA 203k and the VA Rehab loans are lent out by qualified lenders and guaranteed by the United States government. Meaning that the lenders get covered if a borrower must default on a loan, which in turn allows the lender to be a little less stringent about an applicant’s credit score.
There are several benefits to using the BRRRR investment method. These include the potential for a high return on investment, a fast way to build equity, and the potential for lower overall costs and risks once you start owning and renting out several properties. However, the initial costs might be slightly high, although government-backed loans are sure to reduce those costs significantly.
Phil Georgiades is the CLS for VA Home Loan Centers, a government-sponsored brokerage specializing in VA Home Loans. He has been practicing real estate in a professional setting for 22 years. To apply for an FHA home loan, call us at (877) 432-5626.
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