With the winter months approaching, it seems appropriate to talk about an investing method in real estate called BRRRR. BRRRR is an acronym for Buy, Rehab, Rent, Refinance, Repeat. It sounds simple, right? If you do not know what you’re doing this could be a catastrophic approach to your real estate journey.
Although BRRRR has nothing to do with the seasons, I think it’s fair to say, that if not done correctly, it can leave you out in the cold. Why do I say that? This approach is best done with experience. If you don’t count the cost of renovating, labor cost, permit cost, and time associated with your project, you can end up spending more than what you were expecting. However, this can also be a rewarding approach when done correctly.
This is probably best done by finding off-market deals, or wholesale deals. It can be done by buying homes on the market, but you need to make sure you are doing your due diligence. It is always recommended to get the home inspected and if you already have a contractor have them walk the property with you and give you an estimate of how much the repair will cost.
If you are looking for an off-market deal or wholesale deal, you can fund this project with a hard money lender. Normally, the interest is higher than a mortgage. The reason for this is that these types of lending are meant to be for short-term projects. A good rule of thumb is the shorter amount of time the loan is needed, the more the interest will be.
Also, hard money lenders normally do not fund the entire deal and expect to need 20% – 30% of the loan amount as a down payment depending on the lender. If you don’t have it or are new to this strategy, it may be a good idea to consider finding a Joint Venture (JV) partner who will fund the needed amount. The positive side of having a JV partner is most likely they will have experience and will help during the process.
As mentioned before, when looking through the house, having a contractor with you could be beneficial. There could be things that need to be repaired that are not seen at first glance. It’s always a good idea to expect to pay more than what the estimate is because there can be hidden costs that are later discovered once the renovation begins. The benefit of having a contractor is you may be able to negotiate costs if they are taking on the entire project.
An example from our personal experience with our first property was when we found out when we wanted to empty our septic tank, we had a little surprise. We found out someone thought it was a genius idea to move the septic tank to the driveway located on the side of the home. During the renovation, we were driving on the septic tank as well as everyone we had working for us. This is not something you can plan for, especially when the County Environmental Health Specialist didn’t have it on the county map.
After the project is completed, the next step is to refinance your project. If this is going to be under an LLC, you could use a DSCR loan and have the property transferred to your LLC. There are other loans you can use too. Make sure you check with different lenders to make sure you are choosing what is best for you.
If you did your due diligence correctly, when the project is finished, you will refinance the deal, pay off all debt associated with the renovation, and have some money left over. With the money left over you can pay yourself, and position yourself to work towards making enough extra income where you may not want or need a JV if you needed one before.
DISCLAIMER: The information on this website is not financial advice but for educational purposes only. There are risks associated with investing in real estate and other investments.
