No, it’s not just a signal that it’s cold. BRRRR is the acronym for a strategy real estate investors use to try to maximize opportunity in a hot housing market. Here are the basics, and tips for when it’s time to refinance.
What is the BRRRR method?
BRRRR stands for “Buy, Rehab, Rent, Refinance, Repeat.” Real estate investors use the BRRRR method to buy properties at an undervalued price, fix them up and find tenants for a passive source of income. At this point in the equation, the investor has completed BRR – buy, rehab and rent. The investor then teams with a mortgage lender that’ll do a cash-out refinance (the third “R”) to borrow more money to buy another undervalued home, checking off the final R: repeat.
While the BRRRR method involves some advanced-level real estate expertise, the thinking behind it is simple: Increase the value of distressed or older properties to make them attractive enough to rent, then leverage that appreciation to continue acquiring more properties for more rental income. Done right, the BRRRR method is a pathway to collecting passive income and building a large portfolio of rental properties. How successful you are, of course, depends on a number of factors, including how much you can save on the initial purchase price and how experienced you are budgeting for renovations and judging the rental market.
Example of the BRRRR strategy
Here’s a simplified scenario: Say you buy a foreclosed property for $150,000 with 20 percent down ($30,000) and renovate it to the tune of $50,000. So far, you’ve invested $80,000.
With a new kitchen, new bathroom and new floors, the property now appraises for $250,000, and you’re able to rent it out for $2,000 a month to cover the expenses on the initial loan and pocket some extra cash. (Of course, your exact rental price will need to align with the local market and also account for insurance, property taxes and other costs.)
Say you’re now at the point where you owe $115,000 on the initial $120,000 loan. While you’re earning rental income, you do a cash-out refinance for $187,500 – 75 percent of the newly appraised value. You pay off your first loan ($115,000), leaving you about $72,500 left over (less closing costs). You then use a portion of that to make a down payment on another foreclosure and use another part of it for rehab expenses. That cycle continues, with you rehabbing, renting and refinancing to take cash out.
How to finance a BRRRR property
Financing an investment property comes with additional requirements and considerations because the home isn’t going to be the roof over your head, and therefore riskier for lenders.
If …….