You’ve most likely heard of the BRRRR model.
And before you start shivering at the sight of the acronym, you should know that it has nothing to do with the cold. So, with that out of the way, what does BRRRR stand for?
- Buy
- Rehab
- Rent
- Refinance
- Repeat
It’s a neat concept and can be wildly profitable to a savvy real estate investor.
Following the brief explanation of the model, I’m sure you can deduce how it works, but you’ll be getting an in-depth look at what it really means. It’s not as simple as you think.
Trust me…
Buy
This is where the money is made.
It may be your belief that you make money when you sell the house (which is true), but the initial purchase sets you up to make that money.
Since the BRRRR model is typically carried out with properties that could use some extra love (sometimes called a fixer-upper), the right purchase is imperative. You want a house that needs some renovations, but not one that needs so much work that you can never recoup your initial investment.
That’s why it’s so important to do your homework or “due diligence.”
Rehab
This is where you need to put in some elbow grease.
The “R” in rehab could also stand for renovation. In other words, the money and work that you’ll put into the house to increase the value of the property. It’s very important that you make the right renovations that will directly correlate to the price of the listing.
That’s why it was so important that you did your homework from before.
A few good things to look for in a potential purchase would be the easy stuff that has the most impact. Things like:
- Sprucing up the landscaping
- Remodeling a bathroom
- Updating the kitchen
- Painting the walls
- Adding amenities
These can typically be done by most people with not a ton of cost, and a few YouTube videos. That’s what you want to look for in a purchase.
Smaller touches paired with larger rewards.
Rent
The first order of business is to find a tenant.
Most banks won’t want you to refinance without occupancy. Of course, finding a good tenant that you know will pay each month is key. It’s also important to let the tenant know that an appraisal will happen before you go through with the refinance.
This is so the bank can effectively value your property.
The strength of your renovation greatly impacts this, so focus on them!
Refinance
There are 4 main benefits to refinancing.
You’ll be getting a new loan, so you can either obtain a lower interest rate, acquire a different type of loan, use the equity to borrow more money, or shorten the loan to pay it off faster.
The reason for refinancing will be different for everyone, so it’s up to you to again, do your homework. Depending on your own situation and the current state of the markets will affect your decision-making process.
Repeat
This part is quite simple.
You just do it again! Part of the reason you refinanced is to use that access to additional capital and repeat this process.
That’s the essence of the BRRRR model!