Before I discuss the real estate BRRRR strategy, let’s talk about a current pressing topic that’s going to fuel investment talk. With numbers released last week, one thing is very obvious: inflation is here, and it is a problem for most taxpayers.
At least for now.
I want to remind you that they refer to these trends as falling within an economic cycle for a reason: these things always come back around.
The big question, of course, is WHEN.
I won’t attempt to prognosticate about that, but I do think it wise to consider this not to be a mere “blip” … but something to think about. Do NOT panic about this, but take a measured approach.
One thing is clear: holding a bunch of cash in a non-investable, liquid form is costing you because of it.
This is why it makes sense for you to consider investing in inflation-adjusting assets.
(And, of course, it makes even MORE sense for you to be thinking about the tax implications of any financial move — BEFORE we reach year-end. After December 31, there isn’t much we can do that could make as much of a difference as moves you make now:
So, speaking of investing in actual assets, I’ve been on a bit of a real estate kick.
Real Estate BRRRR Strategy Pros and Cons for Investors
“Continuous improvement is better than delayed perfection.” – Mark Twain
You already know there are a load of ways to make money – and lose it – when investing in real estate.
But what you may not know about is this unusual way to keep real estate (potentially) paying off for you long-term, as long as you can be persistent and patient – and do it right.
No, I’m not cold. That’s the acronym of the strategy: Buy, Repair, Rent, Refinance, Repeat.
In regular real estate investing, you buy cheap, work like a dog to turn your fixer-upper into a showplace, live there while you watch your equity and valuation grow, and maybe rent a little for pocket money. Then, way down the road, you sell and likely blow your lifetime of profit on the price of the next place you live in.
The BRRRR strategy doesn’t work that way, though some parts of the strategy are similar. You buy property, spruce it up, rent it out, refinance into a better money position, and then do it again.
Before we get into the pros and cons, let’s look at each step.
Buy. You kick off your real estate investing by snagging a rental property for a price below market value. Needless to say, such a property sometimes needs elbow grease to even come up to residential code.
The condition of this property also means that you might have a tough time getting a traditional mortgage. Talk to your lender.
Other means of financing might include a home equity line of credit or a hard money loan – a short-term loan from individuals or private companies that accepts property or an asset as collateral. Both types of loans come with risk – big risk.
Before signing anything, figure out what’s called your after-repair value (ARV), which is an estimate of what the property will be worth after you renovate it. You probably won’t want to plunk down more than about 70% of your AVR to buy the place.
The BRRR strategy works best with properties that are really below market value. This means you’ll have to…
Repair (or rehab): Time to grab your hammer and paintbrush.
This is one of the trickier parts of BRRRR, in that you want to fix the property up but not too far up. Your goal here is to attract good tenants without biting deep into your profit margin.
First, set a realistic rehab budget and a timeline for improvements to bring the place up to local residential code. As you plan your prospective improvements, stack the end result up against similar properties in the area.
Then tackle the jobs that will increase the value fastest in the eyes of tenants. Redo the kitchen and bathroom, add in some energy-efficient windows, or see if you can add a bedroom.
Rent: A lot of landlords are only interested in seeing the rent check on time. That matters here, too, but in BRRRR your renters play an even bigger role: Lenders generally won’t refinance (our next step) until a property has tenants.
So, look for good renters. Check credit ratings and references – especially for on-time payments and employment. Just as you compared other homes in the area when starting repairs, check out local rents. Balance it against your monthly overhead.
Refinance: Now go to lenders with proof that you have turned this into a profit-making property in which you have equity. Congratulations – you can now use that to do a cash-out refinance – basically cashing out some or all of the equity and creating a new mortgage.
Then, take the balance above the original mortgage and put it toward the next step.
Repeat: The fun part. With the rent as passive income, use the refinancing to buy another property and start the process all over again. You can run with BRRRR for a looong time, steadily smoothing out the wrinkles along the way, until it’s a well-oiled machine.
Good with the bad
The whole thing sounds like gold, and it is, but before you start on that loooong run, look at both sides of the issue.
Real Estate BRRRR Strategy Pros: A game plan that builds naturally on itself (if you do it right) can be a real life-changer. Your ongoing success and means of independence – the rent – is built right into the system and, since you repeat steps, you continuously learn more.
Real Estate BRRRR Strategy Cons: There are a lot of costs and work that go into repairing a fixer-upper. BRRRR can require riskier types of loans, disasters and downturns with property can happen any time, and there’s no guarantee in refinancing that you’ll come out ahead.
Be honest with yourself. Have you got the nerves for all that? Do you have the patience to do each step right?
Any investing plan has a lot of moving parts – and investing in real estate has its own special concerns. If we can help you sort this or other money matters out, drop us a line.
We’ve got your back,
Emelia Mensa EA, CPA