Investing in real estate offers a lot of different options. You can buy and develop land. You can invest in a property fund. You can even flip commercial and residential properties. But for a lot of beginners, the best way to make money in real estate is to apply the BRRRR model to residential property.
The BRRRR acronym stands for: buy, rehab, rent, refinance, and repeat. Not everyone buys into this formula. However, there is no shortage of real estate investors who have figured out how to make it work. BRRRR has proven to be a viable option for a certain segment of the property investor population.
1. Buy Fixer Uppers
The first step of the process is to buy a residential fixer upper. Choosing a house that needs a little rehab is a way to get more for your money. If you buy a turnkey property instead, you will pay more than you should. Focusing on fixer uppers means getting better prices on your investments.
As for funding, hard money is the preferred option. Salt Lake City’s Actium Partners says the key to maximizing hard money loans is to avoid the house flipping strategy. Instead, investors should treat their properties as long term investments. That is what hard money lenders want to see.
2. Rehab the Properties
Whether you start with one property or several, rehab is the next step. It is also the most challenging step inasmuch as it’s easy to spend too much money. You need to know what rehab projects are most likely to add value to a property without sucking your budget dry. This part of the process can take a while to learn.
3. Rent the Properties
One of the main goals of investing in residential real estate is to start generating rental income as quickly as possible. So as soon as properties are rehabbed, it is time to rent them out. It’s wise to make the extra effort to vet every applicant in the search for quality tenants who will pay their rent and not destroy your property.
Generating rental income is key to moving on to the next step. If your properties are not generating enough income, you will not be able to move forward.
4. Refinance the Properties
Assuming you utilized hard money to acquire the properties, you might be relying on rental income to make your loan payments. Refinancing the properties with conventional bank loans accomplishes two things. First, traditional financing provides the funds you need to repay your hard money loans. Second, traditional financing pulls your original down payment out of the properties. Now you have the cash to acquire more.
5. Repeat the Process
With refinancing done and your down payment back in your possession, you repeat the process. Look for new fixer uppers capable of generating enough rental income to be profitable. Combine your down payment cash with new hard money loans to fund your acquisitions. Then rehab and rent just like you did before.
Here’s why this strategy works so well: every property you acquire has the potential to generate monthly income for as long as you own it. This allows you to leverage the value of each property to continue building your portfolio. Each property’s individual value increases over time as well. When you are ready to finally sell, you will earn an additional return, over and above years of rental income, based on higher property values.
The BRRRR strategy is an effective way to make money in residential property. Not every investor is a big fan, but there are certainly those who love it.