If you are into real estate investing, it is possible you have considered BRRRR investing. If you don’t know what the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) is, it could be something for you to consider. Similar to house flipping, this real estate investment strategy can help you build up passive income over time by allowing you to flip distressed property and maintain it within your real estate portfolio as a rental property.
Use of Equity
BRRRR investors make an initial investment into a property that needs renovation. It may be difficult to get a traditional loan on a property that needs repairs. Therefore, a hard money loan may be an option for you. Hard money loans are based on after-repair value (ARV) and are meant for renovation investments. One West is the St. Louis hard money lender to help you navigate your BRRRR deal.
Once the property renovations are completed, BRRRR investors find a tenant to rent. Rental income serves to produce cash flow to cover the owner’s expenses and help build property equity.
When there is enough equity, the next step is to use a cash-out refinance. When you refinance your property, the cash is used to purchase another distressed property and you start the entire process over again.
The BRRRR method doesn’t come without some risks. An investor has a lot of things to consider before taking the leap into BRRRR investing. Let’s take a look at a few of them.
Understanding the costs to get started is extremely important. If an investor doesn’t have all the money upfront, they will need a loan. As we already discussed, conventional mortgages may not be an option when it comes to BRRRR real estate investing. Private money loans will be for a shorter term, and have a higher interest rate, but will be based on after-repair value to give you the funds to complete the needed renovation.
BRRRR property investment takes time to pay off. The ultimate goal is to build up multiple properties to create passive income and eventually financial freedom, but there is a lot of work and time needed upfront. The property needs to be rehabbed and then there is the time it takes to build up equity using the rent money from your tenant. BRRRR real estate investing is not a fast road to financial independence.
Not Everyone is Cut Out to be a Landlord
Being a property manager takes a lot of work. Keeping up with the changing market value of rental properties, staying on top of needed repairs, and dealing with tenant issues can zap a lot of time. Property management can be a full-time job. If you end up with enough properties, you may need to work with a property management company to take it off your plate. Of course, this adds other costs to consider.
Other Financial Risks
Aside from the investment costs we mentioned already, there are other financial risks associated with BRRRR property. Anytime you’re dealing with renovations, there are bound to be unexpected costs of repairs you didn’t see coming. Also, tenants are an unknown variable. It can take time to find good tenants and bad tenants can potentially create more property management costs or even repair costs if they don’t take care of the property. Finally, after-repair value is an estimate, so there is always a risk that appraisals do not come in where you expect them creating more problems with the cash-out refinance potential.
Let One West Hard Money Help!
The BRRRR method is a long-term passive income strategy that requires more effort than investing in a turnkey rental unit, but it can definitely be rewarding. With a solid plan and a little research, you can quickly start earning passive income by renting out your investment property. Let One West Hard Money Lenders be your lending partner and help walk you through the BRRRR strategy today!