Is BRRRR The Best Of Both Worlds? 🌏
We’ve been in the lending space for a while and, in that time, have learned a thing or two about investing. So NavCap’s Marketing Director, Debbie Fales, was happy to contribute to a recent article on Homes.com about the ever-popular BRRRR method.
We have clients with decades of investing experience and others who are embarking on their first project. But no matter how many deals they have under their belts, they are working toward the same goal – profitability. And, many of them have realized that the key to maximizing returns is smart leverage.
That’s one of the reasons we love the BRRRR strategy.
What Does It Mean To BRRRR?
Essentially, the BRRRR method is a sustainable investing strategy that stands for "buy, rehab, rent, refinance, repeat." “It’s a great way to build wealth and generate passive income without having to put down a large amount of cash upfront.” (Homes.com)
Here's how it works:
📌Buy a distressed property that you can snag for a below-market price
📌Rehab the property, making necessary repairs and improvements to increase its value
📌Rent out the property to tenants, generating income
📌Refinance the property, taking out a loan that is larger than the amount you owe on the original mortgage
📌Repeat the process using the proceeds from the refinance to buy another property
Is BRRRR Right For Me?
Since there are a lot of moving parts in the BRRRR strategy, it helps to either have some experience or a good mentor to walk them through any unforeseen challenges. You also need to be really honest with yourself when running the numbers, since this will be a long-term investment. Research the property, the neighborhood, and the region up front to make sure rental demand will be strong.
How Can I Find A Good BRRRR Project?
Evaluating any real estate investment deal, including a BRRRR, comes down to the numbers. By purchasing a distressed property in a solid neighborhood, you can often force appreciation by completing a light rehab. This will allow for an increase in what's called the After-Repair-Value or ARV of the property.
Estimating the rehab costs is one of the first hurdles an investor faces, and it's critical to the project's success. Investors should work with an experienced contractor and create an itemized list of repairs in a shared Scope of Work (SOW). The SOW is essential to keeping everyone on track and on budget. Lucky for you, NavCap offers a free, downloadable SOW template to make this part of the project a breeze!
Financing A BRRRR
In order to start BRRRRing, you’ll need to finance the initial purchase with a short-term fix-and-flip loan. This loan finances a percentage of the initial property purchase and the repair budget. The percentage financed depends on a number of factors, including the investor's experience and financial footing.
Play around with our rental property calculator to see if your project pencils out. Change inputs including the purchase price, expected rental income, rate, terms and more.
Once the rehab is completed, the investor can then do a cash-out refinance of the fix-and-flip loan into a 30-year fixed-rate rental loan or ARM. We may require a new appraisal at this point but often can use the original ARV after confirming that all repairs have been made. For these rental loans, we will consider the DSCR (debt service coverage ratio) of the property when calculating the loan amount and terms.
Avoid These Common Mistakes
A lot of the mistakes we see involve rushing or guessing when it comes to the numbers. It is always worthwhile to take the time to do the research and due diligence.
For any rental investment to pay off, you need tenants. So you’ll want to know a bit about the supply of housing in the area in relation to the estimated demand. Obviously, you want your estimated vacancy rate to be as low as possible, but it should also be based in reality. To find data for your region, consider consulting the US Census Bureau, where they list vacancy rates by region.
Many investors subscribe to the 1% rule, which suggests that monthly rent should be roughly 1% of the property’s purchase price. That would mean a $200K home should rent for $2000 per month. While this might be a helpful rule of thumb, it’s rarely that simple. We suggest diving deeper into listing aggregators like apartments.com or rent.com and comparing similar properties to find the going rental rate.
Help Us Help You
As a direct private lender, we have funded quite a few fix-and-rent projects. Since we require that the projects meet certain parameters and cap the LTV, most of our clients find success time and again. Let us help you get on the right path with your next project. Reach out to your loan officer directly or call 888.444.3160 to be put in touch.