In order to effectively apply the BRRRR Method, it is essential to follow the specified steps in their precise order. Here, we present several recommendations for each stage of the process.
The essence of the BRRRR Strategy lies in acquiring a distressed property that requires updates and repairs, making it challenging to secure a conventional mortgage for the home. There are several reasons for this. Most lenders insist on conducting an appraisal of the property, but evaluating its value proves difficult in this scenario. Additionally, depending on the loan type, the property must meet specific criteria to qualify. Given its distressed nature, the property is unlikely to fulfill these requirements.
Before completely dismissing the possibility of financing, it is advisable to consult with a lender to explore potential options. It may be viable to utilize a home equity line of credit (HELOC) or a hard money loan for the purchase, although these options carry high risks and are often not recommended.
When purchasing a distressed property, it is crucial to calculate its after-repair value (ARV). The ARV represents the estimated value of the home after renovating or rehabilitating it. To determine the ARV, one must compare the intended final state of the property with similar homes, or comparables, that have recently sold in the vicinity. These properties should share similarities in terms of size, number of bedrooms and bathrooms, age, construction type, and condition.
When determining the appropriate offer for the home, adhere to the 70% rule in real estate. Avoid investing more than 70% of the property's ARV. For instance, if the ARV is $300,000, refrain from paying more than $210,000 for the home.
When rehabilitating a home, the initial priority is to address any deficiencies that do not comply with building codes and ensure the property is safe for occupancy. Subsequently, identify the renovations that will genuinely enhance its value. These may encompass kitchen and bathroom upgrades, enhancing the property's curb appeal, and installing energy-efficient windows, appliances, and other features.
Prior to commencing the project, it is imperative to establish a realistic budget and timeline.
Securing tenants before proceeding to the next step, refinancing, is crucial since lenders typically require the property to be occupied before considering refinancing.
When selecting tenants, prioritize certain qualities, including:
- Consistent on-time payment history
- Stable employment with a steady income
- A positive credit report
- No prior criminal activity or eviction records
- Positive references
The information can be obtained by arranging a meeting with the prospective tenant, having them complete an application, evaluating their credit report, requesting references, and conducting a background check. It is essential to ensure you obtain their consent and abide by all housing laws.
When determining the rental amount, it is crucial to strike a balance that is fair to the renter while also generating a positive cash flow for yourself. You can ascertain this by deducting the total expenses associated with owning the property from the monthly rental income you plan to charge. For instance, if you set the rent at $1,500 per month and your mortgage payment is $800, your monthly cash flow would amount to $700. Consulting comparable rental rates can assist in determining the optimal price.
In the BRRRR method, you engage in a cash-out refinance on your investment property to acquire funds for purchasing another distressed property to renovate and rent out. To accomplish this, you must locate a lender who offers cash-out refinancing and meet their specific eligibility requirements.
Although the lender might have their own distinct criteria, you will need to meet a minimum credit score requirement (usually around 620 for a cash-out refinance), adhere to a maximum debt-to-income ratio (typically 50% or lower), and have equity in your property. Additionally, there may be a waiting period before you can pursue a cash-out refinance.
It is important to keep in mind that an appraisal will also be necessary, and there might be additional expenses such as closing costs associated with securing the loan.
In the final stage of the BRRRR Method, you revisit and repeat the previous steps in the same sequential order. Taking notes throughout the process is advisable if you intend to continue repeating these steps, as it allows you to learn from past errors.