BRRRR method: How Does it Work for Investors
When many think of investing in real estate, the most common method is managing rental properties as a landlord. After all, it is a great way to build equity and hedge the effects of inflation on the real estate market. However, another excellent way investors are now starting to capitalize on is the BRRRR method. This method's strategy is embedded in its acronym's meaning, which this article will describe in detail below.
Do you wonder what the BRRRR method is and how it works for investors? Then, we'll discuss everything you need to know, including how to find properties and use hard money lending to finance your next investment.
What is the BRRRR method?
Before getting into details about the BRRRR method, we must define it. The acronym is short for Buy, Rehab, Rent, Refinance, and Repeat, which is precisely what investors do. They purchase a distressed property, rehab it into a more viable space fit for renters, and refinance the apartment or house to invest in another property.
While the BRRRR method shares many similarities with house flipping, using them interchangeably is inappropriate. Yes, they both involve refurbishing dilapidated properties for higher market value. In a house flip, you sell the house to make interest. Remember that one of the Rs in this method is Rent, which means investors hold the property and lease it out to tenants. With the right strategy, the BRRRR can be a lucrative way to earn passive income.
However, without a proper plan, you could spend a lot of time and energy without beneficial results. To avoid making wrong financial turns, discuss with a private money lender before starting your investment project.
How to Find BRRRR properties
1. Use the Driving for Dollars Strategy (signs)
If you want to cash in with the BRRRR strategy, you have to find the right property. One of the most popular ways to locate a potential project is what investors call 'driving for dollars.' It involves hunting around promising neighbors and locations for houses that need renovations. Traffic lights and poles in high-traffic areas also have signs where property sellers advertise their distressed homes. If you pay close attention, you could get a solid lead.
2. Search through Real Estate Websites
Real estate websites are another great place to find dilapidated homes needing rehabbing. Did you know that websites like Zillow and Hubzu have sections specifically for houses in pre-foreclosure? You can swoop in and claim the hidden gems if you act quickly.
3. Attend Property Auctions
Put an eye out for property auctions in the neighborhoods you're targetting. Sellers that have to put their house on the market using this method are usually willing to settle for well below the market value. If you're the highest bidder, you could close the deal there and then walk away with a fatter portfolio.
4. Ask Banks and Lenders
Borrowers that enter secured loans risk losing their property when they default. That allows banks and lenders who have no use for such homes after legally repossessing them. Hence, you can get a great deal on distressed houses, which are usually more challenging for companies to dispose of.
How to Use Hard Money Lending in this Strategy?
Most investors finance rental properties with a traditional bank loan and a house-flipping project with private financing. Unfortunately, funding for a BRRRR strategy can be more complex. It can be tricky to secure a loan because many lending companies aren't familiar with this investment strategy and might be unable to offer suitable solutions.
Thus, hard money lending is often the go-to for investors interested in this path. One of the advantages of this financing solution is that it is usable by people who need to fast-track their project, have a bad credit score, or require a more flexible plan. Here's how to use hard money lending in the BRRRR strategy:
● Look for a Trustworthy Lender
There are plenty of lenders willing to borrow money. The problem is that there's at least one scammer for every legitimate company. It's your duty to perform due diligence with your research to find the right money lender. Ask friends and colleagues for recommendations, search online for reviews, and compare rates and fees to identify the best one.
● Provide Documentation
Although hard money loans require much less documentation than traditional bank mortgages, their requirements aren't entirely absent. Gather all the documents your lender requests, including an application form, identity verification, and proposal.
● Present Your Case
Submitting a hard money loan application isn't always a slam dunk. Sometimes lenders reject potential investors for not meeting specific standards. Some of the most common reasons include selecting a property in a bad location or needing massive renovation. Thus, you have to sell your application if you want a yes. Besides, it also gives you more leverage to negotiate.
The BRRRR method is an underused real estate strategy that is a great way to acquire passive income as your portfolio grows. Of course, it all depends on if you can find the right property and finance it adequately. For the former, you can locate a potential investment by hunting in good neighborhoods, searching online, or asking bankers and lenders looking to dispose of repossessed property. When you have the right property in mind, you can apply for a hard money loan, which is the easiest and fastest way to secure financing.
Remember that the BRRRR method involves being a landlord, so you must find tenants, attend to their complaints, and perform routine maintenance. Since these tasks can be tedious, you can hire a professional property management company to make those duties more effortless.
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