How to BRRRR Real Estate! | The BRRRR Strategy Explained For Absolute Beginners
Real estate investing beginners may have heard of the BRRRR strategy and wondered what it is all about. Well, it is one of the best ways to quickly build up your real estate empire and get back the amount you put in tax-free.
But before we get into how that actually works, what does BRRRR even mean?
What Is The BRRRR Strategy
The term was coined by Brandon Turner from BiggerPockets. It stands for Buy, Rehab, Rent, Refinance, Repeat.
The BRRRR is a very popular strategy used in building a real estate investment portfolio and is widely used.
So How Does It Work
Let’s say for example you find this property that potentially is worth $100,000. But the current owner is unable to sell it at market value. Maybe there is an existing tenant, or it’s a distressed asset.
Because of that, you get to buy it for $50,000. Then you spend $15,000 on renovation costs and put in a tenant who pays $1,000 per month.
After that, you go to a bank to refinance the property. The bank does an appraisal and places the value of the property at $100,000. With 70% loan-to-value, the bank is willing to give you $70,000.
With that $70,000, you now have back the amount of money you put into the property in the first place plus a bit more. And the loan is not taxable.
You can then use that money to buy another property and repeat the entire process.
Do you see where I’m going here? You can do this again and again and again, and acquire more and more properties.
Sounds good right? But it’s actually quite tricky to put it into the process.
What’s The Hardest Part About Doing A BRRRR
Contrary to what you may think, the trickiest part about doing the BRRRR strategy is not finding the property, but refinancing it later.
This is due to some things that could lead to you not getting approved for a loan.
The Two Factors Preventing You From Getting A Loan
Having More Than 4 Loans
When you apply for a loan, the documents banks often ask for include your W-2, bank statements, pay stubs, and tax returns. But when you have more than 4 loans, banks ask for more documentation and the rates are higher.
What makes it even harder is that when you have 10 loans already, banks don’t want to loan to you anymore. You may have to do debt consolidation where you take out one big loan from one property.
There’s also a seasoning period of 6 months for properties. So if you try to refinance before your property has reached that 6th month, the bank may not appraise the property for $100,000 and still put the value at $50,000.
And with the current COVID climate, the seasoning period now extends to 12 months.
Your Debt-to-Income Ratio
Banks look at your debt-to-income (DTI) ratio when you apply for a loan. When you already have ‘too much debt’, they won’t give you another loan. Unfortunately, your DTI only considers your income from your W-2 because rental income doesn’t count until your property has been earning for 2 years.
Tax write-offs for your out-of-state trips to the property and other expenses will also be factored against you as showing your property losing some money.
Because of these factors, there is a cap on how much you will be able to borrow from banks. So it’s best that before you even start doing the BRRRR strategy, have a conversation with your lender first. Don’t just jump into buying a property expecting that you can refinance in 3 months.
So what if you aren’t able to refinance through conventional loans anymore?
Alternative Financing Options
When you can’t get a conventional loan, there are still other refinancing options out there. The rate might be higher, but the most important is that you can get another loan.
We actually have a long-term rental loan program that you can apply for. There are two great things about it. One, we look at the income the property you’re loaning for will generate and not your W-2. Second, we don’t care how many loans you already have.
Conclusion
If this is something you’re interested in finding out more about, then reach out to me and I’ll be more than happy to help you.
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