what is the BRRRR strategy?

Going into this, know that banks have underwriting guidelines, and we recommend they be aware from the beginning of what your plan is. Your lender should be part of the team from the beginning because they will be essential for you to refinance and repeat. You can, from the beginning, let them know you’re planning on renting out a property, and you can ask, “how much can you lend and what are the guidelines for me to be able actually to refinance here later down the line?” They’ll be able to layout the guidelines to help you succeed. Your lender is like a teammate.

The first step is Buying the property. Purchase a property in an area you’ve done your due diligence on and feels like the best fit for you. Consider median income, distance to you, and nearby conveniences. That allows us to move on to Renovating. You are fixing up the property to make it comfortable and safe. Before purchasing the property, you would’ve allocated a certain amount of the budget towards this effort. Having an inspector come through the house before or during escrow will let you know exactly how to plan for that expense. Decide if it’s the right property for you; know when to back out. After renovating, you’re able to qualify a suitable Renter and begin to collect rents, allocating for expenses and keeping a record of every transaction. Once the property is generating passive income, you’re able to talk with the bank and begin to Refinance the property. When you refinance, you are using leverage. You are pulling equity out of the property based on the After Rehab Value (ARV) of the property with the now rental income that you’re generating. Lenders or banks allow you to pull out up to an amount they determine in equity. Finally, that cash out will enable you to Repeat the process using additional savings or funds that you’ve accumulated for your next purchase.

One of the most important things is finding a great deal too you have the funds to allocate towards Renovating. It’s crucial to making this strategy work, people can undervalue the rehab, and we’ve seen it happen repeatedly. Once you get into it, be very careful to allocate the proper funds and get good contractors to give you reasonable estimates.

The location usually determines rents; gauge the rent by getting comparables in the area. Without generating enough income from rent, it will limit the amount of money you’re going to pull out of the equity from the cash-out refi.

Let’s say you picked a property to BRRRR, and it’s a mixed-use building. Not many banks are lending on mixed-use buildings; you could potentially get stuck with that property or if it’s a property in a historical area. Historical buildings can be challenging to get a loan on. The bank may have guidelines restricting or limiting loans on houses past a certain age. Having the bank as part of the conversation is super beneficial.

Overall, it’s an excellent way to build wealth and create a healthy income stream through real estate. From the beginning, team up with the right people: good contractors, good lenders, and good tenants.
I also like that it’s a buy and hold strategy for down the road, those properties will appreciate long-term, and you may be able to go back and refinance AGAIN later down the line.

Contributors: @PabloFPomes, @MichaelPomes