How to Build More Wealth With The BRRRR Method
The BRRRR method is a great way to build passive income, but what the heck is it? So let’s talk about it! What it is and how to use it to build wealth and gain financial freedom!
The BRRRR Method
What is the BRRRR method? The BRRRR acronym stands for “buy, rehab, rent, refinance, and repeat.” This method is followed in steps in the order they appear in the acronym. It a great way to build passive income, but does take time and research. It requires the purchase of a property, renting it out, refinancing to pull out the equity, and then purchasing a new property in order to repeat these steps. You can use this method to build wealth and gain financial freedom, but how to get started?
Well to start, you have to buy a property. This is the first step of the BRRRR method. It is a difficult step for many people. I know it was for me! It can be overwhelming, but don’t let it scare you off! Although, we won’t go too deep into it in this post (more in a future post), this step is the one to take your time on and research. There are many things to consider like:
- What kind of property to buy and for how much?
- How do I pay for it and how much extra for repairs/updates?
- What kind of cash flow to expect?
Of course, you can’t plan for everything but you want to reduce your risk as much as possible. First, determine what kind of property to buy. A single family home? A duplex? Or go big and buy a multi-unit? Will you finance or pay cash? All these questions are important to help analyze your potential property. In addition, you can use this Property Analyzer to crunch numbers. Ideally, you want to buy a property that needs some work at a low cost.
After purchase, Rehab is the second step in the method. This is when you make repairs and updates to make the property live-able and add value. Therefore, you will need to know the costs in advance. Until you have experience, a home inspection can help figure out costs.
For one, you will need to repair anything that relates to safety (electrical) or any preventative maintenance (roof). No slumlords here! Next, make small updates that will improve quality of life or make the property competitive. Just make sure you don’t overdo it based on the market! During negotiations, you can get quotes from contractors to help determine potential repair/updates costs. These repairs will also add to the equity of the property, which is the goal. For more on which updates can increase the value of your property, check out this American Home Shield blog.
So now that you made repairs and updates, it is time to rent it out! You want to be competitive but also cover your costs and max out your cash flow. Equally important is vetting the tenant to reduce the risk of non-payment or destruction to the property. A question to ask yourself is, will you manage the property or hire a property manager (PM)?
I use property managers to make my cash flow more of passive income. The PM is in charge of marketing the property, filtering tenants, and taking care of tenants concerns. On average, 10% of the rental income is the rate I am charged for each rental property. Additionally, other costs like lease contract fees and other fees needed to make the property rent ready, must be taken into account.
Now that the property has the updates and the time to build equity, you can apply to refinance! In this step, you pull out the equity, through a cash-out refinance loan. These types of loans offer up to 80% of the accrued equity.
- Single Family Home Initial Purchase Price : $144,000.
- Appraised Value: $202,000
- Cash-out refinanced: $160,000
- Cash after closing costs and mortgage pay-off: $28,000
However, these loans depend on credit score, debt-to-income ratios, tenant rental history (at least 6 months) and other factors. The lender may require certain amount of time to pass to be refinance eligible. Additionally, make sure to shop around for interest rates. The goal is to get the lowest interest rate possible to lessen the impact to your cash-flow.
The last step of the BRRRR method is to repeat! The cash from the refinance goes towards the downpayment for the next property. The original property will continue to generate rental income and even continue to accrue more equity. The rental income should go into savings to build an emergency fund. Afterwards, the rental income can be used to buy properties.
The BRRRR method continues to prove as a great strategy for passive income and to build wealth over time. As more properties are purchased, the wealth it generates starts to compound. It creates a snowball effect. However, it is important to remember that, as with all investments, there is risk. To reduce them, create a plan and research! Remember, everyone’s journey will vary based on several factors, but you can do it!
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