Early on in my real estate investing journey, I had to creative because I didn’t have much savings to invest with. To make getting started even more challenging, the year was 2009, and the United States was in the worst economic recession next to the great depression.
Friends and family had advised me against investing in real estate on the reasoning that prices continued to drop month over month.
I saw this as an opportunity, properties were being offered at a massive discount, and anything that needed work was an even better deal. The only challenge was in financing those ugly properties, that was until I learned about the BRRR Strategy!
What does BRRR Stand For?
BRRR Stands for Buy-Rehab-Renovate-Refinance. The idea is that you can buy a property that is under market value, typically due to the condition of the property, renovate it, rent it out, and refinance using the new appraised value.
Ten years ago we use to call this the zero down rental strategy, but investors coined the term BRRR and it stuck.
Why Should Investors Use This Strategy?
There are SOOO many reasons why investors should use this strategy.
Infinite ROI interest anyone?
There are variations of this strategy, and my goal is to buy a property that is undervalued using a hard money loan at 100% of the value + the renovation costs, quickly renovating the property to maximize the amount in rent you can charge and then refinancing using the new appraised value and be left with high cash flowing property with at least 25% in equity and none of your own capital in the deal.
What Do You Need To Do A BRRR Deal?
First things first, you’ll need to find a hard money lender that is willing to give you a loan for the entire purchase price along with your renovation budget. They can collateralize your bank account as mine did for security, and release it upon payoff. If you can’t find one that’s willing to do that you can still move forward you’ll just need to do a cash-out refinance if you want to get your capital back. If you go the cashback refinance route, you will need to six months to use the new appraised value.
The second person you need is a lender who can do a rate and term refinance of the hard money loan with no seasoning requirement. A seasoning requirement is an overlay used by some lenders who want to see at least 6 months of ownership before using the new appraised value. I use Caliber Home Loans exclusively for conventional loans because they are very pro-investor and do not have seasoning requirements.
Next, you’ll need someone to do the renovation and quickly since you’ll be paying interest to a hard money lender at a hefty rate. You can do the work yourself or hire a contractor to do it.
Last you’ll need an investment savvy agent (the only way I buy my investment properties) to source deals for you. They will be able to estimate the after repair value for you so that you can have an idea of if the property will appraise for what you need it to.
How Do You Find A Hard Money Lender?
Depending on the area you’re looking in, we may be able to provide you with some contacts for hard money lenders who offer BRRR financing at 100%.
Another option is to look at Biggerpockets or google and see if you can find a local company.
Be sure to make sure that the company you’re working with is reputable and has a track record of doing loans. If they do not record the paperwork right, the refinance may not go well.
How Does The Refinance Work?
Some conventional lenders require a signed lease agreement to close the refinance, others will not so be sure to ask yours. Once the renovations are complete the lender will order the appraisal. For conventional rate and term refinances on a single-family home, they will use 80% of the new appraised value for the new max loan amount. For two to four-unit properties on a rate and term refinance, they will use 75% of the new appraised value.
For cash-out refinances, it is 5% lower, cash-out single-family refinances require 75% LTV and cash out two to four-unit properties are 70% LTV.
For example, if you have a hard money loan of $125,000 and the new appraised value is $200,000, then the new max loan amount can be $150,000. Since you only owe $125,000, you can choose to leave the new loan amount at $125,000 (plus refinance costs which you can roll into the new loan) or you can do a cash-out refinance and pay yourself $25,000.
Be sure to watch the video for more details on an actual example.
We Can Help
Out of frustration for trying to find investor savvy agents out of state, I built Agents Invest to help investors like yourself gain access to on and off-market deals, such as BRRRR deals in markets that make sense for long term buy and hold investing. It is free to join our weekly deal list, and if you would like to learn more about investing strategies like the BRRR strategy, join our ROI Inner Circle to learn more and connect with other investors who are on the same journey as you.
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