So, have you heard of the BRRRR strategy?
This is one of our favorites. It stands for:
BUY (for cash)
This can be a great way to build your rental empire. If you can find the right deals you can get most if not all of your money out during the refinance phase and start all over. It is hard to do but look at the steps below.
- Find that perfect below market deal. Maybe through your own efforts, a wholesaler, an auction, etc… Buy at a level that you can rehab it and still be well below market value.
- Assuming you do your analysis correctly then you can make your repairs and still be well below market (appraisal) values.
- Rent it out. Be sure your rental amount works with your overall numbers/goals. We are not going into that here.
- Refinance the property to get most if not all of your investment out of it. You will probably have to hold the property for a period of time, typically six months right now before you refinance. Also, you will only be able to finance 75% to 80% of the appraisal value.
- Repeat is pretty self explanatory.
Let’s say you found that perfect property that you can buy at an auction (or however) for $30,000.00. Looking at the local comps it appears that normal values in the area are about $80,000.00. Obviously, your new purchase is going to need some work or you would not be getting it for $30,000.00. So, be prepared to either do the work or pay someone to do it.
Let’s say you put $25,000.00 into the property to bring it up to rentable condition. Now you have $55,000.00 of your cash in the property.
Next, rent it out for whatever market rents are. We will just plug in $750.00 per month.
Wait six months from purchase date and refinance. If your property appraises for the $80,000.00 you expect and you can pull out 80% then you will get a check for $60,000.00, minus closing costs of course. So probably you will end up with your original $55,000.00 investment.
However, now you have all your cash back. A new rental property that will cash flow the mortgage and can start the entire process over again…..
The BRRRR strategy. Don’t worry even if you don’t get all your cash back, you should still find that if your rents are high enough you will get a very good return on your invested cash.
Originally published by jdawson on alacapital.com