In the 1965 animated classic A Charlie Brown Christmas, the character we all know as Lucy bemoans the fact that she never gets what she really wants for Christmas. What does she want? Real estate. Those of us old enough to remember the 1960s fully understand what she is talking about.
Real estate has long been considered a stable and lucrative investment. Simply put, real estate almost always appreciates over time. Certain types of properties, like rental properties for example, can even continue generating income during economic downturns. As such, real estate investment is as strong today as it was back in the 1960s.
Many a modern real estate investor relies on what is known as the BRRRR strategy for making money. BRRRR is a scalable five-step strategy:
You have to invest in real estate to make money on it. As such, the first step is to buy. But investors don’t buy just anything. They focus on distressed properties identified through off-market sources. These are properties that sell well below market value because they need extensive repairs.
The goal here is to pay the lowest possible price on a given property. Often times that means closing quickly with a cash payment. Buyers often look for real estate loans in Salt Lake City with companies like Actium Partners for quick access to the cash they need to get deals done.
With a property secured, the next step in the BRRRR strategy is to rehab. If you prefer the term ‘renovate’, that’s fine too. The point is that the buyer invests money in rehabilitating the distressed property so as to make it marketable. How much gets invested differs from one property to the next.
The key here is to not spend so much that you cannot get your money out in a reasonable amount of time. The amount spent on rehab should be enough to bring the property in line with other similar properties without being so expensive as to be unprofitable.
The third step in BRRRR is to rent the rehabbed property. Assuming that the investor financed both purchase and rehab costs with either a hard money or commercial loan, monthly rental must cover loan payments, insurance, taxes, and regular maintenance – at the very least. As such, a property’s rental value influences how much the investor pays for the property and puts into rehab.
Ideally, rental payments should cover all of the investor’s regular costs plus a little extra as profit. The more profit a property can generate, the more money the investor has to put into new properties.
Next up is refinancing. As you might expect, a fully rehabbed property occupied by renters is worth more than a just purchased property that hasn’t yet been rehabbed. Investors can take advantage of this by refinancing. How does refinancing help? By allowing investors to get out some of the money they have already put into a given property. They can turn around and use that money for other investments.
Finally, the last step in the BRRRR process is to repeat the previous four steps. Every completion of those four steps gives investors more money to work with. Over time, a savvy investor can build a very nice portfolio by using each successive property as a launching pad to purchase another.
The BRRRR strategy has more than proven itself. Those who have successfully employed it have built impressive portfolios even after starting with very little. Many of them got their start by relying on hard money to fund early purchases.