Strategies to Become a Real Estate Investor – Part 2 | BRR!
At its core, real estate investment is about finding deals. That said, distressed properties — homes in disrepair due to neglect or abandonment — are where many investors set their sights when hunting for “the deal.”
Due to the popularity of HGTV (and others), most folks are familiar with the “fix and flip” strategy for investing. For those not familiar, it’s very simple: purchase a home in need of repair at a discount, fix up said home, sell at a profit. For this post, I’d like to spotlight a similar, yet distinctly different, strategy that investors can employ on their way to building a real estate portfolio.
BRR (Buy, Rehab, Refi)
Just like a fix and flip, you’re looking for a distressed property at a discount to purchase and renovate/rehab. The key difference is what happens after the home is renovated.
With the BRR strategy, Instead of selling upon completion of repairs, you would go back to your lender (generally after 1yr from the time of purchase) for a cash-out refinance up to 80% of the new value of the home. The proceeds from the refinance can then be set aside for the down payment on the next investment opportunity.
Here’s a hypothetical scenario on the purchase of a new primary residence:
$500,000 purchase price in need of $50,000 of repairs, with a 5% down payment ($25,000). In this scenario, you’re out of pocket $75k and owe approximately $470k after 1 year.
Assume an “after-improved” value of $750,000. After 12 months from the purchase, you secure a cash-out refinance of $600,000 (80% of $750K) and walk away with net proceeds of $130k ($600k – 470k).
Here are some key considerations for success:
Do Your Due Diligence
Without good intel at the time of purchase, this strategy can go sideways real quick. Make sure you have accurate data in terms of the condition of the home, the scope of work required, and the after-improved value
Have a Team of Trusted Advisors
Again, the success of this strategy hinges on good data at the outset. That said, working with professionals who are experts in their field is critical. The lender, contractor, home inspector, and Realtor will play major roles in your success
Determine Parameters Up-Front
With your trusted advisors, determine your parameters prior to jumping into the market. What scope of work are you comfortable with (cosmetic upgrading vs. full-blown structural updating/improvements)? What type of home are you going to focus on (single-family vs. multi-family; starter vs. luxury homes)? Determining your parameters up-front will save you from making compromised decisions on what may be a great opportunity but is outside of your area of expertise.
Finally, this post simply serves as a broad overview of the BRR strategy. There are so many angles/approaches one can take in terms of the type of financing used to secure the property, the type of property, occupancy, etc.
If you have questions or want to chat more in-depth about the BRR strategy (or any other for that matter), I would love to connect!