How BRRRR Works: The Two-Loan Strategy
Categories: Blog Posts
Buy and refi: here’s how BRRRR works.
Say you buy a house and rent it. What’s the big deal? Hopefully, your rental income is a little more than your mortgage payment, and you’re able to pocket the extra cash or save it for future real estate purchases.
How does BRRRR differ from this?
There’s a driving power behind BRRRR, making it a more profitable and fun process than simple rental investments.
BRRRR uses a two-loan strategy to capture maximum equity in value-add properties. Let’s go through these two loans and see how BRRRR works.
Buy: How the First BRRRR Loan Works
The first loan is the “B” of BRRRR – buy. There are 3 problems this first loan needs to solve.
1. Under-Market Property
To make this strategy work, the property you buy must be under-market. This is different from retail investing, where you buy and rent an at-market, rental-ready property.
An undervalued BRRRR property holds the potential to bring your net worth up. It’s a property that closes quickly and cheaply – even if it’s in rough shape.
Ideally, your BRRRR buy loan covers the entire cost of the house. This takes less out of your pocket and makes the process more profitable and repeatable.
2. Quick Closing
Why would there ever be a house selling for under-market? There are many conditions that bring a property to this point, such as a sudden move or foreclosure. Whatever the circumstance, the homeowner, wholesaler, bank, or whoever owns the house will want it gone and the money in their hand ASAP.
Your buy loan will need to close fast, with minimal underwriting, paperwork, or other hassles that come with traditional loans.
Although profitable, an under-market property usually comes with a lot of necessary repairs. Many BRRRRs have construction budgets in the tens of thousands of dollars.
If that money comes out of your pocket, it almost defeats the purpose of a value-add property. It’s best to use the buy loan to leverage all rehab costs on a BRRRR.
What’s the Best Buy Loan?
An investor-specific loan, like a bridge loan or hard money, will check all three of these boxes.
While short-term investor-friendly loans make the perfect buy loan, you’ll need to refinance later in the BRRRR process.
Refinance: How the Second BRRRR Loan Works
The third “R” in BRRRR stands for refinance. At this point, we need a new loan on the property. There are 3 reasons.
1. Term Length
Hard money and bridge loans are useful when used right, but only good for a couple of months. How BRRRR works is that renting your property will require a second, longer loan. However long you’ll want to hold the rental unit is how long your refinance loan will need to be.
Hard money loans won’t have a good long-term interest rate. This second refinance loan should give you a much lower rate. Not only should a refinance create net worth, but it should also give you good cash flow on the property.
3. Capture Equity
BRRRR refinances tend to grab at least 25% of the house’s purchase price in added net worth. Check out this post to see how the numbers break down on a BRRRR refinance.
Diving Deep Into How BRRRR Works
BRRRR is a powerful real estate investing strategy. We want to take away the mystery of how BRRRR works.
Download our free BRRRR map to put you on the right track with your next deal. And email us at Info@TheCashFlowCompany.com with any questions.