In this article on real estate we show you how to generate passive income from real estate using the BRRRR method. In addition, you will learn how to finance each real estate property and leverage your properties. Then, you can acquire more investment property using the BRRRR method.
Never before has investing in real estate been easier. Today, anyone can purchase investment property for generating passive income. In addition, you can use the BRRRR method to leverage multiple properties so that larger passive incomes are generated from your investment property.
You are probably wondering how the big real estate investors acquire so many properties in just a few years. Well, the secret to buying more real estate investment property is using the BRRRR method. What is the BRRRR method and how will it help in earning money from real estate?
The BRRRR Method for Rental Properties
BRRRR stands for buy, rehab, rent, refinance and repeat. The BRRRR method has worked for many successful real estate investors. It allows you to build a portfolio of investment property quickly. In addition, it requires using less personal capital. Let’s breakdown this step-wise process to understand the details and the order of this strategy.
Step 1: Buy Investment Properties
Buy Undervalued Properties and Calculate Profitability Before Jumping In
Once you have narrowed down the kind of property you want to specialize in, such as apartments, duplexes or single-family homes, it’s time to buy. First, you will want to search for investment property that are undervalued or significantly discounted. Many investors credit their profit margins to buying investment property at prices that are significantly below the potential market value.
Next, after screening properties, you must do some calculations. One calculation that can help determine whether the investment property you have chosen are profitable is the After Repair Value (ARV). This will tell you what the investment property is worth after it has been rehabbed. If the cost to rehab a home is too high, profitability can be an issue. In turn, this can jeopardize the BRRRR method.
Finally, you will want to conduct a rental analysis. A rental analysis is a process of determining how much rental income the property is capable of generating. You will use this value in your overall profitability calculation for the deal.
Some other considerations: Don’t forget to include costs such as closing costs, rehab costs and the amount of cash that you will put down for financing. Many investors expect to use 20% down for investment property.
Step 2: Rehab Investment Property
The next step in the BRRRR method is to begin repairing and renovating (rehabbing) the investment property. The object of the rehab is to quickly conduct repairs that will make the home appealing, safe and add value to the property. In addition, you want to rehab the property as quickly as possible. Furthermore, the quicker the process of rehab is complete, the quicker you can begin earning money from rental income.
Step 3: Rent Investment Properties
After completion of the property rehab, it’s time to find a tenant for your property. A good tenant will consistently provide income (in the form of rent) for your investment. Furthermore, a good renter will take care of your property and not allow it to be damaged. Carefully determine what the market rental rate is for your area. In turn, this will ensure that you quickly find a renter and the property doesn’t sit vacant for months. In addition, you will want to properly vet potential tenants to make sure you find renters who are the best fit.
Step 4: Refinance Investment Property
Challenges of Working with Lenders, Obtaining Financing and Economic Cycles
The third “R” in the BRRRR method is refinance. After rehabbing the property and finding a renter, you can begin to look for a lender. The refinancing process means you will be working with a bank to borrow money based upon the remaining equity in the property. However, there are several things to know about refinancing investment property.
First, banks typically only lend approximately 75% or less of the appraised value of the property in a cash-out refinance. The lender will consider your credit score when determining whether to lend money to you. In addition, you may need to demonstrate that the property is generating rental income and is legitimately appraised at the value you say it’s worth.
Dealing with banks can be a slow, frustrating process. Keep in mind that banks only lend money in situations where they feel that the money is secure. Furthermore, they don’t want to lose money or lend too much money out for an overvalued property. In addition, economic cycles can change factors such as interest rates and credit flow. For example, after the 2008 housing crisis, it was very difficult to obtain a loan from banks and the BRRRR method was not smooth.
Step 5: Repeat the Process
If everything lines up correctly, the BRRRR method will be a success. You will find an undervalued property, buy the property, rehab and rent it and then obtain financing that you can use to buy the next property. You can then repeat the process of acquiring investment property. If the BRRRR method is successful, you will be generating a net profit each month.
Getting Started with Investment Properties
Buy Where There is Growth and Population Movement – The South and West United States
One rule that smart real estate investors use is to buy properties where populations are growing. Population growth and population movement tend to drive prices up in real estate markets. Basic economics tells us that when there are more people demanding housing, supply cannot keep up with demand. As a result, prices go up, which is good for landlords.
For many years, there has been growth in the South and Western United States. For example, a United States Census Bureau 2019 Article states that of the 15 cities in the US with the most growth, eight of them were in the South, six were in the West and one in the Midwest. Popular cities include places like Phoenix, Arizona, San Antonio, Texas and Jacksonville, Florida.
Where to Buy Investment Properties
Shifting Populations: People are Leaving the Big Cities
It’s important to understand that real estate prices are going down. However, there will be winners and losers in the market short term. For example, it appears that in the short term, a divided real estate market may present itself.
Current data being reported in the media shows people leaving larger coastal cities and going to smaller inland cities. For example, Californians have been moving out of California to places like Washington, Arizona and Texas in record numbers. This is not a new phenomenon and the trend appears to be gaining speed.
As a result, larger coastal cities like Los Angeles and New York City are seeing reductions in demand for real estate as residents leave the cities permanently. In turn, smaller cities like Phoenix and Las Vegas are experiencing higher demand for real estate as residents move in from the coastal cities.
It appears that in the short term, cities where people are moving to (like Las Vegas) may see higher prices during the coming real estate bubble deflation. The worst-case scenario for cities receiving the influx of those moving from elsewhere would be that property values would remain steady.
Juxtaposed to this phenomenon, larger cities are seeing an increase in available real estate, causing supply to outpace demand. As a result, prices are already dipping lower in cities seeing a mass exodus.
Are You in a Growing or Shrinking Market?
The lesson here is that in order to make logical real estate market predictions for your home market, determine whether you are in an area where people are moving to or from. For example, if you live in Phoenix, Arizona, you are probably in a strong market that is attracting Californians. As a result, prices will likely be stable or even positive in the near term.
Now, one other caveat to consider is the state of the economy currently. Unfortunately, unemployment rates are high the US. Higher unemployment rates are negative for home buyers and are typically seen as a harbinger for decreased demand. As a result, unemployment may cause a decline in home buying nationwide. But we still haven’t answered the question of where the best place to buy rental property might be. Let’s take a closer look at demographics.
In “The Demographic Cliff” by Harry Dent, it is noted that the baby boomer generation (“Boomers”), those born between approximately 1946-1964, are retiring now. As a result, these baby boomers will be down-sizing from larger homes to smaller homes and buying vacation homes.
Prior to the COVID-19 Pandemic people were already beginning to shift in where they lived and how they lived. Now, the changes in living patterns and demographics have been accelerated. In general, more people will move out of bigger cities and move to areas with less dense populations. For example, people are moving out of cities like Los Angeles and moving to places like Idaho.
Individuals are selling expensive homes and flats and buying more affordable properties to replace the high priced, big city real estate. Boomers are selling their large family homes and moving into smaller, more affordable homes.
Big Cities: Not the Best Place to Buy Rental Property
It’s important to note that buying rental properties is a great way to build wealth. Great real estate investors like Robert Kiyosaki and Ken McElroy recommend buying rental properties to generate passive income. The caveat for selecting the best place to buy rental property is to carefully choose the market and location of the rental property.
At the moment, real estate prices in big cities like New York City are still high priced. Yet, many people are moving out of the big cities. As a result, big cities are probably not the best place to buy rental property today. However, if real estate prices in the bigger cities become cheap in the future, then the big cities may become the best place to buy rental property.
Narrow Down Your Real Estate Expertise
Focus on One Type of Real Estate, Such as Single-Family Homes, Duplexes, Apartments, Etc.
One of the recommendations made by real estate guru Ken McElroy is to narrow down the kind of rental property you want to buy. Many investors get caught up in trying to find the perfect property. However, they can get bogged down in the minutiae and complications of searching through so many different kinds of properties. This can lead to mistakes or errors, which means lost money.
Instead, McElroy recommends focusing on one particular kind of property for investment, such as only buying apartments or only investing in duplex properties. Narrowing down your focus on one type of property will allow you to become a true expert in that property type. In addition, you will automatically narrow down the list of properties that are for sale to a manageable number.
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