In the year before, during, and following the recession, real estate investors were swept up with the dreams of fixing and flipping properties.
High appreciation before the recession, dramatically lowered values during the recession, and the steady growth since have all driven more investors into the market to make a quick profit renovating houses in rough shape and selling them to end buyers.
In the last few years we are seeing a shift in the industry, and most real estate professionals are reacting. The rise of what many people call BRRRR. This stands for Buy, Rehab, Rent, Refinance, Repeat.
The goal here is to buy an undervalued or distressed property with the plan to hold it long term. Investors look for areas that have strong rental markets, and properties where they will have substantial equity in the property once renovated.
People have a misconception when it comes to renovating investment properties. Most people think that these flipped houses are trying to be the top price in the market. That may be true occasionally for higher end flips, but most are looking to land in the mid to high price point. If the average house sells for $250k, and the highest sale was $315k, most flippers will aim for $280-300k.
With what I have seen for the BRRRR strategy, this is not true of renovating rental properties. Most investors are looking for the answer to one question: what do I need to do to make this house occupiable? Often that question turns up as “What is the minimum I can put into this property to get market rent?”
Almost no one wants to be renting out properties that just barely receive certificates of occupancy (these aren’t college houses) but you’ll see a definitive difference in the quality of furnishes relative to flipped properties.
Getting a property to cash flow is the best action you can take for a loan on a rental property. Many banks will not want to lend on vacant properties, and even private lenders like RCN want to see what the annual rent is expected to be to establish estimations of cash flow.
The name of the game here is to get as much cash out as possible. Your goal is to own the house with a lower rate mortgage, while also removing the down payment money that you invested into it before the renovation.
If you went into the pre-renovated project with $50k, you want to pull at least $50k out after a refinance.
Now we come to the important part of how to use this strategy successfully do it again. With the money that you pulled out of your last property that is now renovated and cash flowing, you look for another property to add to your portfolio. Over time, you can acquire more and more properties, and have your tenants slowly build equity for you.
This article originally appeared on the Mortgage Professional America website, BRRRR. View the full article here.