Between the growing popularity of real estate based reality TV shows and the increasing desire for passive income, there has been an increase in interest in making money through real estate transactions. While some people might assume that working in real estate automatically means being flooded with paperwork and house repairs, that is not necessarily the case. Understanding current real estate investing methods can turn a mediocre real estate investment into a successful source of passive income. After purchasing a house, the investor repairs or rehabs it; once the repairs are completed, the investor then rents out the house (as opposed to selling it for a profit). Brandon Turner, a real estate expert and investor, named this common method of real estate investing technique: BRRRR. If you are interested in learning more about real estate investing and/or discovering a source of passive income, then take a look at what the BRRRR method entails.
The first step in making money with the BRRRR strategy is to buy a house. The key is to buy, not just any house, but one that is a great deal. Look for a house in need of repairs that is in a good neighborhood. Note: Because of the extent of the needed repairs, some traditional lenders will not finance houses in need of major repairs. Be prepared to pay with cash in those situations. Regardless of how you pay (cash, traditional lender, etc) the BRRRR strategy will work as long as you buy the house.
Under the BRRRR strategy, the rehab work is completed with the rental process in mind. For example, appliance and flooring choices are chosen with cost and durability in mind. While a house flipper intending to sell might choose top of the line appliances and hardwood floors, an investor looking to rent might choose standard appliances and linoleum or carpet flooring.
The next step of this process is to find tenants. Be careful not to quickly accept the first tenants who inquire about the rental unit. Choosing the right tenant goes a long way in creating a solid tenant-landlord relationship.
As mentioned earlier, most fixer upper houses will not qualify for a conventional mortgage. However, after the rehab and appraisal, it is possible to refinance the house and get your money back. Always refinance on the appraised value of the house - not what you paid for it. Let's take a closer look.
- You bought a house for $25,000 in cash.
- After spending $50,000 in rehab, you now have $75,000 invested.
- You rent the house for $700/month.
- The appraised value of the house is $100,000.
Refinancing gives you a net of $25,000 ($100,000-$75,000). That $25,000 gain is key for the next step.
The secret to passive income is to repeat this process. You can now apply that $25,000 towards the purchase of another house. What about the mortgage payment of the first house? Part of the tenant's rent will pay for the mortgage payment and you will have cash flow from the remaining money. While you will not have a large amount of cash flow from one house, the key is repetition. The more houses you buy, rehab, rent, and refinance the more passive income you will create.
Top 3 Benefits of Using The BRRRR Strategy
- Reduce the risk of major repairs early on in your investment: Because you spent the time and money to rehab the house right away, you have reduced the risk of needing to complete major repairs for the first few years of owning the house. In addition, fixing or replacing appliances, roofs, and siding all increases the ability of charging a higher rent.
- Location independent investing: While you can certainly buy homes near you, the BRRRR method for real estate investing is location independent. Thanks to property management companies, you can live in California and purchase homes in Ohio, while a private company manages the property on your behalf.
- Passive income: Because a portion of the rent pays for the mortgage, you do not pay for the mortgage out of your pocket. The remaining rent money is now available cash flow for you.
Investing in real estate can be overwhelming particularly because of the steps, paperwork, and legalities involved. However, with careful and thoughtful planning, investing in real estate and creating rental properties can be a powerhouse of passive income.