New To BP and Excited To Learn

[Ancil Castillo]

Hello, I am new to BP, I have been watching on Youtube for the last few weeks and loved the content. I am completely new to real estate investing and am interested in the BRRRR method. It does feel a little intimidating as there are many pieces that I want to understand better before starting. My wife and I both have successful careers and want to build wealth through real estate. Are there any getting-started posts I should read regarding BRRRR? Thanks in advance!

[Wale Lawal]

@Ancil Castillo

Welcome to BP!

There are numerous factors to consider before tackling the BRRRR strategy ranging from your schedule to financing, tax incentives to holding periods. Read through the following pros and cons to learn more about what you're diving into.

BRRRR Strategy Pros

Any investing strategy will promise certain advantages while bearing some level of risk, and the BRRRR method is no exception. Before executing any strategy, make sure to review the pros and determine for yourself whether or not BRRRR is appealing for you:

• Potential for returns: One of the main benefits is the possibility of a high return on investment. When done right, investors can purchase a distressed property for a relatively low cash investment, fix it up, and rent it out for strong cash flow.
• Building equity: One should also account for the amount of equity that is built up during the rehabilitation phase. When pursuing a passive income strategy, many investors are merely creating cash flow off a property worth the price it was bought for.
• Top-grade tenants: If a property has been properly rehabbed to meet consumer standards in a specific market, it will most likely attract great tenants. Tenants who are willing to pay top-dollar for their rental property in exchange for certain features and amenities are more likely to take better care of the property and reduce their expenses. Better tenants often translate directly into improved cash flow.
• Economies of scale: Once you hit your BRRRR stride, you can achieve something called economies of scale, where owning and operating multiple rental properties at once can help you lower your costs overall by lowering your average cost per property and spreading out your risk.

BRRRR Strategy Cons

The following list helps to shed some light on potential risks associated with the BRRRR strategy. However, it should be noted that these points are not necessarily cons or disadvantages. Rather, they warn investors of what can happen if they are not careful and have not minded their due diligence:

• Expensive loans: When opting to use a short-term or hard money loan to finance the purchase of a property, investors can find themselves over-leveraged, especially during the rehabilitation phase. According to Brian, a real estate investor and founder at SparkRental.com, “Far too many new investors underestimate expenses such as repairs, maintenance, vacancy rate, and other irregular but inevitable expenses that don’t hit you every single month.” Investors should make sure they know how they will make mortgage payments during the time that the property is not producing any income.
• Rehabilitation: Taking on a large rehabilitation project can prove to be expensive, with many headaches along the way. Rehabbing means dealing with project timelines, managing contractors and sub-contractors, and dealing with unexpected issues. Make sure that you have the right resources and contingency plans in place before tackling a project.
• Waiting period: BRRRR is a strategy associated with a longer time horizon, which includes at least two waiting periods. The first is during the rehab phase, where the investor must improve a property before they can place tenants and start earning income. The second waiting period is seasoning, a term that describes the period an investor must wait before a lender allows a cash-out refinance.
• Appraisal Risk: Investors typically refinance a property based on the appraisal of the property, rather than how much money they have paid into it. There is always a risk that the property will not be appraised for as much as expected. This should serve as a warning that running the numbers correctly in advance is crucial.

All the best!