Making money in real estate is not nearly as easy as it looks. There are no shortage of fires to put on and problems have a way of arising when they are least expected. However, those who take the proper steps will be able to make $100,000 per year and they will only need two transactions to do so.
This may sound too good to be true. With the help of the BRRRR strategy, investors can achieve all of their goals and then some. This investment strategy is gaining in popularity but some may not be familiar with the acronym.
Once the fixer upper is purchased, the investor can rehabilitate the property and use the funds that are obtained from renting to new tenants to refinance. This is a process that can be repeated over and over again. Investors who rely on this strategy are able to acquire various properties and they will never run out of fresh capital for investment purposes.
In order to learn more about this strategy, it is important to assess each step:
Once the investor has found a great deal, they are able to purchase the property. Every aspect of the deal should be excellent. The neighborhood, location and home must be pristine. This investment strategy shares a lot of similarities with house flipping. Instead of placing the house up for sale, it will need to be rented.
The same general principles apply, though. There is a common rule of thumb to follow. A flipper should never spend more than 70 percent of the property’s post repair value. While this may seem like a challenging margin to achieve, any experienced house flipper is able to locate properties that are built on these sorts of margins.
Check Craigslist. Be willing to hustle. Check the local newspapers. Investors who put the necessary time in are able to find the best properties. Home equity and hard money will be needed to fund these transactions as well.
This is the fixer upper step. This strategy differs from house flipping in one key way: the property is going to function as a rental and the investor should select the materials that are able to reflect this reality. The property needs to be “tenant proof”. The materials must be resilient and if the investor can convert a two bedroom residence into a three bedroom, this will add much needed cash flow.
Now, it is time to seek out the proper tenants. Purchasing a property in a prime location and rehabilitating it will make this step even easier. Since the property has already been rehabbed, the expenses are going to be low. Maintenance and repairs should still be budgeted for. Most experts will recommend managing the property yourself, as a means of saving more money.
Obtaining a conventional mortgage on a property of this nature is not always easy. That’s why refinancing takes on an added level of importance. Once the property is all fixed up, it is much easier to obtain a conventional mortgage. These mortgages are long term and low interest.
There are some who may not need to refinance a property to get their money back. Some investors have the ability to finance the property with their own salaries. Those who are relying on traditional lenders will typically be able to receive a loan for 70 percent of the after repair value. Once this step is complete, the property is completely stabilized and providing monthly cash flow.
This is where the process begins anew. If the process worked once and the investor received the proper return on their investment, why wouldn’t they continue? While a bank will not always continue to refinance properties, there are other solutions available. Some may benefit from the assistance of a portfolio lender. As each deal is repeated, we gain 30 percent equity and place some much needed cash in our pockets.
So How Can Someone Make $100,000 Per Year?
Real estate prices climb between 2 to 3 percent each year. In order to make $100,000 per year with this investment strategy, the investor must make two deals per year. With the proper ARV investment and rehabilitation, properties increase in value. Over time, the increase in real estate prices allows for at least $50,000 in equity. By making two deals each year, this $50,000 becomes $100,000.
What Are The Drawbacks?
An inability to refinance the property will stop the investment before it has a chance to start. Be sure to speak with local banks. A lack of exit strategies can also be damaging to the investment process. A home must be tenant proof and the investor needs to be able to finance the original purchase.
While this strategy does come with a wide range of moving parts, it is one of the simpler ways to build wealth. By taking the time to maximize this strategy, profits are increased and rental properties achieve the necessary level of appreciation.