It seems that every year, a new real estate investing strategy rises to the forefront. Recently, the trend du jour is the BRRRR method, which stands for “Buy, Rehab, Rent, Refinance, and Repeat.” The acronym is self-explanatory: an investor buys a distressed property, remodels it to make it rentable, places a tenant in it to generate rental income, holds it for about six months before refinancing it, and then moves on to repeat the process with another property.
While the process sounds like a home run, the devil is in the details – and the BRRRR method becomes especially devilish when investors use it for out-of-state real estate purchases.
Choosing a Property with the BRRRR Method
When you use the BRRRR method, you’re counting on a number of factors to fall into place in order to be successful. Among those are being able to rent the property out at a rate that will generate cash flow, as well as being able to refinance the property at more than the purchase price.
Picking a property that will clear these hurdles requires an in-depth knowledge of the real estate market in the area. In some locations, even an attractive remodel may not be enough to draw in enough rent or help the property appraise at a significantly higher price. Remote real estate investing is tricky enough, and it becomes even riskier when you purchase a property in need of TLC.
Who Is Your Contractor?
Especially if you’re planning to use the BRRRR method, you’ll need a good contractor to take care of the remodeling. Unfortunately, if you’re purchasing out of state, you’ll likely be using a contractor with which you’re unfamiliar. This can create crunches when it comes to time tables and budgeting.
When planning how long a home remodel will take, keep in mind that a contractor’s best intentions are often quite different than reality. A project expected to take six weeks may take three months. This can especially be the case if a contractor schedules in other projects for better-established clients while they’re working to finish yours. With rental properties, time is money, and any delays in remodeling mean that you’re left with a monthly mortgage and no way for the property to generate the income to cover it.
Uncertainty Over Vacancy
Once the remodel is through, it’s time to move a tenant in. The question is – can you find one? In an ideal world, you’ll be pulling up the “For Rent” sign the day after you put it out.
The reality, however, is that locating a reliable tenant can take time. The advertising, application, and screening process means that you may be without a tenant for weeks after it’s fixed up. A dip in the rental market could cause your newly-remodeled investment to sit empty for months.
You have a renter in and have been generating passive income for about six months. Now, it’s time to refinance your BRRRR property. When purchasing an investment home out of state or in an unfamiliar market, it can be difficult to know what to expect. In some areas, even a completely-remodeled home won’t draw a value that’s significantly greater than surrounding homes that haven’t been overhauled. Add in the potential for a downturn in the real estate market and using the BRRRR method out of state becomes even more of a dice toss.
When investing out of state, many folks try to eliminate the unknowns by purchasing turnkey properties that are ready to rent on day one. By purchasing properties that are rental-ready and working with a turnkey real estate investment company to help them make choices that are best for their budget and future plans, a lot of the uncertainties inherent with BRRRR investing are taken off of the table.