There are MANY different strategies that active real estate investors use, such as wholesaling, rent-to-own or flipping. One of the most popular and arguably the most profitable strategies for building long-term wealth is the Buy, Renovate, Rent, Refinance (BRRR) strategy.
Let’s see how this strategy works.
Sophisticated active real estate investors will become experts in a particular city and neighbourhood(s), so that they know know exactly what a particular type of property will sell for and how much rent the property can get on the open market.
First step in this strategy is to buy a property that meets his/her specific criteria, usually with the help of a real estate agent specializing in real estate investing. There is a big difference between your run-of-the-mill real estate agents that you use to sell your primary residence vs. a real estate agent who is knowledgeable about real estate investment properties.
These properties may be listed on mls.ca, however, often these properties are found before they hit the mls listings. Therefore, having a knowledgeable real estate agent on his/her team is essential to finding the right property
The ideal property is usually bought at below market value, as the property requires renovations. This is where the property’s value is forcibly appreciated via renovations.
This step varies amongst active real estate investors. Some investors only deal with “lip-stick “ renovations, which implies that the property only needs minor renovations, such as new paint, while other investors gut the property and do a full structural renovation of the property.
Depending on the type of renovations required, this time period can range between 3-12 months, before the property can be rented out.
Now that the property has been renovated, not only has the property value been forcibly increased, but the property’s rents have also been increased. By renting it out to tenants at the higher rents, the investor now has a positive cash-flowing property who is paying down the mortgage for the investor
Most people have watched HGTV about flipping houses. Concept is easy to understand. Buy a property that needs work. Renovate it, and then sell it at a higher price.
Well, the BRRR strategy is basically the same as flipping houses, but the investor flips the house to him/herself by refinancing the property with the bank.
By refinancing the property at its higher appraised value, the investor is pulling equity out from the property (basically selling to property to him/herself).
Ideally, a refinance will give back the investor all their downpayment and renovation money, so that what is left in the property is the investor’s new equity from the bank. They now have a wealth-building machine with none of their original money left in the property.
The investor then uses the money pulled out of the property from the refinance to purchase another rental property. Rinse. Repeat.
As you can see, this strategy is very effective in growing one’s wealth/networth, which is why a lot of active real estate investors use this strategy. However, it takes a lot of experience, time and effort to make this strategy work. You require a team consisting of a real estate agent, lawyer, contractors, property manager etc…
How do you do this? Well, one way is to become an active real estate investor yourself. There are many blogs/seminars/courses/books out there that help people become active real estate investors.
This blog is not one of those resources.
This blog is to shed light into the world of a PASSIVE real estate investor.
How does one reap the benefits of this wealth-building strategy without becoming an active real estate investor him/herselft…….the answer is to become a Joint Venture Partner, which I will discuss in a future post
Any active/passive real estate investors use the BRRR strategy? Do you find another strategy works better for you? Please comment below