THE BASICS OF BRRRR (BUY, REHAB, RENT, REFINANCE, REPEAT)
• BUY BRRRR investors are not seeking a property that has already been fully renovated; instead, their goal is locating the right value-add property that checks all the boxes: an attractive location for future tenants and requires enough improvements to bring out its value. Accurately calculating the After Repair Value (ARV) is a critical step in determining how successful the process will be. When evaluating properties to renovate, investors have the option to buy properties that don’t qualify for traditional financing (i.e., major roof damage, inoperable kitchen, damaged drywall) or those that are less appealing than the local inventory (either too small, not enough bedrooms, or lacking expected amenities such as upgraded bathrooms). These can provide opportunity to update a home and outfit it with specific features to attract and retain an ideal tenant, providing the investor doesn’t bite off more than they can chew. • REHAB Beyond making a home habitable and considering wishes of future tenants, numerous considerations should be factored when developing a renovation plan—from cost and availability of materials, access to and affordability of skilled labor, and timeline to complete the property. Experienced real estate investors, even those who have strong connections to suppliers and tradesmen, will readily acknowledge every plan should have some contingencies built in for cost and time overruns. Projected rental value is important in deciding which improvements to make, but if you’re planning to rent the renovated property, it’s important to factor in the after-repair value (ARV) the home will reasonably sell for following rehab. • RENT A properly rehabbed home will attract strong tenants and typically require fewer expenditures for future maintenance. Rental properties are long-term investments. Although some investors gain early equity through their improvements, and some realize positive cash flow from the get-go, most rental properties see the bulk of their profit over time.
Ben Lyons is the co-founder of LYNK Capital, a private equity fund providing capital to real estate investors and builders, and leads the LYNK Capital Mortgage Fund. With nearly 40 years in the mortgage banking and real estate industries, Lyons’ experience includes the founding, building, and selling of several mortgage banking platforms. Having been a founder or co-founder of a commercial bank, a title company, a consumer finance company, and several mortgage banks, Lyons has sponsored countless residential and commercial real estate projects. An avid supporter of education, Lyons has served on multiple school boards and currently sits on the board of a private leadership and college preparatory school. He volunteers teaching personal finance and has authored “Be the Bank” and “From Worry to Wealth.” • REPEAT Leveraging the learnings and equity earned through the process, investors can re, building a portfolio of properties and wealth. Experienced real estate investors often find that repetition offers advantages. Knowing which contractors to count on, how to navigate local processes such as permitting, and projecting potential pitfalls and windfalls. • Typically, projected cash flow is simply what’s projected at present and doesn’t account for future rent increases, appreciation, demand, and inflation. If financed with a fixed-rate loan, cash flow spread will continue to grow over the life of the rental property. • REFINANCE Once a rehab project is complete, investors looking to retain the property can often secure a rental property loan from the private lender who financed the renovation. Debt Service Coverage Ratio (DSCR) loans are qualified using the property’s income (rent) rather than Debt to Income (DTI) loans, which require proof of employment income and borrower’s tax returns. Investors looking to repeat the process by reinvesting a portion of the property’s equity will refinance the property with a long-term fully amortized loan that can provide a cash-out option. Although there is often a required seasoning period in which rentals need to have tenants before being eligible to refinance for a long-term rental loan, a short-term bridge loan with a cash-out option can be an optimal solution through the seasoning period.
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