In the two previous articles on the subject of BRRR I discussed the overall effect that each piece of the BRRR can bring to bear on the plan as a whole, (Buy Rehab Rent Refinance Glitch) and Began part one of how the buy, rehab, rent would affect the refinance. I will tackle the RR, (rehab and rent) of BRRR in this segment. The overall goal in this process is to gain more investment property using the simple plan of repeating a buy, rehab, rent, refinance cycle over the shortest period of time possible. In my case the shortest cycle for a repeat has been about five years and I consider this nothing short of luck/ great timing.
The Rehab as it Relates to the Refinance
The rehab part of the plan does not at first glance have much influence on the future refinance, but the rehab is an important stepping stone on the road to a refinance. Unless you purchase a rental property that is in perfect shape and needs no work at all, in which case you probably paid a premium for the impeccable state of the property, (that will take time to recoup) you will have a few projects to complete before renting the units. Not completing needed repairs or updates can limit your ability to rent and you may come up short of the cash you were expecting during the refinance.
Having decent or even great looking and functioning investment properties will draw in the tenants you need to make any profit and pay down the debt service/principal on the investment property. This pay down will be crucial in your future refinance plans. Neglect the property and you will find it more difficult to rent, will likely have to charge less for rent and might find the refinance property appraisal falls short of the current market values of similar properties. Don’t neglect your investment property, it can provide future returns in the form of refinance capital, a steady income stream for as long as you like and a tidy profit when you decide to sell the property.
How the Rentals Effect the Refinance
Just like the rehab, you may not draw much of a correlation between rent performance and the refinance, but trust me lenders take a good look at past investment performance before investing in any type of refinance of the investment property. The rental income stream should appear as a consistent pattern of steady income and not have long vacancy gaps, frequent early lease terminations and at least a consistent rental rate.
Lenders considering a refinance will compare the income for the investment property against all outstanding debt. If the debt exceeds the income you may find a refinance either difficult to come by or it will have less than optimal conditions, (such as a higher interest rate or less cash out than anticipated). My goal in managing the rentals is to have tenants that will stay three or more years, which provides a very steady and consistent rental history.
These long term rentals mean less gaps between rentals, less cost in fixing up units between rentals and honestly the piece of mind of not worrying about a ‘revolving door’ of short term renters which can be difficult to manage. Investors will take notice of a well managed investment property. I have had several lender representatives comment on the great rental history my investment properties have. If you are using the BRRR as a means to increase your investment property portfolio, understand that the rental performance has more weight than you might realize on any future refinance plans.
The overall goal in using the BRRR approach is to increase your investment property holdings. By doing so you will have provided that all important nest egg, an extra source of income, (if you decide you can’t part with your 9-5 job) and the piece of mind that comes from taking a hands on approach in your investment strategy. I have never been comfortable with simply taking a chance on the stock market or some of the other investment vehicles which are managed by investment companies.
If you actively apply yourself to an investment property strategy such as the BRRR, I believe your financial goals are far more reachable than by just trusting in others to manage your hard earned money. Just keep in mind that if you are an investment property owner you can’t take a passive role in achieving wealth and your ability to manage all aspects of the investment properties effectively, will largely determine your overall success. There will be miss-steps, snags, set backs and missed opportunities, but overcome these and work through the issues and you will find that investment property ownership can be very rewarding indeed!