The BRRRR method is an excellent strategy for real estate investors to apply to their value-add portfolio with the objective of a long-term hold. As a hard-money lender in Los Angeles, I would like to focus this blog on the BRRRR approach by long-term holders to gain maximum positive leverage with little personal liquidity and to enjoy the monthly income generated from their investments.
The BRRRR Method
BRRRR is the acronym for buy, rehab, rent, refinance and repeat. This plan of action works well for investors with the long-term hold objective and not for the fix-and-flip plan.
Real estate investors often have similar approaches to identify properties. Investors seek a property with the value-add potential. The property needs to be purchased at the right price relative to the rehab budget. The sooner the rehab project is complete pursuant to the schedule and the budget, then the sooner the property is available for rent to generate income. It is the cash flow that creates the end value of the property for the refinance.
The long-term investor needs to position the property for refinance as opposed to the short-term investor positioning the property for sale. The net loan proceeds from the refinance recapitalizes the investor to expand the portfolio and to reap the benefits of the income.
How Does this Method Work?
The theory behind BRRRR is very similar to the fix-and-flip method, but with a different end objective. For the long-term investor, the goal is to cash out the maximum of the invested capital on the refinance. The refinance is the mechanism for recapitalization. A long-term investor needs to understand that the equity that cannot be monetized at the refinance, will over time, will be recouped from the monthly rents generated from the property.
There needs to be specific attention paid to the strategies for choosing the property, selecting the contractor for the rehab and seeking a hard-money loan program for the acquisition and the construction.
It is the identification of the hard-money lender in Los Angeles that is the key to the property achieving the investment goals.
Will a Hard-Money Lender Loan on the BRRRR Model?
Absolutely. It is this type of a value-add project for which a hard-money loan program has established. A hard-money lender seeks investments in properties with the potential for value creation. While traditional lenders seek stabilized properties with the value in place, hard-money lenders will lend on the potential. A long-term investor becomes positioned for the traditional bank loan once the value is created and the property becomes stable.
However, to maximize the placement of a hard-money loan on a value-add investment, time is not your friend. Time cannot be wasted during the construction or during the implementation of the advertising and the lease-up plans. Any time delays will significantly affect the investment returns in a negative way.
It will be the investor’s control of the rehab budget, the schedule and the identification of the hard-money lender that will determine the investment goals and place the property in a position for refinance by a traditional lender.
Does BRRRR Increase Positive Leverage?
Absolutely. As your portfolio grows, you will be acquiring other properties with the use of the proceeds from the refinance loans without using your liquid cash. The investment returns on a cash-on-cash basis will be infinite. The levered returns will continue to increase at the asset level.
In addition to the return levels, the relationships you will build with your investors, your contractor and your hard-money lender in Los Angeles will prove priceless.
It will be the use of the hard-money loan program that will position the property to qualify for a traditional loan. The value created by the implementation of the investor’s plans for the value-add and the stabilization that will achieve the requirements for a traditional loan program.
If you are an investor with a long-term hold objective and would like more information on the BRRRR method for your next project, then you need to work with a reputable and respected hard-money lender in Los Angeles. PB Financial Group is a premier, direct hard money and bridge lender who has been providing quick funding since 2006, and who has funded over 2,700 hard money/private money loans. Our objective is to satisfy your financing needs on important real estate projects throughout California in an efficient manner.
To learn more about how to successfully finance your next value-add investment, please contact PB Financial Group at 877.700.3707 to schedule a consultation or visit www.CalHardMoney.com to learn more.
PB Financial NMLS #357614/DRE #01522495