Actively fast-tracking your real estate portfolio using the BRRRR strategy.
Rome wasn’t built in a day. Neither were any of the world’s greatest real estate portfolios, or any real estate portfolio for that matter! Building personal wealth through real estate takes patience, persistence, and time, right?
Well…yes, most of the time.
It’s true, many (or most) homebuyers are content to buy a home to live in long-term, with the hope of turning a profit at some point in the future. Certainly, this isn’t a terrible strategy— relying on steady appreciation over time is a way to build equity. What this simple “buy and hold” strategy misses however, are opportunities to accelerate growth—opportunities that can be realized through the power of leverage.
The power of leverage.
As a vehicle for building wealth, leverage is a powerful tool that real estate investors can use to accumulate properties and grow their portfolios. How it works is simple. When an investor has equity in a property, they can access those funds through a sale, mortgage refinance, or home equity line of credit (HELOC). Then, they can use those funds to purchase a secondary property or participate in additional real estate investments. Depending on the strategy used to build equity in a property, the time required to generate a substantial lift can be gradual or fast tracked. An investor can wait for property values to rise over time as a mortgage is paid down, or they can create an instant equity lift themselves in a more predictable way.
How? Through a value-add approach known as the BRRRR (Buy, Renovate, Rent, Refinance, Repeat) strategy. Let’s take a look at these two schools of thought and learn how leveraging real estate can help you create wealth.
Gradual appreciation over time.
As we’ve pointed out, waiting for a property to rise in value is one way to build equity you can leverage to create additional real estate investment opportunities. Here’s how it works in practice:
Let’s say you buy a move-in ready home or property for $800,000. In five years (for argument’s sake) it’s worth $1 million. Now, you take out a HELOC, or refinance your existing mortgage based on the new property valuation and put that money down on a pre-build condo or income property. Great work! You’ve increased your holdings, and your net worth starts to climb.
This strategy definitely works, but over the five years you’ve waited, prices everywhere have risen. If only you’d been able to jump on opportunities faster. (Here’s where things start to get really interesting.)
Actively capitalizing using the BRRRR strategy.
In this scenario, let’s say you’re an investor who’s willing to roll up your sleeves and put in a bit of work. Or, perhaps you prefer to hire a contractor to swing the hammer for you. In either case, a strategy sometimes known as BRRRR (Buy, Renovate, Rent, Refinance, Repeat) may be your plan of action. Here’s how it works.
- Buy a property with good bones that needs a bit of work. This time around, let’s say you buy a less than move-in ready property for $700,000. Maybe it needs new bathrooms and a roof, or it has a 1980’s interior that needs to be gutted. Either way, with a bit of work this is a property you can see potential in.
- Create instant equity with value-add improvements. At this stage you come up with a plan of action. You put an additional $100,000 into value-add improvements, raising the value of the property in only a few months. You’ve spent the same $800k as in example one, but this time you’ve lifted the value of the property and created instant equity while doing so. Nice work.
- Rent out the property. Rather than sell your newly improved property, step three is securing tenants on a new lease to cover your carrying costs. As a bonus, because you made enhancements as mentioned above, your property will be more desirable and will obtain a higher monthly rental rate than it would have previously.
- Reappraise & refinance your property. Once rented, you can now work with a mortgage brokerage like Pro Funds Mortgages to refinance the property based on a higher appraised value. This valuation will take into account your value-add improvements, renovations, and increased rental income. For illustrative purposes, let’s say the valuation comes in at an even $1 million—200k more than what you’ve put in. Now you can borrow against the reappraised value of the property and use that money to purchase another. The big difference? You’ve created equity in a matter of months, rather than years.
- Repeat! Now you’re ready to repeat the process and watch your net worth really start to grow.
Leverage your way to endless possibilities.
As you can see, by actively creating value and then leveraging your real estate holdings, the opportunities for growth are virtually limitless. In addition to the two strategies we’ve outlined here—a gradual versus a more aggressive approach— there are countless other strategies that can transform your wealth in real estate.
Don’t sit back and wait! Talk to our skilled team of mortgage finance professionals at Pro Funds Mortgages, to see how you can actively start building the real estate portfolio you’ve been dreaming of.
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