Buy-and-hold real estate investing is a strategy for wealth building that does not require a large infusion of cash to get started. With a little bit of research — and a lot of elbow grease — it can be a great way for beginners to start investing their money.
Buy-and-hold real estate investing, also known as the BRRRR method, is a strategy in which investors buy properties in need of rehabilitation, rent them out, and refinance them to repeat the process.
It’s a great way for those new to real estate investing to have greater control over short- and long-term investments.
The Benefits of BRRR
A buy-and-hold investment offers tax benefits via a 1031 exchange if you sell a property and invest the proceeds into another like-kind property.
This can be especially profitable if you’re utilizing a 1031 exchange in Florida, a state with few regulations and a white-hot housing market.
Save Money on Property Management
More money will flow back into your pocket if you manage your properties. Some investors may not have the time or expertise to act as property managers, but if you do, it’s a great way to improve your return on investment.
Earn Passive Rental Income
Once you’ve completed the buy-and-hold process, rental income is passive. You’ll need to complete repairs as needed and clean units between tenants, but it can be a low-maintenance way to earn extra income if done correctly.
Utilizing one of the best home rental websites will allow you to quickly and easily find a tenant. This is how you build wealth. Your investments make money for you.
In addition to passive income, real estate values generally appreciate. In 2021, the average home price rose by nearly 17%. That beats the stock market’s rate of return by 7%.
How To Get Started
There are six steps to a buy-and-hold real estate investment strategy.
Step 1: Work With the Best Realtor
A crucial step is to locate the best property, so you’ll need to start with a great Realtor. You can save money on this step by using an experienced discount broker to save money on commission.
Step 2: Buy the Right Property
Once you secure a Realtor, you can start looking for the right property.
- Look for properties that will provide at least a 1% monthly return on investment. For example, if you buy a property for $200,000, your rental income should be at least $2,000 a month. Have your real estate agent perform a comparative market analysis of similar homes that have sold recently in the area to ensure you don’t overpay for a property.
- Avoid condos, properties with homeowners associations, and properties in historic districts. These are typically more challenging for new BRRRR investors and can eat into the bottom line.
- Purchase a “value-add” property. This investment requires a little sweat equity to bring out its true value. If the work’s already been completed, your return on investment will plummet.
Step 3: Be Smart About Remodeling
That “value-add” property is going to need some work. You’ll have to put some money into it upfront, but there are ways to save while you make improvements.
Ensure you always pull permits so there are no building code violations.
- Use a cash-back credit card. If you spend $100,000 rehabbing and charge it to a 2% cashback card, you’ll save $2,000.
- Use professionals when you need them and DIY the rest. For repairs, such as electrical and plumbing, that are highly technical or require a licensed contractor, let the professionals handle it. Do it yourself if you’re just refreshing the paint or making small cosmetic repairs. Having reliable contractors can be a godsend.
Step 4: Choose Good Tenants
Rental properties are a lot like your children. No one will care for them exactly the same way you do. That said, taking the time to pick the perfect tenants will help you protect your investment.
- Start with a solid lease agreement. This might require a conversation with a lawyer, but it’s worth it to draft a document that is clear, specific, and free of loopholes.
- Consider a property manager. This can add anywhere from 8–10% in monthly expenses, but if the property is large — or you don’t have time to do the job — it might be worth the cost.
- Screen tenants carefully. If you choose to manage the property yourself, take time to find excellent tenant screening tools. You’ll want to look specifically for good credit and a rental history free of evictions.
- Be fair. Treat every tenant exactly the same way, regardless of circumstances. You might be tempted to offer benefits and exemptions to some tenants, but resist that temptation. In the end, the BRRRR method is a business, and a consistent approach is best for you and your tenants.
Step 5: Refinance
You’ve bought, rehabbed, and rented your property. Now it’s time to refinance.
- Choose a lender. Credit unions and small community banks tend to have more favorable rates. Online banks are another resource, often with lower — or zero — closing costs. Don’t forget to compare rates and fees.
- Get an appraisal. This helps you realize the fruits of your labor during the rehabilitation phase.
- Make sure you can cash out. Your lender should be able to offer a new mortgage that’s higher than the original. Cashing out puts money in your pocket for the final step — building your portfolio.
- Mind the seasoning period. Some lenders require you to keep your first mortgage for a set period of time before refinancing.
Step 6: Start Looking for a New Property
With your refinancing complete and your cash in hand, it’s time to look for your next property.
Before starting your search, take time to reflect on what worked and what didn’t in your first buy-and-hold real estate investment. There’s no sense in making the same mistake twice.
All the investment books in the world don’t replace experience, so figure out what parts of BRRRR worked for you.