You may be thinking that I have completely lost my mind, or I have no idea what I am talking about. But what if I told you that you could move into a newly remodeled home with little money out of pocket, and have 25% equity in it from the start? If you are a real estate investor, you have certainly heard of the popular BRRRR method to investing. BRRRR stands for buy, rehab, rent, refinance, repeat. If you are sick of competing or worrying about over paying for a house in this market, you can take components of this niche, and apply it to your personal home in order to get the house you want, and have a ton of equity in it.
Step 1 - Finding The House
The first step you are going to take is to find a distressed house in or near the area you want to live in. What is a distressed house? A distressed house is one that is in need of obvious repair. This could be damaged siding, overgrown lawn, damaged windows, missing components, and much more. To locate these houses, you can enlist the help of an agent, or simply drive around and look yourself. This is more than likely going to be a tedious task, so I encourage you to seek help from a professional. You can also look for a distressed seller. A distressed seller is one that needs to sell a house quickly. They could be in financial difficulty, needing to move fast, or simply tired of trying to keep up with the house.
Step 2 - Making Your Offer
Once you find a few houses you are interested in, you need to begin making offers. The whole purpose of finding a distressed house or seller is we are going to buy this house at a discount. But how do you know what to offer? You will make an offer based on the after repair value (ARV) and the repairs needed on the house. You can run your own comps or ask an agent or appraiser for help. Once you know your ARV, consult a trusted contractor to see how much it will cost to bring the house to the condition you desire. Once you have both of these numbers, you can make your offer using the following formula: (ARV x 75%) - Repairs.
Lets look at an example: You find a distressed house that has an ARV of $400,000 and needs $75,000 worth of work to get the house into the condition you desire. Your offer will be ($400,000 x 75%) - $75,000 = $225,000. This may take a while to find a house where you can achieve this, but trust me, it can be done!
Step 3 - Get Your Financing
Next, we are going to use a short term loan to fund the purchase and the renovations on the house. I recommend using a hard money loan. These are short term loans specifically designed to do this. The interest rates are high on these loans, but remember, we are only needing it for 3-6 months. And you will be making interest only payments. Do your research on a reputable hard money lender in your area prior to starting your house search. Many are difficult or expensive, but there are several in the US that are reputable and helpful.
Step 4 - Get To Work
Now that the home is purchased, we are going to remodel it. Find a contractor you can trust, depend on, and will get the work done to the standards you require. I recommend signing a contractor's agreement in addition to signing a contract. Your contractor's agreement will state when the contractor is to be paid, and what is required from them. Always pay your contractor in installments. Typically this is in the agreement, and you will pay your contractor during percentage of completion periods. It's common to front the first 25% of the cost up front. Once that 25% is complete, give the contractor the next 25% and so on.
Step 5 - Refinance
Once the home is complete, you will refinance the house with a traditional lender such as a bank or credit union. They will usually refinance 75% of the value. That is why we multiply the ARV by 75% when we make our offers. Once your refinance is complete, you will be moving into a freshly remodeled home with equity!
Final Thoughts
his is an excellent way to move into a brand new remodeled home without spending a fortune or overpaying in the process. The real estate market is insane right now! And I don't foresee newer retail homes slowing down from flying off the shelf! This is a unique strategy that I have employed for my personal home, and also a popular strategy I use with Shipwash Properties.
