If you’ve been pursuing your passion for investing in real estate, you may have heard, “Your home or the house you live in is not an investment — it’s a liability.”

While this statement at its core can be true, it doesn’t mean that your primary home can’t be an investment. All it takes is the right plan.

Typically, when buying an investment property with traditional financing, the bank will require a 20% down payment. Which, depending on your market, could be anywhere from $20,000 – $100,000+. This is where purchasing a home as a primary residence can have a huge advantage, especially for those just starting out. You can put as little as 3.5% down on an FHA loan as long as you live in the property for a year. Taking advantage of that opportunity can reduce your capital investment tremendously.

But how do you make that primary residence an investment if you live there with no roommates? You do so with the BLRRRR method.

Now, you’re probably thinking BLRRRR? Doesn’t he mean BRRRR? No, that is not a typo. While the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) is tried and true, it requires a hard money loan or a 20% down payment and a higher interest rate.

The BLRRRR method (Buy, Live-in, Rehab, Refinance, Rent, Repeat) is a longer investment (2-3 years), but it can allow you to stretch your capital the furthest while still having ownership rights and taking advantage of a lower interest rate and a significantly lower down payment.

Breaking down the BLRRRR Method

1. Buy

The most important step of the process is buying the right property. Look for the path of progress in your market. Where are the new highways extending to, what businesses or companies are coming to the area, what does future public transportation growth look like? Targeting areas that are along this path of progress will maximize the probability of your home appreciating over the 2-3 year period you plan to live there. Look for a home with good bones and mechanical systems that can be updated with little effort and knowledge or a home that has a flexible layout and lot that would allow for conversion or extension of living space.

2. Live-in

Living in the home, house hacking, and renting out additional rooms right away is a bonus to this strategy but not required. Living in the home provides a few advantages, like a lower interest rate, lower monthly payment, and tax benefits depending on the state you live in. States like Texas, Florida, Iowa, Kansas, Oklahoma, and South Dakota all have a homestead tax exemption, which puts a cap on how much your property tax bill can change year-over-year and reduces the assessed taxable value of your home. This means you’ll pay less property tax vs. a traditional investment property. Additionally, living in the home for 2 of the last 5 years will protect up to $250K (single) and $500k (married) equity from capital gains tax if sold according to the current tax code.

3. Rehab

The rehab portion is at your own pace, as you won’t be under the gun to pay off that hard money loan. While this works best for DIY’ers, it doesn’t mean you can’t succeed if you hire contractors. Your goal during the rehab is to work on projects in phases and not over-renovate. A budget of $5-10K per year in upgrades can go a long way. When renovating, have your future renter in mind. What products are durable, what appliances/ fixtures are energy efficient and low maintenance? What can you add that will attract the best tenants? These are all things that should be considered in step one and executed throughout your occupancy.

4. Refinance

This is where the fun starts. It’s now 2+ years since you bought this home, and you’ve been making cost-effective, functional updates. The house has appreciated 3-10% each year (depending on your market), plus you’ve added value to the home with your renovations — let’s call that 20% and say you got close to dollar for dollar back inequity on the rehab costs (it will be more for DIYers). You are now in a position to either pull a Home Equity Line of Credit (HELOC) or refinance and pull your initial investment out. Both those options allow you to access up to 80% of the appraised equity in the home. For example, let’s say you purchased a home in Austin, Texas for $280,000 with $9,800 down (3.5%), you spent $20,000 in upgrades over two years that increased the value of your home by $40,000, and the path of progress has reached your neighborhood, your house has now appreciated 8% both years. That same house is now worth $370,000. The bank will now allow you to refinance or open HELOC because your equity is around 30% despite only putting 3.5% down. You can draw on up to 80% of the equity, in this case, $72,000, giving you a 20% down payment for your next property

5. Repeat / Rent

After pulling out your initial capital investment of this property with a refinance or a HELOC, you can now use that equity to repeat this process. You can either upgrade to a larger home at essentially the same cost as your first home because of a higher down payment, or you can find another property to repeat the process, allowing you to collect cash flow on the first property while it appreciates. If and when the home value increases, you can continue to use that equity to purchase other investments. This is how you build wealth.

The BLRRRR method is my favorite way for anyone getting started in real estate investing because it allows the investor time to learn, put their team together, and get started with limited capital and risk. If you have any questions about investing in real estate, please contact me at tmcneil@kw.com or (970) 627-7392.