The BRRRR Strategy Explained
Renters Warehouse Blog
The BRRRR Strategy Explained
No, we’re not talking about the weather! The term ‘BRRRR’ refers to a real estate investment strategy. With this approach, an investor buys up a discounted and distressed property, fixes it up, rents it out, refinances, and then starts the process over again.
While the BRRRR method of investing isn’t for everyone, when done correctly it can be extremely rewarding. If you are willing to take some risk, get involved with some of the heavy lifting and dirty work of rehabs, and have a distressed property available to purchase at a discounted price, then this might be a great option for you.
And even if you’re not feeling brave enough to dive into a BRRRR method yourself, a little bit of research might make you feel a lot more excited about it. In this article, we’ll share what is involved with a BRRRR investment strategy, and highlight how you can get started with it.
What Is the BRRRR Method?
The BRRRR method stands for Buy, Rehab, Rent, Refinance, Repeat. The term, and strategy itself, was coined and pioneered by Brandon Turner of Bigger Pockets fame. It’s this strategy that allowed Brandon, and many others, to start and grow successfully cash-flowing rental property portfolios.
With this strategy, you buy a property, fix it up, and refinance it to then buy another property and then, of course, start the process all over again. If done correctly, this method can be a great way to reinvest your money, over and over again, growing and expanding your portfolio as you go.
Obviously, the first thing you need is an investment-worthy property that will help get you started on your journey. Be sure to run the numbers to determine if the property will be worth the price you pay and to help ensure you will turn a profit at the end of the venture.
The key to making the BRRRR method work is to look for a property that is being sold at a greatly discounted price, most likely due to repairs that are needed. You probably won’t be finding any turnkey rentals worth investing in for the BRRRR method, as those are not likely to have the discount you’re looking for. It is important that you consider the area that the house is located in, the neighborhood and surroundings, to ensure that once you have made necessary improvements, you have a decent location to work with. That’s something you can’t change unless you’re planning on using this method on a mobile or raised home and have land available at your disposal.
Note: When looking for financing to purchase your initial investment, you’ll need to find a lender that will allow a cash-out refinance so that you can use the funds for your next investment.
Once you’ve found your property, the next step is to rehab it. This step is similar to a fix and flip, except you are holding the property instead of selling it. Before you get started with the rehab of your property, it is important to make sure the repairs you are making are necessary and also will improve the value of the property. The main goals of your rehab should be to make the home livable and functional as well as improve the value.
While some things, such as an updated and functional kitchen, are almost always a must, other upgrades, such as skylights and chandeliers, are expensive and will only serve to lower your bottom line. It is also important that you establish a good budget and quick timeline to complete these repairs. The longer you wait, the more money you’ll end up losing out on.
Wondering what upgrades are worth the investment? Read: Long-Term Investments Upgrades That Can Last a Lifetime in Your Unit to help make the process easier for you.
Next comes the task of renting out your property. This is an important step as most lenders won’t refinance a property unless it has tenants. However, it is important not to rush this process either. Choosing a tenant is a process that should be done carefully. It is also important that you have done your research on your responsibilities and requirements as a landlord, and know the laws of both your town and state. Be sure to price your rental accurately for the market and thoroughly screen your tenants.
Once you have a stable tenant and a few months of rent history established, you can start the process of refinancing. A cash-out refinance is a type of refinance loan that lets you tap into the equity of the property. Since you’ll have fixed it up, there should be more equity in the property for you to access. You’ll also need to have a new appraisal done to assess the new after repairs value of the property.
Ideally, everything will have gone down without any problems and you will be able to go through with the cash-out refinance, and use those funds as a down payment on the next property to start over at step one.
Be sure to take all the information you have learned along the way and roll it over with the finances as well. The more you repeat the process, the more you will learn and understand about this method, so be sure to take good notes and document what you might do differently each time around.
Advantages of BRRRR
Now that we know how it works, let’s take a look at some of the advantages that come from using the BRRRR method.
- Potential to Grow Your Portfolio
One of the main attractions to the BRRRR method is the fact that you can have some potentially good growth to your portfolio. If everything goes as planned, you can rinse and repeat the process, growing and expanding at a fairly quick pace.
- Amazing Return on Investment
One of the main benefits of the BRRRR method is the possibility of an excellent ROI. Your ROI is the percent of the total investment you expect to receive back within a year. When done right, and you secure a property that’s undervalued and in a good housing market, you can expect your ROI to be good with a successful BRRRR method.
- Build Equity
Another potential benefit of the BRRRR investment method is the equity you will build up during the rehab process. Because you are specifically choosing properties that have a need for improvement, you have the opportunity to start building up equity as the rehab goes on.
Risks of BRRRR
As with any kind of investment adventure, there are disadvantages that you must also consider to be realistic about the process. Nothing is foolproof, especially when it comes to investing.
- Potential for Costly Repairs
The rehab process is a headache in and of itself. But then you have to consider that the cost involved might not go as expected either.
One of the biggest disadvantages of the BRRRR method is the potential for costly repairs. While it is possible to estimate how much repairs will cost, there is always the potential for hidden needs, more repairs required, or for costs to be higher than anticipated when it comes to rehabbing a house. It is also possible that the timeline involved with the rehab drags on longer than expected and more time goes by without renters - ergo, without passive income.
- Long Wait Periods
Another disadvantage is that there are often long periods of waiting when it comes to investing with the BRRRR method; waiting on the sale to go through, the repairs to be completed, then waiting to find tenants. You also have the “seasoning” period which is the length of time that most banks or lenders will request you to rent for, establishing a history of rent payments, before refinancing. After this, you then have to wait for the refinance process to start and finish. While the process is a potentially fast way to grow your real estate portfolio, it also involves a lot of - often long - waiting periods.
- Bad Appraisals
Perhaps the biggest disadvantage to the BRRRR method is the potential for a bad appraisal. In order to refinance, you will need to have your home appraised. A bad appraisal could potentially leave you unable to refinance and, as a result, you might have a hard time finding funds to pay back your initial loan. This is why it is important to do the math and run the numbers before you decide to buy the property in question.
Financial Options to Get You Started
While the BRRRR method might sound like a great way to get started on your investment journey, it can often be difficult to find financing to get things rolling. Here are a few options you might consider looking into when it comes to getting this project underway.
- Conventional Bank Loan
Often, the conventional bank loan will not be an option for the BRRRR method since most conventional bank loans require the house to be in decent condition and your property most likely won’t make the cut. However, a conventional loan is not completely out of the question and should still be considered. Discuss this opportunity with your financial advisor, as you could save yourself the trouble of looking for another loan if the property meets the requirements.
- Local Bank Loan
Local bank loans are often more flexible when it comes to financing rentals. However, it is important to keep in mind that they will usually require a down payment.
- Private Lenders
Private lenders can be anyone from family and friends, to business partners and those looking to invest. The amount you end up financing can depend greatly on the relationship you have with the lender.
- Hard Money Lenders
Hard money lenders, such as private companies or individuals who lend money for the short term with high interest rates, are another option you could consider. The rates of hard money lenders are often higher than a common bank loan, but they also specialize in flipping houses and rental investors. They will also most likely cover all repairs and improvements. Hard money lenders generally will approve you within just a few days, meaning you can act faster on a promising investment.
Looking for more financial options? Here are some Creative Ideas for Down Payments that could help.
Is the BRRRR Method for You?
The BRRRR method is an exciting investment strategy that can help investors build a passive income portfolio. However, the process is a lot more hands-on and requires you, as an investor, to be more involved than other investment strategies. Those who are comfortable taking a risk and have the finances available can benefit greatly from this strategy!
You should also ask if you are willing and able to handle the rehab, as this is arguably the most intense and time-consuming part of the whole process. Do you have a team ready to help? Or a trustworthy contractor available? What is your timeline like, and how flexible are you on waiting to receive that passive income? Ask yourself these questions before you dive in.
While there is a certain amount of risk involved with the BRRRR method, it can be a great investment strategy that, if done correctly, can be extremely rewarding as well. Make sure you do your research and ensure that you find a good property in a great market. It’s also a good idea to exercise caution and avoid paying more than 70% of the property’s after repairs value (ARV). That way, if you do run into unexpected costs or if the market experiences a sudden downturn, you’ll be in a good position and able to weather any fluctuations.
Ready to get started with investing in real estate? Search our available inventory of properties for sale to find a rental that’s right for you.
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