Property Investing Strategies Using BRRR

Nikka Sulton

Property Investing Strategies Using BRRR

Property Investing Strategies Using BRRR. The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method is a practical real estate investment strategy. It involves revitalizing a distressed property, renting it, and then refinancing to fund more investments.

Unlike traditional methods, BRRRR focuses on distressed properties and using refinancing to expand your portfolio. If you’re a real estate investor, read on to understand how BRRRR works and decide if it aligns with your financial and investment goals.

How The BRRRR Method Works

The BRRRR Method, when executed correctly, offers a way to generate passive income and continually acquire rental properties. It involves these steps:

Buy a property: Acquire a property in need of renovation, typically at a lower cost due to its condition.
Refurbish the property: Invest in structural, safety, and aesthetic improvements to prepare the property for renting.
Rent out the property: Determine rental rates and find tenants for the property.
Perform a cash-out refinance: Increase your mortgage to access the property’s equity in cash.
Use the refinance funds for the next purchase: Reinvest the cash from the refinance to acquire and renovate another distressed property, and repeat the process.

Buy

In the BRRRR method, the first step is ‘B’ for buy, and it’s a crucial phase that sets the tone for the entire investment. Finding the right property involves a complex evaluation of its potential as both a solid investment and a profitable rental.

This stage demands in-depth deal analysis, encompassing renovation costs, monthly rental expenses estimation, and ensuring that the rental income yields a satisfactory profit margin. To ensure a rental property’s strong performance, research into rental markets and a purchase price that accommodates renovation expenses is essential. Many investors apply the 70 percent rule, factoring in repair costs and post-renovation value to determine the maximum offer for a property, ensuring a profitable margin after the renovation.

Refurbish

In the BRRRR strategy, the first step is ‘R’ for refurbish, which involves a detailed cost-benefit analysis. Investors should focus on home improvement projects that offer a high return on investment. Some high ROI rehab projects include:

Roof Repairs: Adding a new roof often increases the property’s value, providing a good return on investment.
Updated Kitchen: Rehabbing houses with outdated kitchens can yield a high ROI, especially if many features are still usable.
Drywall Repair: Fixing damaged drywall is cost-effective and can make a house eligible for financing, increasing its value.
Landscaping: Simple landscaping projects, like clearing overgrown vegetation, are low-cost and can enhance the property’s value.
Updating Bathrooms: Bathroom updates are relatively inexpensive and can make the property more competitive in the market.
Additional Bedrooms: Increasing the number of bedrooms in a spacious home can add value, making it more competitive with higher-end properties in the area.

Rent

After completing the property’s rehabilitation phase, the investor enters the rental phase. This involves tenant screening, turnover management, and addressing maintenance and repair requests. Over time, investors will assess the effectiveness of their due diligence. Possible issues include vacancies, problem tenants, or rental expenses exceeding income. While this isn’t meant to discourage investors, it underscores the need to thoroughly analyze the numbers before investing.

Refinance

After successfully rehabbing and renting your property, it’s time to plan for refinancing. Some banks offer cash-out refinancing, which is preferable. Be aware of the ‘seasoning period,’ dictating how long you must own the property before refinancing against its appraised value. While some banks may be hesitant to refinance single-family rental properties, investors can often find a suitable lender through their networks.

Repeat

Subsequently, the investor can utilize the cash-out refinance from their initial rental property to finance the purchase and renovation of their next one. Cash-out refinancing provides added benefits, including favorable interest rates, tax advantages, and control over your financial schedule. While the learning curve may pose challenges and mistakes in the first BRRRR cycle, investors can apply their experience and newfound knowledge to subsequent properties.

Pros And Cons Of BRRRR Investing

Before committing to the BRRRR strategy, it’s essential to carefully evaluate its advantages and disadvantages.

Pros:

Generate passive income
Expand your rental portfolio
Build equity during the rehabilitation phase

Cons:

High costs and labor associated with property rehab
Potential need for a more expensive or riskier loan due to difficulty obtaining a traditional mortgage
Uncertainty about the refinancing amount
Requires patience, including waiting for renovations to finish and finding suitable tenants

Consider these factors to determine if the BRRRR Method aligns with your investment goals and preferences.

BRRRR Method Example

Examining a practical example of the BRRRR real estate strategy can clarify the steps involved. Consider the following scenario to grasp how to Buy, Rehab, Rent, Refinance, and Repeat.

Let’s take Johnny Crushit, who resides in Austin, TX, and is keen on capitalizing on the growing rental market. He discovers a property priced at $200,000 and performs a thorough financial analysis. Johnny can make a $40,000 down payment and secures a $160,000 loan to cover the rest. After consulting with a contractor, he decides to invest $10,000 in property rehabilitation. Here are the key figures so far:

– Property Sale Price: $200,000

– Down Payment: $40,000

– Loan Amount: $160,000

– Rehabilitation Expenses: $10,000

Upon completing the renovations, the property’s appraisal value increases to $250,000, and Johnny can lease it for $2,500 monthly. Approximately a year later, Johnny pursues refinancing, obtaining a loan for 75 percent of the appraised value, which amounts to $187,500. He uses this sum to clear the initial loan of $160,000, leaving him with $27,500, in addition to the ongoing monthly rental income. With these funds, Johnny can acquire and rehabilitate another property, progressively expanding his portfolio. While this example employs simplified figures, it serves to demonstrate the BRRRR method in practical terms.

How To Finance BRRRR Properties

Securing financing for BRRRR properties can be a challenging hurdle for novice investors. Typically, you’ll need to finance the property twice: first for the purchase and then for any necessary repairs or enhancements. For those embarking on their initial property purchase, several options are available:

Conventional Bank Loans: These require a down payment of approximately 20% to 25%. Interest rates are akin to owner-occupant loans. It’s worth noting that banks may decline a loan if the property’s condition is subpar.
Local Bank Loans: Local banks offer greater flexibility when financing rental properties. While they may demand a similar down payment to conventional bank loans, they may overlook repair costs and provide leeway with mortgage limits and debt-to-income ratios.
Private Lenders: Private funds come from individuals you have personal relationships with, such as family, friends, business associates, or fellow investors. Interest rates can vary based on the property and your relationship with the lender. Private lenders often extend financing for property repairs.
Hard Money Lenders: Specializing in serving house flippers and rental investors, these lenders typically offer higher costs and rates compared to bank loans. However, they often cover repair and improvement expenses.

Refinancing A BRRR Property

When it comes to refinancing your BRRR property, there are two primary avenues to consider. Conventional financing stands out as the more popular choice, offering the lowest available interest rates. On the other hand, commercial finance is an alternative, albeit with higher interest rates.

Who Should Use The BRRRR Method

The BRRRR method is an ideal choice for investors looking to build a passive income portfolio from the ground up. While it demands more effort than simply buying a turnkey rental property, the potential rewards are substantial. This strategy is well-suited for investors willing to embrace a degree of risk, possess the necessary initial capital for a down payment, and are prepared to engage in thorough market research.

Who Shouldn’t Use The BRRRR Method

Determining if the BRRR method suits you hinges largely on your willingness to tackle a renovation project. Renovations are a central and intensive aspect of the BRRRR method, and those lacking the time or commitment for this process may not achieve success. For those who are apprehensive about managing a renovation but still desire to utilize the BRRRR strategy, I suggest assembling a competent real estate team. This may involve a business partner willing to take a more hands-on role if you provide the capital, or finding a reliable contractor to oversee the majority of the renovation work.

Summary

In summary, the BRRRR method is a strategy that entails purchasing, renovating, renting, and refinancing an investment property, with the intention of repeating the process. By increasing a property’s equity through renovations, investors can use the post-repair value to enhance cash flow and invest in more real estate through refinancing.

While some level of risk is involved, thorough research and due diligence can help mitigate potential drawbacks. It is essential to pinpoint an ideal renovation project in a thriving rental market. This approach is well-suited for investors willing to invest extra effort into building a successful real estate portfolio.