What Is The BRRRR Strategy For Beginners?

Nikka Sulton

What Is The BRRRR Strategy For Beginners?

Discover the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method, a unique real estate investment approach centered on acquiring distressed properties, renovating, and leasing them. Unlike conventional strategies, it highlights property rehabilitation and subsequent refinancing to fuel additional investments. For real estate investors, comprehending the mechanics of the BRRRR method is paramount. It presents a distinctive opportunity to leverage distressed properties for potential profit. However, like any investment strategy, it has its own set of pros and cons. Evaluating these aspects is essential to determine if the BRRRR Method aligns with specific financial and real estate investment objectives.

What Is the BRRRR Method?

Here’s a simplified guide to using the BRRRR method for real estate investment without tying up your own money in the property after refinancing.

Step 1: Buy

Start by acquiring a property that requires substantial improvements to increase its value significantly, often referred to as “forcing equity.” Many BRRRR investors opt for purchase-renovation loans, which allow them to borrow 100% of the renovation costs. Alternatively, you can explore financing options like a revolving line of credit, such as a HELOC against a rental property or your home. Another option is to consider unsecured business lines of credit or business credit cards, available to real estate investors. If you’re new to this concept, you can look into services like Fund & Grow, which help real estate investors access substantial credit lines, typically ranging from $150,000 to $250,000, to use the BRRRR method without investing your own money upfront.

Step 2: Renovate

The renovation can range from simple cosmetic changes to a full-scale gut and rehab. It’s essential to avoid taking on projects that exceed your capabilities, as I learned from my initial property purchases.

However, the renovations must significantly increase the property’s value. Your goal is to build enough equity to enable you to borrow the entire amount you invested in the property. But let’s not jump ahead of ourselves.

Step 3: Rent

Once the renovation is complete, move on to Step 3, which involves tenant screening and promptly leasing the property. Remember, a vacant property translates to lost income every month.

Begin advertising the unit for rent even before every detail of the renovation is finalized. Your goal is to have a tenant sign a lease agreement and move in as soon as the work is finished.

Step 4: Refinance

Now it’s time for Step 4 – refinancing to replace your purchase-rehab loan with a long-term mortgage. The goal is to recover your initial investment and renovation costs, provided you’ve built up enough equity in the property. Typically, the more extensive the renovations, the greater the potential for increased equity.

Remember, lenders determine the cash-out refinance loan based on the property’s after-repair value (ARV), not the initial purchase price. However, exercise caution not to over-borrow and become over-leveraged, which could lead to negative cash flow due to high mortgage payments.

Step 5: Rinse & Repeat

With the cash-out refinance complete, your initial funds are now available for the final step: rinsing and repeating the process to acquire more rental properties.

By recycling the same down payment, you can gradually build a portfolio of income-generating rental properties. If done consistently, this strategy could lead to achieving financial independence and early retirement with as little as $50,000 in your pocket.

How The BRRRR Method Works

How BRRRR works: Method Of Real Estate Investment. The BRRRR Method, if executed correctly, offers a systematic approach to generating passive income and continually acquiring rental properties. It involves a series of steps:

Purchase a distressed property: Begin by acquiring a property in need of renovation, typically available at a lower cost due to its condition.
Rehabilitate the property: Undertake extensive renovations, addressing structural, safety, and aesthetic improvements to prepare the property for rental.
Rent out the property: Determine the rental rate and secure tenants for the property.
Perform a cash-out refinance: Opt for a cash-out refinance to convert your equity into cash. This involves obtaining a larger mortgage, exceeding your current loan amount, providing access to funds for various purposes, including property acquisitions.
Utilize funds for another purchase: With the cash from the refinance, repeat the process. Acquire another distressed property, renovate, rent it out, and eventually refinance it, creating a continuous cycle.

BRRRR pros and cons

Pros:

Passive income: BRRRR offers the potential for passive income, which can serve as an additional revenue stream or a means of financial support.
Equity growth: Holding multiple properties can steadily increase your equity over time.
Repeatable: Unlike one-time house flipping, BRRRR can be repeated, allowing for exponential wealth building.

Cons:

Costly and time-consuming rehab: Quality renovations are often expensive and time-consuming. Managing the work can be stressful, and extensive repairs may require rehab loans with higher interest rates.
Delayed profits: BRRRR doesn’t provide quick cash; it’s a gradual strategy that demands time and effort before yielding returns.
Landlord responsibilities: Finding and managing tenants can be challenging, and as you repeat the process, the workload of landlord responsibilities increases.
Financial risk: BRRRR involves uncertainties, such as estimating post-rehab property value, rental income, and renovation costs, posing financial risks that could result in losses.

What are the risks to the BRRRR strategy for buying rentals?

Investing in real estate through this strategy is a solid method, but it does come with certain risks to consider:

Renovation Timelines
Rehabilitation Management
Property Appraisal
Rental Duration

BRRRR Method Example

Let’s delve into the BRRRR real estate strategy using an example. Meet Johnny Crushit, a resident of Austin, TX, keen on tapping into the growing rental market. He discovers a property priced at $200,000 and crunches the numbers. Johnny puts down $40,000 and secures a $160,000 loan. He decides to invest $10,000 in renovations. Here are the key figures:

Property Price: $200,000
Down Payment: $40,000
Loan Amount: $160,000
Rehab Costs: $10,000

After the renovations, the property’s value increases to $250,000, and Johnny rents it for $2,500 per month. Approximately a year later, Johnny undergoes a cash-out refinance, obtaining a loan for 75% of the appraised value, which amounts to $187,500. This clears the original $160,000 loan, leaving Johnny with $27,500 (in addition to ongoing rental income) to invest in another property. Johnny can replicate this process, amassing more investment properties over time. While these figures are simplified, they provide an overview of how the BRRRR strategy operates in practice.

The BRRRR Formula & How To Use It

How do you calculate BRRRR? Real estate investors should target an all-in cost, which covers the purchase price, repair costs, closing costs, and carrying costs, equal to or less than 75% of the After Repair Value (ARV) of the property. To simplify this analysis, you can use the BRRRR formula:

Maximum Purchase Price = (ARV x 75%) – Repair Cost

For example, if the projected ARV of a property is $100,000, your total investment should stay within $75,000.

It’s crucial for your deal to meet this criterion. Subsequently, you must assess it as a rental property. Using the projected ARV as the new purchase price, crunch the numbers to ensure the expected rental income can cover all your projected expenses, ensuring the property’s long-term sustainability.

When purchasing a distressed property, it’s essential to accurately calculate the ARV, which estimates the property’s value after renovations. To determine a reliable ARV, compare the property to recently sold similar ones in the area, considering factors like size, age, condition, and room count. This prevents overinvestment.

What Is The 70% Rule For BRRRR?

A commonly-used guideline in real estate is the 70% rule, suggesting you should not invest more than 70% of the property’s ARV. For instance, if a home’s ARV is $300,000, you should aim not to pay more than $210,000.

The “Buy” phase demands careful financial planning and an objective approach. It’s crucial to view this property as an investment and base decisions on solid financial reasoning rather than emotional attachments. With these considerations, you’ll be better prepared to pursue profitable real estate investing.

In the following sections, we will delve into the subsequent stages of the BRRRR method, starting with “Rehab,” to provide an in-depth understanding of how each step contributes to this potent investment strategy.

The Types Of BRRRR Properties In Real Estate

The BRRRR method’s strength lies in its versatility. It’s applicable to various property types, such as:

Single-family homes
Townhouses
Condominiums
Apartment units
Duplexes, triplexes, and fourplexes

What Rehab Projects Are Worth It?

Given the financial importance of the rehab phase, a thorough cost-benefit analysis is essential for every improvement project you undertake. The objective is to choose projects with a high return on investment. Here are some rehab projects known for their high ROI:

Roof Repairs: Investing in a new roof can significantly boost property value, often yielding a return on investment equal to the repair cost.

Updated Kitchen: Renovating an outdated kitchen, even with usable features, can substantially improve ROI. Houses with demolished kitchens can be attractive opportunities for cash buyers as they are often ineligible for financing.

Drywall Repair: Fixing damaged drywall, while making a house financing-eligible, is a relatively low-cost improvement, providing an opportunity for investors to increase property value.

Landscaping: Simple tasks like clearing overgrown vegetation can significantly enhance curb appeal and offer a high return on investment. These projects can often be completed without professional assistance.

Updating Bathrooms: Bathroom renovations are typically cost-effective, as these spaces are generally small. Modern, appealing bathrooms can help your property compete with higher-end homes in the area.

Additional Bedrooms: Homes with ample square footage but few bedrooms can benefit from adding extra rooms, significantly increasing property value. A three- or four-bedroom house is typically more competitive in the market.

Next, we’ll explore the “Rent” phase, a crucial element of the BRRRR method. We’ll delve into the significance of finding the right tenants and how it contributes to the overall success of your real estate investment.