Why Should I Invest In BRRRR?

Nikka Sulton

Why Should I Invest In BRRRR?

The real estate landscape embraces the straightforward “BRRRR method”: buy distressed properties, renovate, rent, refinance, and repeat. This strategy prioritizes flipping properties before refinancing, leveraging increased equity to secure larger mortgages for additional investments. Despite its potential profitability, the BRRRR method comes with inherent risks that warrant careful consideration before embarking on the journey of real estate investment. Exploring its nuances and pitfalls is crucial for informed decision-making in this dynamic market.

What is a BRRR?

The BRRRR Method, an acronym for “buy, refurbish, rent, refinance, repeat,” is a systematic approach for investors seeking passive income. This method involves a precise sequence of steps. Firstly, investors acquire a property, which is then meticulously renovated. Subsequently, the refurbished property is leased to tenants for an extended duration. The rental income covers the mortgage, generates profits, and builds equity. As equity accumulates, it can be leveraged to purchase more properties through refinancing, repeating the process.

Buy

The ‘B’ in the BRRRR method stands for “buy,” and it’s the critical starting point for the entire investment journey. This phase involves a multifaceted evaluation, determining the property’s potential as a lucrative rental. Factors such as renovation costs, projected monthly rental expenses, and ensuring a profitable rental income are meticulously analyzed. Investors often adhere to the 70 percent rule, which considers repair expenses and post-renovation value to establish the maximum property offer. This rule safeguards a viable profit margin post-renovation.

Refurbish

The next step in the BRRRR method is “refurbish.” Here, landlords must ensure their rental properties meet basic living standards and functionality requirements. Once these prerequisites are met, investors can explore value-adding renovations that justify higher rental rates. Striking a balance is crucial, avoiding excessive upgrades that surpass potential rental income.

In the BRRRR strategy, the first ‘R’ stands for “rehab,” and it involves a thorough cost-benefit analysis at each step. Investors should focus on home improvement projects known for their favorable return on investment (ROI). Here are some rehab projects with high ROI:

Roof Repairs: Repairing or replacing a roof often adds property value equal to the investment.
Updated Kitchen: Even outdated kitchens can have salvageable features. Houses with demoed kitchens, typically purchased with cash, offer a high ROI rehab opportunity.
Drywall Repair: Fixing drywall damage is relatively inexpensive and can make a property eligible for financing.
Landscaping: Simple landscaping, like clearing overgrown vegetation, can be cost-effective and doesn’t always require professional help, making it a high ROI project.
Bathroom Updates: Bathrooms are relatively small, and material and labor costs are manageable. Updating bathrooms enhances the property’s competitiveness with higher-end homes in the area.
Additional Bedrooms: Homes with ample square footage but lacking enough bedrooms can be upgraded to increase value without significant costs. Adding 3 or 4 bedrooms can enhance competitiveness with upscale properties in the vicinity.

Rent

After completing the property’s rehab phase, the investor progresses to the “rental” stage. This phase includes tasks such as tenant screening, managing turnover, and addressing maintenance requests. Over time, investors evaluate the effectiveness of their due diligence. Challenges may arise, including vacancies, troublesome tenants, or rental costs surpassing income. These issues can strain property finances, increasing the risk of foreclosure. Therefore, it’s crucial for investors to carefully analyze the numbers and make informed decisions when implementing the BRRRR strategy or venturing into the realm of landlords.

Refinance

After completing the rehabilitation and rental stages, it’s time to consider refinancing. Some banks offer cash-out refinance options, while others focus on covering the outstanding debt. Opting for a cash-out refinance is generally more favorable. However, be aware of the ‘seasoning period,’ which indicates how long you must own the property before refinancing based on its appraised value. Although some banks may hesitate to refinance single-family rentals, investors can usually find suitable lenders through their networks.

Repeat

Following the cash-out refinance of the initial rental property, investors can proceed to finance the purchase and rehabilitation of their second property. Cash-out refinancing offers advantages such as favorable interest rates, tax benefits, and financial control. Despite the initial learning curve and inevitable mistakes, investors can apply their experience and newfound knowledge to subsequent BRRRR cycles with confidence.

How The BRRRR Method Works

The BRRRR Method, when executed correctly, offers a systematic way to generate passive income and continually acquire rental properties. It comprises a series of steps:

Purchase a Distressed Property: It begins with acquiring a property in need of renovation, often available at a lower cost due to its condition.
Refurbish the Property: Comprehensive renovations are undertaken, addressing structural, safety, and aesthetic improvements to prepare the property for rental.
Rent Out the Property: Determining the rental rate and securing tenants for the property is crucial, as lenders typically require occupancy before refinancing.
Perform a Cash-Out Refinance: A cash-out refinance is chosen to convert equity into cash, providing access to funds for various purposes, including property acquisitions.
Utilize Funds for Another Purchase: With the cash from the refinance, the process is repeated. Another distressed property is acquired, renovated, rented out, and eventually refinanced, 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 refurbishment: Quality renovations are often expensive and time-consuming. Managing the work can be stressful, and extensive repairs may require refurbish 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-refurbish property value, rental income, and renovation costs, posing financial risks that could result in losses.

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 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

Is buy refurbish refinance (BRR) a risky strategy?

Every investment involves risk, so thorough due diligence is crucial. Assess the property carefully, and budget for potential refurbishment surprises. For beginners, consider a 20% contingency fund to account for unforeseen circumstances. An RICS property survey is advisable to identify major issues. These steps minimize risks in a BRR project.

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.