BRRRR Method: The Red-Hot Approach To Real Estate Investing was written by Courtney Luke and originally appeared on Arrest Your Debt. It has been republished with permission.
There are many approaches one can use to buy, sell, and rent real estate. One particular approach has a particularly cold moniker and acronym, but it’s actually a red-hot way to do real estate business. Here’s more on the BRRRR method and a guide to how you can use this real estate investing strategy to make money in the real estate industry.
What Is The BRRRR Method?
This hot new approach to the real estate market has many investors excited. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. Essentially, investors buy up properties, rehab what is necessary to make the properties livable and safe, rent out the properties to recoup what they have invested, refinance at a lower rate to reduce the selling price on the property, sell it off (if they so desire), and then repeat.
They can choose to keep the property as a rental property for a period of time if they want to make some money off it, but selling a property as soon as the market values rise again is a better option. Refinancing the property leads to a cash-out option that provides the property owner/buyer with funds to buy another property that needs fixing up.
The profit margins, especially when the market is a seller’s market, are quite handsome. Learning how to use this method isn’t as tricky as it sounds either.
How The BRRRR Method Works
In the 1930s, there were companies called “Building and Loan” companies. Essentially people wanting to buy and build a new home would come to these companies seeking funds. Other people who had already taken money from the building and loan and were repaying it would have those funds reinvested into the building and loan process for new customers.
The BRRRR Method is very similar to this old building and loan business model, except that it’s a real estate investor that is borrowing money to fix up and buy a property before turning it into a rental cash cow. The money from renting it pays back the purchase price of the loan and funds needed to fix up the property.
Next, the investor refinances the property later and takes the “cash-out” option on the refinance process. Then the cash return is used to purchase yet another property, where the entire process is repeated.
Some people might think this is “house flipping,” but house flipping is a different business model altogether. With house flipping, the property buyer is completely remodeling and then selling the property outright once all the work is complete. They aren’t waiting to rent it out or make money on it using it as a rental, nor does a house flipper refinance the property to get more cash out of it.
Instead, a house flipper sells the updated and remodeled property for an enormous profit before taking the profits and doing it again.
The steps in the BRRRR Method are straightforward.
The investor looks for a distressed property but is hopeful of finding a turnkey property. The real estate investor expects that these properties will yield a high return on investment. Then, after the rehab phase is complete, the properties will generate rental income as long as the investor wants to hold onto them.
Different lending options and loan programs can be used to purchase the properties in question. However, you have to be very careful when selecting a loan product to purchase a property. You have to evaluate the rehab costs and weigh them against the interest you will have to repay while fixing up the property.
If the value of repairs is not high enough to cover the closing costs, rehab budget, and current fair market value of the said property, you should avoid that initial loan product and avoid purchasing that property.
Rehabbing a property is a key component of the BRRRR Method. You are trying to make the property livable and attractive to renters. The objective is to choose a house or building that has “good bones” and doesn’t need too much work to bring it to code.
Before you jump in and buy a property, have it thoroughly inspected by a building inspector so that you know what it will cost to bring the property up to code and what it will cost to make it attractive to renters.
Have a rehab budget in mind and stick to it. If you can manage it, don’t go above that amount, or your profit margin will shrink. To be successful, you have to pick the right properties for the right price and stay well within your rehab budget. The inspector is helpful in providing you with an appraisal risk before you even decide to purchase a property.
Examine the local rental market. What are people willing to pay for rent where this property is located? If you charge too much, you will be stuck with the property for a long time and lose money.
On the other hand, you will lose money if you charge too little because you can’t regain what you invested or keep up with the monthly mortgage payment. The monthly cash flow has to be above the mortgage payment but low enough that renters can pay the requested rental price.
Also, make sure that the tenants you choose are suitable, decent people with a steady income, a good credit report, and no history of criminal behavior. You don’t need the property destroyed after already investing so much! You will lose money if you have squatters too.
Research the potential renters/tenants thoroughly before accepting their security deposit and first and last months’ rent.
Wait a few months after you start accumulating the rent. A traditional lender will require a seasoning period of a year or more of continuous payments on a property before you can refinance.
This is why many property investors have more than one property going under the BRRRR Method simultaneously so that each will “mature” at a different time for refinancing.
Be sure you ask for the cash-out option in refinancing. It would help if you had enough equity in the property, both in the rehabilitation phase and sweat equity, as well as the mortgage equity of the home. Then you can take the cash from refinancing, put it into another property, and start over.
No surprise, but now you repeat the process. Repeat this as often as you have a consistent cash flow available to you through the cash-out process on a previous property. It will keep a chain of properties in your pocket, turning out passive income while you rehab your next project.
In addition, the more often you can repeat this process, the less likely you will become dependent on financing options and current mortgage rates by lenders because the cash-out refinance will give you the startup funds for buying the next property.
How Much Money Can You Make From The BRRRR Strategy?
That all depends on current markets and available properties. It also depends on how many properties you purchase and put through the strategy.
Can you become very wealthy with the BRRRR method?
Absolutely, but it won’t be immediate because you have to expand your rental property portfolio to the point where you have enough properties generating income in order to avoid creating loan debt. At the same time, you continue to invest and rehab.
Those who are successful at this can make millions of dollars, but they also own dozens of properties. If you want to do this on a smaller scale and millions of dollars generated isn’t your goal, you can do that too.
First, understand your real estate investment goals and then scale the BRRRR Method/strategy to meet those goals.
A BRRRR Method Example
If you need to see the numbers in order to know if this investment strategy can work for you, let’s take an example from the success of others who are doing this right now.
Let’s say you buy an investment property that only needs about $20,000 in updates. You buy the property on the low end because of its location, say the purchase price is about $100,000. Your equity becomes the $20,000 and any money you use to pay off the original loan amount in the first year.
For the sake of argument, let’s say you pay off another $15,000 via the rent you make on said property.
When you cash-out refinance, you get $35,000 back in instant equity. Now you can use that money to build your rental portfolio and buy another property. If you do it very well, you can find a property for less down and a rehab budget of $15,000.
After one year, you can refinance and have two properties generating income passively for you while you go on to purchase a third property. If you have six properties generating $20,000/yr in passive income, that’s $120,000/yr.
Eventually, you can buy properties outright and begin turning profits after rehab and renting because you won’t be paying a conventional bank loan or conventional lender’s monthly payments!
How Much Money Do You Normally Need?
Depending on the property locations and your intended rehab project budgets, you will need startup capital of about $60,000-$150,000. This is just for your first initial investment property. This amount includes the 20% down to secure the mortgage on your first property, and the rest is for rehab purposes.
How To Finance BRRRR Properties
You can finance a BRRRR property in any number of ways. However, it’s wisest to find low-interest rate loan options and have a large chunk of money to put down at the start. Non-traditional funding sources may also provide you with the financing you need since many traditional mortgage companies may not be willing to help you buy distressed homes or dilapidated properties.
You may also consider a private money lender or an investor’s club with people you trust or involve a property shark as a backup plan to help you get started. Remember, the object is to borrow at a low-interest rate to avoid cutting into future profits!
Properties That Work For BRRRR
You don’t want properties that will cost you more than 70% of the property value to rehab. You have to find relatively simple properties to fix, resulting in a steady cash flow with no repairs necessary for the following year. Short sales, foreclosures, etc., are an excellent place to start as these properties may not be in such bad shape.
Always get a property inspected and check out a property yourself before buying it.
Who Should Use The BRRRR Method?
Most people with a little extra cash in their pockets could use this method. However, it isn’t for everyone as it does require a good deal of real estate knowledge and skills for making home repairs.
You want to do as much of the work on the rehabilitation phase as possible to turn that equity into cash, which is why you want to avoid hiring contractors and outside help. If you can’t do basic home improvement projects like plumbing, electrical, construction, etc., this might not be right for you either.
Who Shouldn’t Use The BRRRR Method?
People with poor credit history, bankruptcies, poor credit score, low source of income, or trouble paying their bills on time, and people who can’t do most of the work on the properties themselves should not use this method. They will not meet the demands, financial responsibilities, and deadlines involved with making this method work.
Pros And Cons Of The BRRRR Method
It’s easy to see that there are definite pros and cons to this method of real estate investing. Therefore, you should weigh these pros and cons before you decide to jump into this.
When done right, the BRRRR Method is very lucrative. The money is passive, so you don’t have to do much to keep the money coming in every month. You can own dozens of properties and have millions in cash reserves which leads to paying off the loans on many of your properties. Then you own the properties outright, and the monthly rental income is pure profit.
It takes a long time and a lot of hard work on your part to get this going. If you can’t or won’t put in the work and the effort needed, you will lose your shirt and end up filing for bankruptcy.
In addition, you have to stay on top of all of your properties and make sure they remain in good rental condition. This can lead to additional expenses if you have poor tenants or overlook something that needs repair during the rehab process.
Potential Risks Of The BRRRR Strategy
Risks often include:
- A sluggish market
- Lack of properties that would work for your intentions
- Overly high loan rates
- Lack of decent tenants
- Tenants who seem great on paper but turn out to be destructive
These are often out of your control, and they can be costly. Failing to have a property inspected and appraised before purchasing it creates its own expensive level of risk, too, such as tens of thousands of dollars to bring plumbing or roofing to code.
It’s essential to keep your renovation time short. For that reason, don’t attempt to rehab more than one property at a time. One to two months is recommended to get tenants into the property and start making money almost right away.
Every day that your property is not ready to rent is another day you are paying the bank, private lender, etc., for a property you can’t use and aren’t using.
Likewise, your renovation costs should be as low as you can keep them. The property should be up to code with the city and livable for humans. If you’re fortunate, your total cost of repairs for the renovation will be 30% or less of the entire property value.
Renovate what has to be renovated, and then if there are funds left, renovate something that will bring value to the property and increase curb appeal For example, a kitchen remodel with granite countertops brings value to the property while enticing renters.
Appraisal of the property before and after you have made your investment is really important and probably the biggest risk when doing the BRRRR strategy. Before, you are looking to find a property that will not cost a lot to purchase and not cost a lot to rehab either. After, you want the property’s value to jump high enough that when you refinance at a later date, you can get a nice chunk of change during the cash-out process.
Find an excellent appraiser you trust to help you in this process.
Time To Fill Vacancies
When a property is ready for tenants, make sure you fill your vacancies within three months or less, preferably within the first month. Any longer than that, and you will lose money. Always keep your vacancy times short to maintain a positive cash flow.
The rent amount should always be enough to cover the monthly loan amount plus a little extra. It should also be on par with the average rental market in the neighborhood where your property resides.
For instance, if you have expensive properties that you are renting out and they are located in a nicer part of town, local rents are probably between a couple thousand and five thousand. Be sure to do your homework before you set the rent amount.
Otherwise, potential tenants will skip over your listing for something cheaper or more reasonable.
Alternatives To The BRRRR Method
There are alternatives to this method, although they too have pros and cons. As previously mentioned, you could be a house flipper and buy, renovate, and resell at a higher profit. Flipping houses could help you grow your real estate portfolio.
However, the trouble with this approach is that not every property resells quickly, and an empty property that is not being used for rental income ends up costing you money.
Another real estate strategy is to buy nice pieces of real estate when the market is in a “buyer’s market” trend and then sell when the values go way up. This, too, has the drawback of costing you money because you have to play the waiting game on market trends.
Frequently Asked Questions
What Is The BRRRR Method Meaning?
It’s an acronym for a real estate investment approach that allows you to make money every month while adding new properties to your portfolio. BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat.
Is The BRRRR Method Worth It?
It is if you’re willing to put in a lot of time, skills, energy, and you have the financial savvy to do it right.
How Do I Start The BRRRR Method?
You start with some investment capital and one property you are willing to purchase and rehab. Then, you can gradually add more properties as each previous property is ready to be refinanced with the cash-out refinance option.
Can You Apply The BRRRR Method To Commercial Real Estate?
Absolutely! You can make this work as long as the commercial real estate can be rented out to businesses or business owners. The thing with commercial properties is that you may make more money if you are charging various amounts of rent for each space within the commercial building.
However, it will take more significant startup capital and renovation capital to make this work, so make sure you have the funds or the resources if you are going to do the BRRRR Method with most commercial properties.