One popular investment strategy is known as the BRRRR method. This is a strategy that some investors use to grow their returns on real estate more quickly than if they were using their own funds and simply paying all cash for everything.
BRRRR, also known as the Buy, Rehab, Rent, Refinance, and Repeat method is a strategy that allows investors to use leverage to quickly grow their investment portfolios. But just like most things, BRRRR is a strategy that has many proponents and some people who are against it. Before you can decide if the method is right for you, you must first understand what it is and how it works.
In this article, we’ll take a look at the different aspects that are involved with this method, and highlight how we can get started with it.
What Is the BRRRR Method?
One of the most important aspects to consider when it comes to using the BRRRR method is that it focuses on older houses or properties that need some work. If you are looking for a unique investment strategy that involves rolling up your sleeves and getting to work, then BRRRR might be for you. Likewise, if you’d like to start growing your portfolio of rental properties, maximizing both cash flow and appreciation using leverage that can be obtained through financing, then you’ll want to consider this method.
Perhaps the biggest questions are “what is it” and “how does it work?” The method, in short, involves finding rundown properties that are discounted. They usually require a lot of repairs and upgrades in order to make them functional again. Once rehabbed, the property is rented out and finally, refinanced, allowing the investor to roll the proceeds into the next investment.
How Much Money Do You Need for a BRRRR?
One of the great things about a BRRRR is that you don’t need a great deal of money to start. However, you will need some reserves. The better the deal, the less cash you’ll need, but you’ll want to have reserves on hand as not every lender will do 100% financing. Some experts recommend having between $5,000 and $10,000 cash reserves for expenses.
Just make sure you have enough set aside for potential setbacks, and always try to sort your financing out ahead of time. In most cases, you’ll want to get prequalified first before you even start looking at potential properties.
Now, let’s take a closer look at some of the details that are involved with a BRRRR.
- Buy
The first step in the process is to find a property worth buying. When it comes to purchasing using the BRRRR method, the property that you’re looking for will be different than when you are looking for turnkey rental properties. You’ll want to find a property that’s discounted, one that you can add value to in some way. In most cases, this means you’ll want to buy a fixer-upper or a property that’s in need of a few repairs. You’ll want to consider the local housing market conditions carefully as well. Ideally, you’ll want to find a market where property values are increasing. Run the numbers ahead of time to make sure you’ll come out ahead.
Keep in mind as well, that you may not be able to obtain traditional financing on the property since you’ll be looking for a distressed property, and many lenders will not loan for this type of property. For this reason, you’re doing to want to shop around, talking to different lenders to see what your options are. In some cases, you may want to consider using a home equity line of credit (HELOC) if you own your own home or consider a hard money loan to finance the property. Of course, these methods carry their own levels of risk, so you’ll want to make sure you do your due diligence first.
How much should you invest? Consider the 70% rule. In most cases, you’ll want to avoid paying more than 70% of the property’s after repairs value (ARV). This means if the home’s ARV is $200,000, you shouldn’t pay more than $140,000.
Important Note: Keep in mind that when looking for financing to purchase your first property, you’ll want to find a lender that will allow a cash-out refinance so that you can use the funds for your next investment.
You may also want to consider going through a small, local bank that uses just one appraisal company. If you take this approach, you can go to them before you start the rehab, explain your strategy to them, and see what upgrades they recommend you do for the highest ARV. With this approach, request that the same appraisal agent comes out later on for the final appraisal. Some investors try to have the appraisal agent come out once repairs are completed but before the property’s rented out, just to make sure there’s nothing else they’d recommend doing for the best appraisal value. The goal in this is to hopefully get an appraisal that’s close to what was agreed upon before the rehab started.
- Rehab
Next comes the rehabbing. This step is pretty similar to fix-and-flip properties. The only difference is you won’t be selling when you are finished. However, the process is similar. When you are doing repairs, it’s important to consider what repairs will enhance the value of your property. While there are some repairs and upgrades that will be non-negotiable, make sure you perform things that will add value to the place. In most cases, you’ll want to limit high-end features unless it’s in a neighborhood where those features are standard, and you’re bringing the property to the same standard as other properties in the neighborhood. Keep in mind that time is of the essence when it comes to renovating. In most cases, you’ll want to wrap things up quickly so that you can start generating cash flow as quickly as possible.
- Rent
Once the property’s in good shape, you can start the process of renting it out. It’s important not to rush this step. Take your time finding a good tenant. The process of renting is an especially important part of the BRRRR method as most lenders won’t refinance unless you have tenants. Make sure you implement an airtight tenant screening process and run each applicant through it. You should also make sure that you have done your research on what your obligations are as a landlord and look into landlord-tenant laws in your area as well.
Wondering what to look for when screening tenants? Read: Things to Look for When Screening Tenants to help shed some light on the situation.
- Refinance
Once you have tenants and a few months of stable rental income established, you can begin the process of refinancing your property. Since you have put work into your property, the value of your home should now be higher than your original purchase price. Ideally, it should have appreciated some anyway if the market conditions are right. At this stage, you’ll want to have a new appraisal done so these repairs will be reflected in it. Next, you’ll want to have a cash-out refinance, which will allow you to access the equity in the property so that you can use it for the next one.
- Repeat
Once you have the refinancing process completed and access to funds, you should be able to use those funds as a down payment on the next property, and the process starts again.
Is BRRRR Method Risky?
Like every investment method, there are pros and cons involved with the BRRRR method as well. Here are some of the unique challenges and benefits that come along with investing using the BRRRR method.
Benefits of Using the BRRRR Method
- Great Returns
Perhaps one of the biggest benefits there are from investing with the BRRRR method is the ROI you receive. If done correctly, the BRRRR method can yield some pretty decent returns. This is assuming that you buy a property at a discounted rate, make wise rehab choices that boost the property’s value, and buy in a good market. When done right, in the right housing market, you can expect decent returns.
- Faster Equity Growth
Another benefit of the BRRRR investing method is the equity you will build during the rehab. Since you are purchasing a property that needs a lot of work, you’ll have the chance to increase the home’s equity quickly, especially if you buy in a market that’s on the rise.
- Grow Your Portfolio
Investing with the BRRRR method is a great way to grow your portfolio. Assuming the process goes down without a hitch, you can grow your portfolio faster this way as you’ll be using the lender’s money, coupled with the profit that you make on each investment to scale.
Risks of the BRRRR Method
- Costly Repairs
It’s always possible that there will be unanticipated repairs that need to be done. If your home inspection wasn’t accurate or the costs come in higher than anticipated, you could face the prospect of lost profit. Careful budgeting and a home inspection can help with this. Likewise, having a good contractor, ideally, someone who can assess potential properties with you when you’re first getting started, is invaluable as well.
- Long Waiting Periods
When it comes to working the BRRRR method for investments, there can be a lot of time spent waiting. Waiting for the right house, waiting for the sale to complete, waiting for the repairs to be done, and waiting for it to rent. While the process can potentially grow your portfolio quickly, the process itself can involve a lot of waiting as well, so you’ll want to be prepared to act quickly and then wait.
- Bad Appraisals
It’s also important to consider the risk of a bad appraisal. Your whole investment is riding on a good appraisal since you need one in order to do a cash-out refinance successfully. One that comes in low could leave you unable to pull any money out and put you in a tight spot. To help combat this, make sure you run the numbers before purchasing the property in question. It’s also worth trying to work with the appraisal company from the start to increase your chances of getting a good final appraisal.
- A Dip in Housing Prices
Finally, there’s always the risk of an economic downturn or a dip in housing prices, which could also make it difficult to do a cash-out refinance.
Utilizing the BRRRR Method for Rental Properties
The BRRRR method can be a great way to buy rental properties, as long as you buy excellent investments that will produce a good amount of cash flow. However, it’s not a silver bullet or a guarantee of success. You’ll want to be prepared and make sure you conduct your due diligence on lenders as well as contractors from the start. You’ll need to be clear on what you’re doing and have a plan in place for repairs, along with quotes from contractors and a budget in case things come in more expensive.
Finally, keep in mind that things don’t always go 100% according to plan. You’ll need a backup plan just in case the market goes south or your final appraisal doesn’t come back high enough. Still, at the end of the day, BRRRR has helped many investors to grow their wealth exponentially, and when done carefully, it can help you as well.
Here are some things that you can do to increase your chance of success with the BRRRR strategy.
- Find the Right Property
Finding the right property for the right price is crucial. Make sure the property you are purchasing is in a decent neighborhood and has all the nearby amenities that will attract the tenants you want. You should also make sure that the property has decent bones and that you’ll be able to make the necessary repairs and upgrades that will bring the property into decent, rentable condition.
- Do Your Homework
As with any investment, it’s crucial to do your homework and run the numbers, and then run them again just to be sure. While you often need to move quickly to purchase a discounted property, make sure you don’t rush into it simply because you don’t want to miss out. It is better to lose out on a property because you were doing your homework than to get into a property too fast and find out it wasn’t financially sound.
- Hire a Property Manager
Finally, once you have started the process of renting, you’ll want to consider hiring a property manager. Not only will they save you time in the long run, but they’ll be able to help you maximize your returns as well. Since you won’t have to spend all of your free time overseeing your rental, you’ll be able to focus your attention and energy on finding and rehabbing properties instead.
Could a property manager benefit you? Be sure to check out: Do You Need a Property Manager?
The Rehab Process
When it comes to renovating a BRRRR to increase the ARV, here are a few things you’ll want to keep in mind.
- Consider Adding a Bedroom
Adding additional bedrooms to your property may help to boost your property’s value. Consider how much this would cost and whether it’s suitable for your property.
- The Roof
Roofs are costly, but the roof is something you won’t want to skip. Leaky roofs can’t be neglected as they will lead to other extensive damage and more costly repairs down the road. If you are purchasing a property with a roof that is in bad shape, then be sure to budget this in.
- Bathrooms/Kitchens
When it comes to upgrading a property, bathrooms and kitchens are usually the most expensive rooms to renovate. Be sure to factor these costs into your budget.
- Landscaping
Finally, consider landscaping the outside as well. Make sure the landscaping you choose is low maintenance but attractive. Choose plants native to the area, or grow well there, ones requiring minimal care and watering.
When it comes to investing, there are many different methods out there. While some investors prefer the stability and predictability of buying properties outright with cash, others appreciate the chance to grow their portfolio and returns more quickly with methods such as BRRRR. If you’ve done your research on it and would like the chance to grow your portfolio faster then it could be a viable option. At the end of the day, just make sure you plan carefully, and have some funds set aside for expenses and to weather any challenges that may arise along the way.
Looking to get started with rental property? Claim your free guide How to Assess and Survey a Potential Property - Your Guide to Walkthroughs.
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