For decades, purchasing property has been an effective way to build wealth. To this day, real estate still remains one of the most viable ways to generate continuous income.
Here are the ins and outs of the BRRRR method. Additionally, we’ll help you determine whether this strategy is right for you.
- What is the BRRRR Method Of Real Estate Investing?
- What does BRRRR stand for?
- Who can use the BRRRR method?
- How does the BRRRR method work?
- Does the BRRRR strategy work?
- How to BUY using the BRRRR method
- How to REHAB using the BRRRR method
- How to RENT using the BRRRR method
- How to REFINANCE using the BRRRR method
- How to REPEAT using the BRRRR method
- Pros and cons of BRRRR
- Alternatives to BRRRR
- How much can I make from BRRRR?
- In conclusion
What is the BRRRR Method Of Real Estate Investing?
The BRRRR method is a popular real estate investing strategy. It can be used to help you reach your goals whether you’re a seasoned real estate investor or are just starting out.
What does BRRRR stand for?
BRRRR is an acronym for Buy, Rehab, Rent, Refinance, and Repeat.
Who can use the BRRRR method?
Anyone who qualifies for a mortgage can partake in the buy, rehab, rent, refinance, and repeat real estate investing strategy. Alternatively, if you have enough cash to secure your first property, that works as well as it gets the ball rolling on the remaining steps of the buy, rehab, rent, refinance, and repeat strategy.
How does the BRRRR method work?
Here’s a quick summary of how the BRRRR method works. Later, we’ll get into greater detail on how to best execute each step.
- Buy the property: The first step is to purchase an undervalued or distressed property. It needs to be undervalued or distressed so that you can create value by bringing it up to standard via the next step. This is the most important step, make sure to do plenty of research and be sure that the value has enough room for you to spend fixing it and still make a profit.
- Rehab the property: Purchasing a distressed property means it needs work before you can rent it out. You’ll have to spend money on the property’s safety, functional, and aesthetic improvements to make it renter-friendly. If you’re a handyman or woman, you could save some money by doing things yourself, but at the cost of your own time.
- Rent out the property: This step involves putting the property on the market to attract renters. This can be done through multiple avenues including Zillow, Redfin, and Craigslist.
- Refinance the property: A cash-out refinance involves replacing an old mortgage with a new one. This allows homeowners immediate access to capital, which you can use for anything. In this case, you’ll pay off your original loan with part of that money.
- Repeat the process by using the rest of the refi money from the cash-out to purchase another property: This step involves repeating all the steps mentioned above. Use the leftover money from your cash-out refinance to buy another undervalued or distressed property. Then renovate it, and rent it out again.
Does the BRRRR strategy work?
The BRRRR strategy differs from traditional property investing strategies because it focuses on distressed properties. The method calls for refinancing a currently owned property in order to finance the distressed property purchase and rehab.
The BRRRR strategy is ideal for real estate investors who desire to grow their rental portfolio quickly, and it’s been tested time and time again.
Simply put, it works.
And it works extremely effectively if executed properly because it provides passive income as well as a way to fund the continual purchasing of rental property. The keyword being executed properly. When so much money is on the line, it is very important that you take the time to make sure that everything has been researched as much as possible.
How to BUY using the BRRRR method
The first step in the BRRRR strategy is to purchase a distressed property because that gives you the best chance at a great discount. Buying on multiple service listings or off-market is a good way to do this. Be sure to ask your preferred real estate agent if they have any pocket listings they can let you in on.
It’s important to keep in mind that it may be challenging to get a traditional loan when purchasing a distressed property. This is because most lenders require an appraisal of the property prior to giving out a loan.
It may be difficult to assess the value of a distressed property.
Additionally, the property may need to pass certain guidelines in order to qualify for the loan and it’s highly likely that a distressed property won’t meet those requirements.
It’s best to speak to a lender beforehand to gauge what options you have available. Hard money loans can be used to finance your property, but it’s worth noting that this option is quite high risk.
Should you choose a hard money loan, make sure you have at least 20% of the loan’s total value saved for a deposit. Closing costs should also be factored into your budget, even though you may not have to pay that much if you find a well-priced property.
Calculating a distressed property’s potential value after it’s been renovated is important to determine whether or not the property will have equity after it’s been repaired.
The after repair value (ARV) formula is ideal for this. It involves comparing the average sales prices of recently renovated homes in the same area.
You should only compare homes that are similar in condition, build, age, size, bedrooms, etc. You can easily do this using filters on Zillow, Redfin, and Trulia. It’s also important to never invest more than 70% of the property’s ARV.
A rental analysis should be done to make sure that the property will make an ideal long-term rental.
How to REHAB using the BRRRR method
Rehabbing a home starts with making improvements that make the home safe to live in. Then, you can make other types of improvements to increase curb appeal.
Having a budget and a timeline for your home improvement project is key. You don’t want to overspend or take too long making the required changes.
Although it may be tempting to try and directly hire out subcontractors to save some money, we advise against it.
You should instead hire a general contractor to save you a bunch of headaches. This oftentimes has the potential to actually save you even more money overall. Especially if it’s on your first property using the BRRRR method.
How to RENT using the BRRRR method
After you’ve completed your renovations, the next step is to search for the best tenant to occupy your property.
The ideal tenant has a record of paying their rent on time, a steady income, good credit, and positive references. They should have no history of eviction or criminal behavior.
You can search for a tenant independently or enlist an agent to help you. If you’re searching independently, you’ll have to set aside a budget for advertising and time for walking potential tenants through the home.
Screening tenants thoroughly before accepting their applications is also key.
It’s your responsibility to learn how to be a good landlord. That includes the ability to price your property fairly according to its market value.
You can determine your monthly rent by subtracting your total expenses to own the home (mortgage, utilities and other costs), and the total amount of rent you want to charge. This will give you an idea of what your cash flow should be and help you find the perfect price.
Don’t forget to set aside some cash for repairs that may occur too.
How to REFINANCE using the BRRRR method
Once you’ve found the ideal tenant and have a few months of rental payments gone smoothly, you’re able to start the process of refinancing your property.
There are many different types of refinancing, but you’ll want a cash-out refi specifically so that you can purchase another distressed or undervalued property.
Having a tenant in your current property makes it easier to apply for refinancing and speeds up the application process.
Your most important step here is to find a lender that offers cash-out refinancing. Keep in mind that every lender has a specific process for you to meet the requirements of the loan.
Most need a minimum credit score of 620. Lenders also typically require you to have owned the home for some time and they’re usually willing to loan only 75% of the property’s appraised value or less.
You need to budget for the appraisal and additional fees like closing costs and a deposit to receive the loan.
You should also have an alternative plan for financing should your refinancing efforts be unsuccessful. This is because refinancing is affected by the state of the property market and economy, which limits the amount you can receive from a lender.
How to REPEAT using the BRRRR method
You’re almost done with the BRRRR method! Now, the last step is to repeat all these steps with another property. The best thing about it is, you’ve already gone through it at least once. It only gets easier.
The better the deals you find, the more likely you’ll have profit remaining that you can keep or reinvest into your real estate venture.
It’s best to take down notes as you go through the BRRRR method so that you can keep a record of what steps you’ve taken. This will also make it easy to learn from your past mistakes.
Pros and cons of BRRRR: The pros
- The BRRRR method allows you to earn passive income.
- It allows you to build a rental portfolio without requiring huge sums of capital upfront. This means less money is required with this investing method than in traditional real estate investments.
- The cash-out refi nature of the BRRRR method allows you to reinvest your money into another property. That means less cash coming out of your pocket.
- You can benefit from several tax deductions.
- You’ll increase your net worth exponentially down the road.
- You’ll be building up equity relatively quickly on your properties.
Pros and cons of BRRRR: The cons
- There is a good amount of money, time, and effort required to rehab properties.
- You may not be able to receive a traditional mortgage. That means you’ll need to apply for a more expensive and riskier loan.
- There’s the potential for you to qualify for less than you had anticipated. If that’s the case, you won’t be able to refinance the property for the full amount.
- Reaping the benefits of the BRRRR method requires a lot of patience.
- It takes time to wait for renovations to be completed, to find a tenant, and to apply for refinancing.
- Being successful at this investment method doesn’t happen overnight. But when you get good at it, the rewards are tremendous.
Alternatives to BRRRR
There are alternatives to the BRRRR method if you feel it isn’t the best investment method. You can opt for the traditional real estate investing strategy. That simply involves buying a home and renting it out for rental income.
Or, you can opt for crowdfunded real estate investing. This strategy requires you to receive funding from a variety of investors that pool funds to buy property. It’s a great way to make investments and requires way less money and work than other strategies.
If you want to invest in real estate, check out Doorvest, HoneyBricks and Divvy Homes.
How much can I make from BRRRR?
The return on investment made from using the BRRRR method is variable. It generally ranges between $10,000 to $100,000+ depending on how experienced you are and where you’re located.
It also depends on your ability to find properties at great prices. Being able to do this while managing properties, finding good tenants, renovating properties, and doing market research is key.
If you chose a property that doesn’t rent for a long time, it would really affect your overall income for your portfolio.
The BRRRR method is a great real estate investment strategy. It simply involves:
- And finally, the fun part: Rinse and Repeat
Each time you do it, you get better and better at it. And so does your portfolio. If well-executed, it’s an extremely effective way to build wealth and generate income.
We hope we’ve helped you weigh the positives and negatives of this real estate investment strategy, along with giving you a clearer picture of whether or not this method is for you.
Have you tried the BRRRR method before? If so, would you do it again? Are you still doing it? Let us know, we’d love to hear your thoughts!