The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method is a real estate investment approach that involves flipping a distressed property, renting it out, and then getting a cash-out refinance on it to fund further rental property investments.
One of the main differences between the BRRRR Method and a conventional investment property strategy is the focus on investing in distressed properties and on refinancing the purchased property to buy another one.
If you’re a real estate investor considering this type of strategy, read on to learn about how the BRRRR Method works, its pros and cons, and if it’s the right method for your financial or real estate investing goals.
What is the BRRRR method?
The BRRRR method, short for Buy, Rehab, Rent, Refinance, Repeat, is a real estate investment strategy that follows a systematic approach. Investors target properties in need of renovation, refurbish them, rent them out to cover mortgage costs, then perform a cash-out refinance to fund the next investment. However, BRRRR is not beginner-friendly; it demands experience, knowledge, and finesse.
The key to success in the BRRRR method lies in acquiring properties at discounted prices. Seasoned real estate investor Todd Baldwin emphasizes, “All of the money you make will be when you buy. Rehab, renting, refinancing, and even selling the property are all great, but the money is made when you buy. If you can get a property on terms or under market value, you are doing awesome.”
How The BRRRR Method Works
The BRRRR Method, when executed correctly, offers a sustainable way to generate passive income and continually expand your rental property portfolio. This method unfolds through a series of steps:
- Buy a property: Acquire a distressed property in need of renovation, often available at a more affordable price due to its condition.
- Refurbish the property: Invest in extensive renovations to bring the property up to code, ensuring it’s safe, structurally sound, and appealing to potential renters.
- Rent out the property: Determine the rental rate and secure tenants for the property.
- Do a cash-out refinance on the property: Utilize a cash-out refinance to access your equity by increasing your mortgage, effectively borrowing more than your current balance. The cash obtained can be allocated for various purposes, including acquiring another property.
- Use funds from the refinance to purchase another property: With the funds acquired through the cash-out refinance, repeat the process. Purchase another distressed property, renovate it, rent it out, and perform a refinance, initiating a cycle of property investment and growth.
What BRRRR stands for
This acronym lays out each step the method requires, in order: Buy, Rehab, Rent, Refinance and Repeat.
To kickstart the BRRRR Strategy, you’ll need to acquire a distressed property that necessitates refurbishments, which can pose challenges when seeking a traditional mortgage. This arises from several factors, including the requirement for property appraisals, which are often intricate for such properties. Additionally, depending on the loan type, specific property standards must be met, which distressed properties are likely to fall short of.
While conventional financing might not be a straightforward option, exploring alternatives is prudent. You could potentially consider options like a home equity line of credit (HELOC) or a hard money loan for funding, although these alternatives come with higher risk levels and typically aren’t the first choice.
When dealing with a distressed property, it’s crucial to assess the after-repair value (ARV). The ARV represents the estimated value of the property post-renovation. This assessment hinges on a comparison with similar homes (comparables) in the vicinity that have recently sold. These comparables should align in various aspects such as size, bedroom and bathroom count, age, construction type, and condition.
Adhering to the 70% rule in real estate is essential when determining your purchase offer. This rule recommends not investing more than 70% of the property’s ARV. For instance, if the ARV stands at $300,000, your acquisition cost shouldn’t exceed $210,000.
The next phase involves the rehabilitation of the acquired property. Initially, prioritize repairs that bring the property up to code and enhance safety. Subsequently, focus on upgrades that genuinely boost its value. These enhancements might include kitchen and bathroom updates, enhancing curb appeal, and incorporating energy-efficient elements like windows and appliances.
Before commencing the project, craft a realistic budget and a timeline to guide your renovations effectively.
Prior to moving on to the next step, refinancing, securing tenants is vital since most lenders require a property to have occupants before considering refinancing.
When it comes to tenant selection, specific qualities should be sought after:
- Consistent on-time payment history
- Stable employment with a steady income source
- Favorable credit report
- Absence of criminal records or eviction history
- Positive references
Gathering this information involves meeting potential tenants, having them complete an application, reviewing their credit reports, soliciting references, and conducting background checks. Naturally, all actions should be conducted with the tenant’s consent, adhering to housing regulations.
Determining the rent should strike a balance between being fair to the tenant and yielding a positive cash flow for you. This calculation involves deducting the total homeownership expenses from the monthly rent income. For example, if you set the rent at $1,500 per month while your mortgage payment stands at $800, your monthly cash flow, excluding additional costs, amounts to $700. Consulting rental rate comparisons can guide you in setting an appropriate price.
In the BRRRR strategy, you initiate a cash-out refinance on your investment property to obtain funds for the acquisition of another distressed property, primed for renovation and rental. To accomplish this, you must identify a lender offering cash-out refinance options and satisfy the loan’s eligibility criteria.
While specific requirements may differ depending on the lender, you will generally need to meet a minimum credit score threshold (typically around 620 for cash-out refinances), adhere to a maximum debt-to-income ratio (typically 50% or lower), and possess equity in the property. Moreover, there might be a mandatory ownership duration before you can secure a cash-out refinance.
It’s essential to note that an appraisal will be required, and additional expenses such as closing costs may apply to the loan.
In the final phase of the BRRRR Method, you return to repeat the preceding steps in the same sequence. If you intend to persist with this cycle, it’s advisable to maintain records of each iteration, allowing you to glean insights from past experiences and refine your approach.
Who is the BRRRR method best for?
“The BRRRR method involves inherent risks,” notes Baldwin. It’s a strategy tailored for individuals with a strong background in real estate and the ability to make precise assessments of market values, renovation expenses, and other factors. Any miscalculation in pricing or budgeting, or the inability to secure a tenant at the opportune time and rate, can lead to substantial financial setbacks.
Furthermore, a BRRRR investor should allocate a significant amount of time to the process. The property search, renovation work, and potential landlord responsibilities, especially for multiple units, demand a substantial time investment.”
Pros And Cons Of BRRRR Investing
Before Opting for the BRRRR Strategy, Consider the Following:
- Generate Passive Income: The BRRRR Method allows for the creation of passive income streams.
- Expand Your Rental Portfolio: It presents an opportunity to increase your inventory of rental properties.
- Build Equity: Equity accumulates during the property’s rehabilitation phase.
- Rehab Costs: Consider the expenses and effort involved in property rehabilitation.
- Loan Challenges: Securing a traditional mortgage might be challenging, leading to more costly or riskier loan options.
- Refinancing Uncertainty: There’s a possibility that your cash-out refinance amount may be lower than anticipated.
- Patience Required: The BRRRR Method demands patience as you wait for renovations to conclude and potentially longer for a cash-out refinance. Finding suitable tenants can also be time-consuming.
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