The BRRRR Method, short for Buy, Refurbish, Rent, Refinance, Repeat, is a unique approach to real estate investment. It centers around acquiring distressed properties, renovating them, and renting them out. What sets it apart from conventional investment strategies is its emphasis on property refurbishing and the subsequent refinancing to fund additional rental property investments. If you’re considering this strategy, understanding how the BRRRR Method works and evaluating its advantages and disadvantages is essential.
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:
1. Purchase a Distressed Property: It begins with acquiring a property in need of renovation, often available at a lower cost due to its condition.
2. Refurbish the Property: Comprehensive renovations are undertaken, addressing structural, safety, and aesthetic improvements to prepare the property for rental.
3. Rent Out the Property: Determining the rental rate and securing tenants for the property is crucial, as lenders typically require occupancy before refinancing.
4. 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.
5. 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.
Buy, Refurbish, Rent, Refinance, Repeat (BRRRR): Tips For Each Step
Executing the BRRRR Method involves a specific sequence of steps, each with its considerations:
The initial step involves acquiring a distressed property requiring renovations. Securing traditional mortgage financing for such properties can be challenging due to difficulties in property valuation and meeting loan requirements. Alternative options like home equity lines of credit (HELOCs) or hard money loans may be explored but entail higher risks.
When buying a distressed property, it’s crucial to calculate the after-repair value (ARV). ARV estimates the property’s value post-renovation by comparing it to recently sold similar homes (comparables) in terms of size, bedrooms, bathrooms, age, build type, and condition. Adhering to the 70% rule is advisable—don’t invest more than 70% of the property’s ARV. For example, for a $300,000 ARV home, the purchase price should not exceed $210,000.
During the refurbishment phase, prioritize safety and code compliance improvements. Subsequently, focus on upgrades that genuinely enhance property value, such as kitchen and bathroom renovations, enhancing curb appeal, and installing energy-efficient features. It’s essential to establish a realistic budget and timeline before commencing the project.
Before proceeding to the next step of refinancing, it’s crucial to secure tenants for your property, as lenders typically require occupancy before refinancing.
When selecting tenants, prioritize qualities like a history of timely payments, stable employment with consistent income, a positive credit report, absence of criminal or eviction records, and positive references. Gathering this information involves meeting potential tenants, having them complete applications, checking their credit reports, seeking references, and conducting background checks while ensuring compliance with housing laws.
Determining the rent should strike a balance between being fair to tenants and generating positive cash flow for you. Calculate this by deducting total homeownership expenses from the monthly rent. For instance, if the rent is $1,500, and the mortgage payment is $800, the monthly cash flow is $700, barring additional costs. Consider rental rate comparisons to set the right price.
In the BRRRR method, a cash-out refinance on your investment property enables you to acquire funds for purchasing another distressed property to renovate and rent out. To proceed, find a lender offering cash-out refinancing and meet their loan requirements.
While specific lender criteria may apply, you generally need to meet minimum credit score (typically around 620), maximum debt-to-income ratio (usually around 50% or less), and have equity in the property. Some lenders may also require a minimum ownership duration before approving a cash-out refinance. Prepare for an appraisal and potential additional expenses, such as closing costs.
The final phase of the BRRRR Method involves repeating the previous steps in the same sequence. To maintain efficiency, document your experiences and learn from any past mistakes if you intend to continue applying this strategy.
BRRRR Pros and Cons
- 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.
- 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.