You’ve probably heard of the BRRRR method in real estate, but let’s break it down for you. BRRRR stands for Buy, Renovate, Rent, Refinance, and Repeat. Some investors call it the BRRR method, omitting “rent” since it’s self-explanatory. But let’s not get caught up in semantics.
The BRRRR strategy offers a unique advantage: it allows you to recover your initial investment within a few months. This means you can use that money to invest in another property, rapidly growing your rental portfolio and passive income with minimal cash outlay. Now, let’s dive into the essential details about the BRRRR real estate investment strategy to get you started on building your portfolio.
What Is the BRRRR Method?
Let’s simplify the BRRRR method for real estate investment without tying up your own money in the property after refinancing.
Step 1: Buy
Begin by acquiring a property that requires substantial improvements to increase its value significantly. Many BRRRR investors opt for purchase-renovation loans, allowing them to borrow 100% of the renovation costs. Alternatively, explore financing options like a HELOC against a rental property or unsecured business lines of credit to use the BRRRR method without investing your own money upfront.
Step 2: Renovate
The renovation can range from simple cosmetic changes to a full-scale gut and rehab. Avoid projects that exceed your capabilities, but ensure renovations significantly increase the property’s value to borrow the entire amount invested.
Step 3: Rent
Once the renovation is complete, move on to tenant screening and promptly leasing the property. Begin advertising the unit for rent even before every detail of the renovation is finalized.
Step 4: Refinance
Moving on to Step 4: Refinance the property by replacing the purchase-rehab loan with a long-term mortgage. The aim is to recoup your initial investment and renovation expenses, especially if you’ve significantly boosted the property’s value through extensive renovations.
Step 5: Rinse & Repeat
Recycle the same down payment to gradually build a portfolio of income-generating rental properties.
How Does Buy Refurbish Refinance Work?
A simplified guide to the BRR strategy:
- Find a Property Needing Updates: Locate a habitable but outdated property that requires modernization.
- Crunch the Numbers: Research property returns, including estimating refurbishment costs.
- Purchase the Property: Acquiring the property involves a detailed process.
- Refurbish the Property: Focus on interior updates and cost-effective choices.
BRRRR Method: Pros and Cons
As with any investment strategy, the BRRRR method comes with its set of advantages and disadvantages.
- Passive Income: Generate a steady stream of passive income.
- Equity Growth and Portfolio Expansion: Increase your equity and grow your rental portfolio.
- Scalability: This method can be repeated indefinitely, accelerating your portfolio growth.
- Significant Risk: Relies on calculated estimations.
- Time-Consuming: A time-intensive endeavor that involves substantial effort and commitment.
Risks to the BRRRR Strategy:
- Renovation Timelines
- Rehabilitation Management
- Property Appraisal
- Rental Duration
Investing in real estate through the BRRRR method can be a rewarding journey, but it’s essential to understand the risks and rewards that come with it.