What Is the BRRRR Method?
The BRRRR method refers to Buy, Rehab, Rent, Refinance and Repeat. It is a popular real estate investment strategy that has gained momentum recently. It allows investors to build a portfolio of rental properties without tying up their capital. The goal is to acquire a distressed property, renovate it, and rent it out to generate income. Once the property has been stabilized and creates cash flow, the investor can refinance it to pull out their initial investment and move on to the next property.
In this article, we will expound on the details of the BRRRR method, including how it works, the benefits and risks, and tips for successfully implementing the strategy. Regardless of your experience, understanding the BRRRR method can guide you in building your wealth through real estate.
How the BRRRR Method Works
When done correctly, the BRRRR Method provides passive income and a revolving method of buying and owning rental properties. The following steps are involved in this method:
- Purchase a property: You should buy a distressed property that requires some work to get up to code and is ready for renting. This home will be more affordable to purchase due to its condition.
- Rehabilitate the property: Due to the distressed condition of the property, extensive repairs may be needed. During this step, you'll improve the property's safety, aesthetics, and structure and prepare it for renting.
- Rent out your property: Determine the rental price and look for tenants.
- Refinance the property with cash-out: Convert your equity into cash with a cash-out refinance. You can use the money for anything, including purchasing another property. Taking out a bigger mortgage and borrowing more money than you owe will allow you to access your equity.
- Use funds from refinance to purchase another property: In this final step, you must go through the entire process again. By utilising the funds from your cash-out refinance, you’ll purchase another distressed property and rehab it before renting and refinancing it.
Buying a property is the first step to BRRRR. But not just any property will work, so take your time with a contract. You must be confident that:
- You can afford the property, and it is a good value.
- Rental income can generate strong cash flows. You will have significant equity to tap once repairs are complete.
Calculating the home's after-repair value (ARV) before making an offer is part of the process, along with estimating the costs of those repairs. The total repair cost plus the purchase price (including closing costs) should be 70% of the ARV.
You must be honest about what you can do yourself, what are the things you will need outside help for, and what must be done to act in accordance with local building regulations. Materials and labor costs can add up and should go into the estimate.
Make your offer without any passion. Offer what you can afford, and don’t exceed your budget to make something happen just because you like the property. It isn’t your home. Since it is an investment property , accounting must take precedence.
Rehab is the first “R” in the BRRRR. Even though HGTV makes it look easy, rehabbing a house is hard work. You’ll need a good eye for detail, a talented crew, and a good understanding of what changes will increase your property value versus what will only make it look nice.
You will also need to consider the mechanical items on the property since you’re not just rehabbing it. Renting out this unit in the future means you are also responsible for future repairs. If you ignore the 15-year-old furnace so you can install shiplap throughout, it will come back to bite you.
Other improvements that can improve rental and property values include:
- Hard flooring.
- Moderate upgrades to kitchens and bathrooms.
- Installing energy-efficient items like windows and doors (including the garage door)
Curb appeal is also a great place to invest, especially when dressing up the front of the home. But above all else, keep your budget in mind.
The second “R” in the BRRRR method or step three is to rent out your now-completed rehabbed property to someone who can take care of it. It means finding a great tenant who will not let you down. A solid rental history for your property will contribute to your future refinance, which is why you should look for a permanent renter.
This person probably has had the same job or worked in the same field for quite some time. They haven’t moved around much by choice (but work relocation does happen). Check their credit report to see how well they pay their bills and if they are already overleveraged. There is no significant criminal history (although some incidents can last for years).
Similar to how banks want to see that you will come through with each mortgage payment, you’ll need to ensure that your renter has a solid financial profile. A lease is also a must-have since you will need it for the refinancing portion of this process.
You can work with a property manager to handle the day-to-day responsibilities of your rental property, but make sure you’ve budgeted that expense into the rent you charge.
Step four, or the third “R” in BRRRR, is “refinance.” After you complete your project and have a renter in place, you will talk to the bank about recapturing as much equity as possible. In turn, the bank will require an updated appraisal, a copy of your tenant’s lease, and perhaps more information about your finances. They might also request an updated credit report.
Sometimes, you may have to be patient and allow your mortgage to “season” before you can refinance it. Typically, you will have to hold the same mortgage and make on-time payments for approximately six months, but it will vary depending on the loan product you used to secure the property and what kind of loan it is.
It is up to you how to refinance that equity, whether you wholly refinance and take out a new mortgage or only use a second mortgage to tap what’s available. It might be a great idea to consult an accountant about how to proceed for the best long-term outcomes.
Before choosing your next property, take the time to analyze the project you just completed and determine what you did well and what you could have done better. If you did the rest correctly, the last step is a piece of cake: repeat. You return to the “B” in BRRRR and work your way down.
These simple considerations will help you tighten up your process and improve efficiency. While every rehabbed property is different, your steps to bring it back to life are the same. Always put systems first, and make repairs with an eye on rental and property value increases.
BRRRR Method Pros and Cons
Everything has its pros and cons, even the BRRRR method. Here are a few to consider.
- With a market where home values continue to climb, you can quickly accumulate equity and cash.
- A long-term renter will keep the mortgage covered, the home in good shape, and the utilities paid.
- You will know your rental properties like the back of your hand.
- If market conditions deteriorate, it may be impossible to “repeat,” The cycle will stop until the market recovers.
- Unexpected repairs or code compliance issues can wipe out a budget in no time, forcing you to sell before you finish the job.
- Choosing the wrong renters may result in added expenses simply from the wear and tear caused by people moving in and out too often, not to mention actual damage.
The Bottom Line
Your real estate portfolio can be built over time using the BRRRR Method, which produces passive income. However, before you can refinance with cash-out, you must rehab the property, find tenants, and allow it to season. You should weigh these pros and cons before making your next investment decision - a traditional approach may be better.
Using the BRRRR method can help you build capital for a rental portfolio in a relatively short time, but it is not a get-rich-quick scheme. Choosing a property and deciding what it will become will require a lot of thought and energy.
However, if you are good at planning and have experience in home improvement -- or even professional construction -- your very first BRRRR can open up a world of possibilities for you. Remember to stick to the budget and find reliable tenants to keep the cycle going. A banker will only refinance a rental property that can pay for itself.
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