If you are in real estate or have considered buying, renting, selling real estate, then you may have heard of the BRRRR method. The investment strategy is an acronym that stands for Buy. Rehab. Rent. Refinance. Repeat. We will break down each part of the cycle and discuss how investors have made maximum profits using the BRRRR strategy.
One of the many reasons investors prefer BRRRR is that it is a perfect cross between rental property investing and house flipping. It takes the best benefits from each investment strategy and reduces the risk for both.
In order to invest in fixer-upper rental properties, you must look for undervalued properties that need repairs and updates. Of course, you must do plenty of research before purchasing distressed properties. Once you find the property that you are interested in, be sure to calculate its after-repair value (ARV). This value will help determine the estimated value of the property after rehab and repair; this amount will be based on comparables that are similar in size and have recently been sold in the area.
When purchasing the property, you most likely will need to use a hard money lender or a private lender to fund the initial purchase. Be sure to follow the 70% rule, which says to pay no more than 70% of the property’s ARV.
During the rehab phase, repairs and improvements will be made that simply bring the home up to code. Once basic repairs have been completed, investors should begin to look at the improvements that can add value to the house without going over budget. Again, it’s critical to look at comparables in the area – if all of the homes have updated kitchens and bathrooms, it might be a good idea to upgrade those same areas in this property. Keep in mind that rehabbing a property is different than renovating a property. With the BRRRR method, this step is all about getting the house safe to live in to rent it out.
Once your property is rent-ready, it’s time to figure out how much to charge. Look at rental rate comparables in the area and charge enough to where you can cover your costs and still have a monthly cash flow. The next and possibly the most critical step is finding a trustworthy and reliable tenant. The ideal tenant should have a rental history of on-time payments and zero evictions. Another rule of thumb to follow when choosing a tenant is to make sure that the applicant has a steady income that is three times the amount of rent owed. Ask for references and call each one.
Once you have rented out the property for at least 6 months, you should start looking to refinance the property. You will need to do a cash-out refinance so you can pay off your original hard-money or private loan. Be sure to do your research because you will need to qualify – good credit, equity in the home, etc. – for this type of loan and find a lender who offers cash-out refinance options. Each lender might have different requirements or qualifications, so it’s critical that you do your research.
Remember that you will need to include costs associated with appraisals, closing costs, or any additional fees that may come from the refinance of your property.
The BRRRR method is considered an investment cycle because this is the last step before you go back and repeat all of the steps. The goal is to have profit left over from the cash-out refinance and use that as a downpayment or partial payment for your next property.
There are many benefits of the BRRRR method, but as with all investing, it still comes with its own set of drawbacks. Most investors who are experienced with this investment strategy prefer this method because BRRRR properties help to build equity, monthly cash flow and allow investors to buy real estate without using a large sum of their own money. The most significant risks come from poor planning and lack of research when it comes to the project’s timeline. Perhaps rehabbing the property takes longer than expected, or maybe you are waiting longer than you expected before the property reaches the value you hoped to sell at.
The bottom line is that the BRRRR method can help you to build an impressive portfolio and passive income if appropriately executed. This is not a quick way to make money, so do your research and due diligence before you start investing.