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If you're investing in real estate or plan to start a real estate investing business, you'll eventually hear of BRRR or BRRRR investing. This method of investing in rental property has grown in popularity over the past decade and focuses on finding a distressed property to buy, rehab, rent, refinance, then repeat.
The BRRRR method of real estate investing has proven to be a great way to build cash flow and financial independence through rental income, but it isn't right for everyone. Learn how to invest with the BRRRR method, the pros and cons of this method of real estate investing, and how much passive income you can make from the BRRRR method.
What is the buy, rehab, rent, refinance, repeat (BRRRR) strategy in real estate?
The BRRRR method in real estate investing stands for buy, rehab, rent, refinance, and repeat. This investment strategy is ideal for investors who want to grow a large rental property portfolio quickly and is done in the following manner:
- Buy: purchase an undervalued or distressed property with alternative financing such as hard money.
- Rehab: Make improvements to the property to add value and get it rent ready.
- Rent: Rent the property out to market standards.
- Refinance: Use a cash-out refinance to pay off your original hard money loan.
- Repeat: Use profit left over from the cash-out refinance as a new down payment for your next investment property.
What are the benefits of BRRRR real estate investments?
BRRRR investing allows you to grow a portfolio without having to tie up large sums of cash for a long period of time. Traditionally, if you wanted to own five rental properties, you would have needed a down payment for all five properties with a long-term mortgage on each. With this method, you can still grow a portfolio of five rental properties, but you are expelling far less cash than with the traditional investing method.
Since this strategy utilizes a cash-out refinance after the property has been improved and rented, you are able to pull out your money to reinvest in another property with the benefits of a long-term mortgage that has little to none of your money invested into it. Additionally, since you own rental property, you now benefit from several tax deductions.
If done properly, the BRRRR method has the potential to increase your net worth, create passive income through rental income, and ultimately create financial independence by allowing you to own rental real estate in a unique and continual manner.
What are the drawbacks of BRRRR real estate investments?
No investing method is foolproof. BRRRR real estate investments do come with drawbacks, probably the greatest of which is that your investment is relying on a future value. If the property appraisal during the refinance process comes back lower than expected, you may not be able to refinance for the full desired amount.
Another potential risk is the renovations taking longer than expected. If you've ever rehabbed a home, you know it's fairly common to have additional expenses from unexpected but necessary repairs or delayed timelines.
If you borrowed money from a hard money lender, you're paying high fees and interest rates. The longer your hard money loan is in place, the less money you make. Getting in and out of the deal as quickly as possible is a key component to the success of this investment method.
|Benefits of the BRRRR Investing Strategy||Drawbacks of the BRRRR Investing Strategy|
• Growing a large rental portfolio with less money invested.
• Potentially higher returns because less money is invested in each deal.
• The tax advantages of owning rental real estate.
• The risk of being unable to refinance at the desired amount.
• The risk of a longer-than-expected timeline to renovate.
• Losing some cash flow by refinancing with a larger loan.
How do you begin with the BRRRR investment strategy?
If you're interested in starting to grow a rental portfolio using the BRRRR investment strategy, here's how to get started.
The first thing you'll need to do is identify a worthwhile investment property to buy. For this method to be successful, you need to find a property that is undervalued or that's value can be significantly increased with renovations. Buy at a discount -- a steep discount. There are a number of ways to buy properties off-market or within the multiple listing services (MLS).
It is suggested you stick to the after repair value (ARV) formula used when flipping homes to ensure the property will have plenty of room for added equity after repair. Always run a thorough rental analysis to ensure the property makes sense as a long-term rental. The BRRRR model is for rental properties, so the ARV formula alone will not suffice.
Once you find the right investment opportunity, you'll need to buy it. That means securing financing. Since the property needs repairs, it's unlikely it will qualify for a traditional mortgage. Most investors use private financing or hard money loans to fund their BRRRR investments. This is a more expensive option for financing but has fewer underwriting criteria than a bank or traditional lender would require.
A hard money loan will also include rehab costs. It's best to have around 20% of the total loan saved for a down payment, and don't forget to budget for closing costs. If you find a great deal, you may not need to put down that much, but it's a good target to have when getting started.
The next step is to rehab the property. Try to complete the rehab as quickly as possible. This keeps costs down and allows you to start earning cash flow from the property sooner. Remember that this property is being held for rental income and may not need all the bells and whistles a full-blown rehab property would require. Make the home safe, nice, and livable.
Once the renovation is complete, you can rent the property. Being a landlord isn't always a cakewalk. Before deciding to become a landlord, do your due diligence on what owning rental property entails and how to be a good landlord.
If you've priced your rental property accurately for the market and renovated it nicely, it should rent fairly quickly. Make sure you advertise in the most effective way and run a thorough tenant screening before renting the unit.
After the property is stabilized with a tenant, and you have several months of rental history, you can start the process of refinancing. Refinancing can be the most challenging part of the BRRRR method, as certain lenders will have specific requirements for the refinance process.
Try to find a lender to work with once a tenant is in place, and find out their exact requirements. This will make the actual refinance process much faster and allow you to refinance at the soonest possible point.
Keep in mind that most banks will only loan a portion of the appraised amount in a cash-out refinance, which is typically 75% or less of the appraised value. Even if you know the property is worth more, they will only lend up to a specified amount, which will vary based on the asset as well as your experience and credit score, among other factors.
It's always a good idea to have a backup plan in case the refinance doesn't work out as intended. A recession limits lending and may make it challenging to refinance, or your appraisal could come back below what you need.
Ideally, the BRRRR investment will go as planned and you will have bought, rehabbed, rented, and refinanced the property without a hitch. If so, then it's time to roll your initial investment into a new investment property. If you did a really great job, you should have additional profit left over that can go into your pocket or be reinvested into your real estate investing business.
How much you can make from the BRRRR strategy?
How much money you make using the BRRRR strategy depends on how good you are at finding the right properties to buy at the right prices. As with any investment strategy, returns, profits, and results will vary dramatically. However, the better you are at finding quality leads, analyzing investments, and managing properties and rehabs, the better your results will be.
There are a lot of moving parts to this investment strategy and a lot of areas for things to go wrong. Doing your due diligence on the individual investment strategies utilized with the BRRRR investing method is imperative before trying to buy a property with the BRRRR method.
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