If your goal is to have a long-term real estate investment and you are ready to double or triple the speed at which you grow your rental portfolio, the BRRRR is the method for you.
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Table of Contents
- What Exactly is the BRRRR Strategy of Real Estate Investment
- Understanding the BRRRR Method: How it Works
- Your Step by Step BRRRR Strategy
- An Example of the BRRRR Method
- What Kinds of Properties Are Perfect for the BRRRR method?
- What Are the Pros and Cons of buying and holding with BRRRR
- Factors to Consider Before BRRRR-ing
- How should you pay for your BRRRR Property?
- Refinancing your BRRRR Property
- Beyond the BRRRR Method
- Key Takeaways and Summary
The BRRRR method of investing in real estate is fun, profitable, and a long-term method of building a rental portfolio quickly. In this article we explain what BRRRR is as well as how to implement it into your business today. From buying to rehabbing, renting, refinancing, and repeating, you can build equity which you can then leverage from the property’s after-repair value to improve the cash flow and invest in more real estate.Back to top
What Exactly is the BRRRR Strategy of Real Estate Investment
BRRRR is a real estate investment strategy. But what kind of strategy is it? How is it any different from conventional investment property strategies? BRRRR stands for Buy, Rehab, Rent, Refinance and Repeat.
So, in very simple terms, it involves you as an investor buying a distressed property, repairing it, and then renting it out. After renting the property to tenants, the next step involves recouping your investment through refinancing the property. Lastly, you repeat the entire process with another distressed property.Back to top
Understanding the BRRRR Method: How it Works
The BRRRR method works as in a cycle where the investor uses their available cash or borrows a short-term loan to buy a fixer-upper property and improve it for renting purposes. The investor then refinances it and reuses the money for purchasing another property, and the cycle begins again.
We have broken up these steps so that you can have a better comprehension of how this strategy works.
Purchasing a property (BUY)
In this stage, your goal should be to find and purchase a distressed property. The property should be bought at below market value or there needs to be a way to add value while keeping your costs down.
Unless you have the cash you will likely need to finance your initial BRRRR purchase. So keep this in mind when figuring out your total costs.
Fix the property (Rehab)
In this stage, your goal as an investor should be to improve the areas that will make the home rentable and safe. Specifically, focus on more sensitive areas like enhancing curb appeal and improving bathrooms and the kitchen. Don’t forget to install other features like installing modern appliances and energy-efficient windows.
Renting out the property (Rent)
It is essential to note that majority of the banks will not refinance until you find tenants to rent your property. Note that the tenants should be reliable. So, how will you determine reliable tenants?
Reliable tenants have certain qualities like having a steady income from a stable job. Their record of on-time payments should be good. They should have a perfect credit report and have no history of eviction or criminal behavior.
Refinancing the property (Refinance)
This step is only practical when tenants have already occupied the rehabbed property. So, as the investor, once your tenant is in place you will apply for refinancing with a bank or other mortgage lender based on the property's after-repair value (ARV). From the two refinancing types (cash-out refinancing and pay-back refinancing), the recommendation is to go for the cash-out refinancing type because you will get the capital to buy a new property and restart the cycle.
Repeat the process (Repeat)
Being able to repeat the process can depend on how well you did the previous steps. Assuming you were able to get the property at a low enough price compared to ARV, you can pull out the equity in the property. This will allow you to repeat the cycle by investing in another distressed property. That’s where you begin growing your real estate portfolio. Instead of saving lots of money to make a single investment, you recycle your capital and invest in multiple properties. This is even possible with little money and sometimes poor credit.Back to top
Your Step by Step BRRRR Strategy
Follow the points below for an overall step by step guide to investing using the Brrrr method. Make sure to read through the post and come back to dive into each area individually for more details.
In most scenarios, getting a distressed property to pass specific requirements to qualify for a loan becomes challenging. So how will you refinance the property’s rehabilitation? Before giving up on financing, consult a lender and hear their opinions. At this point, you can use a hard money loan or HELOC to finance the property’s purchase and rehab.
Note that the above two options come with many risks, so you may have to be extra careful. Before buying the property, calculate its after-repair value. When you complete the calculation, follow the real estate 70 percent rule by avoiding investing money that exceeds 70 percent of the home’s ARV. This number changes by location but it's a starting point.
If you are able to find a property at that number you will be more likely to get all your money back out. As you pay more it becomes harder to get all the capital back and extends your time frame to buy your next property. (Unless you have a lot of capital, to begin with).
As an investor, it is essential to note that how you rehab a distressed property significantly determines its final value once you present it to the market. So, it would be best to focus on the improvements that will get your recently-bought home up to code. With that, we mean that the property should be up-to-standards and safe to reside in by the end of the renovations.
That’s not all. You will also have to identify the improvements that will make the home stand out in the market, thus increasing its value. For instance, focus on installing high-end features like appliances and energy-efficient windows. Also, update the bathrooms and kitchen, and don’t forget to enhance the curb appeal. Lastly, before beginning the project, develop a realistic timeline and cumulative budget.
Renting is a critical step in the BRRRR method. For some loans, it acts as one of the determining factors of whether a financial lender will refinance the project or not. Some banks and lending institutions will only refinance your real estate project once there are some reliable renters on your recently rehabilitated property. This means you have to look for tenants to occupy your home.
Again, the tenants you get need to be reliable, and you will identify their reliability by examining a number of their qualities. First, they need to be earning a steady income from a stable job and present an on-time payment record that is reputable. Secondly, the tenant’s credit report should be good with no history of criminal behavior or eviction. Also, look out for positive references before allowing the tenant to occupy your property.
How will you get all this information? You can physically meet with the tenant and request them to fill out an application form as you review their credit report. At that point, you can also perform a background check on them by asking for references. There are also many services that can help with this.
A cash-out refinance loan is preferable for the BRRRR method. The reason is that with a cash-out refinance, you get money back, which in turn can be used to buy another distressed home, flip it and rent it out. So, after successfully finding renters to occupy your property, look for a lender that offers this type of property refinance. Note that you have to meet specific qualifications to get the refinance loan.
For instance, for a cash-out refinance, you as the investor may have to meet the minimum credit score obligation. In most cases, this requirement is usually approximately 620. In addition, be prepared for a maximum DTI, usually at around 50 percent, at least with typical lenders. That’s not all. Home equity is also required. That's what will determine how much money you can pull back out of the property.
Keep in mind that some lenders may also need you to own the newly-refurbished property for a specific period before qualifying for a cash-out refinance. This is called seasoning and essentially is a requirement for a certain period of time to lapse after the initial purchase before they will refinance or put a loan on a property.
The above criteria are important but keep in mind it's what most typical banks want to see. As this method has gotten more refined, other lenders have developed programs to help BRRRR investors.
At this step, the essential tip is to take notes and be extra vigilant when repeating the cycle. ‘Repeat’ is the final step you will go through as an investor using the BRRRR method. Generally, there is nothing much in this step as you only need to return and repeat all the above steps.
You should repeat all the steps in a similar order. When repeating the cycle, it has always been a good idea to note the mistakes you made in the previous process and learn from them, thus making the current cycle more straightforward.Back to top
An Example of the BRRRR Method
In order to better explain this investing technique, I have prepared a simple example:
Suppose Gerald is a real estate enthusiast and an aspiring investor living in Amsterdam, New York, USA. He begins his real estate career by trying this method which hopefully allows him to purchase several homes and recycle his available cash into each.
After some time and effort, Gerald finds a property that he can purchase directly from the seller for $300,000. The as-is value of this property is $360,000, and the after-repair value, he figures is $415,000 if $15,000 in repairs are made. He is buying a pretty good deal (not quite the 70 percent rule but still good). Check with the 70 percent rule calculator to be sure.
Gerald has $60,000 in his bank account and doesn't want to use it all, so he decides to use $30,000 as his down payment, goes to the bank, and gets a $270,000 loan for the remaining cost. Gerald then finds his favorite contractor, who walks with him through the house.
Gerald receives a quotation of $15,000 from the contractor to fully rehab the house. He now does the work and pays out of his remaining savings. This leaves him with $15,000 in savings. At this point, we have several values;
- The sale price - $300,000
- The down payment - $30,000
- The amount of the loan - $270,000
- Rehabbing costs - $15,000
- After repair value -$415,000
Gerald’s property receives an appraisal value of $415,000, and he gets tenants who rent the property for $3,250. After 6 months, Gerald’s property qualifies for refinancing from his lender and they offer him a refinance loan equal to 75 percent of the appraised value ($311,250). From this amount, he pays off the outstanding loan of $270,000 and now has 41,250 back.
Remember he used $30,000 for the down payment and $15,000 for rehab, which totals $45,000. He has gotten most of his money back and is able to do another deal. Don’t forget that he is still getting the monthly income from the tenant’s rent, which should be more than his loan payment, and he still has equity in his house.
So, he can use this remaining amount plus the rent to invest in another distressed property. Gerald can decide to repeat this process and accumulate more investment properties over time.
I want to note something here. This was a simplified version for illustration. There are other small costs involved that aren't mentioned, not to mention it's not typical for estimates on ARV and rehab to be exactly spot on, but the idea is still the same. Want more examples? Check these out!Back to top
What Kinds of Properties Are Perfect for the BRRRR method?
The best properties for the BRRRR investment strategy are majorly distressed or undervalued properties. However, it is essential to get the best appraisal and market value, you need to add value to the property through improvements. For that reason, turnkey properties are not as suitable for this real estate investment strategy.
I'm not suggesting that turnkey properties are not suitable for real estate investments. I just mean that turnkey properties will not allow you as an investor to recoup your initial investment, which is vital in your ability to buy more properties in the future without raising or making large amounts from other sources.Back to top
What Are the Pros and Cons of buying and holding with BRRRR
After comparing the BRRRR method with other real estate investing strategies like flipping, we found several advantages that BRRRR has manifested over the years. Here are some of the key benefits:
Pros of This Method
- Using the BRRRR method demands less upfront capital. How is this possible? If you implement the technique correctly, you will quickly enter the real estate business without looking for larger volumes of upfront capital. As a real estate investor, you will primarily require adequate funds to use as a down payment. If the approved loan is low, you will also need extra money to cover the potential closing costs.
- Rental income is (at least supposed to be) semi-passive income. With passive income, you get to enjoy the earnings from your investments in rental properties without having to engage yourself daily and actively.
- The BRRRR method is a good way of building equity as a real estate investor. In most cases, during the rehabilitation process, you can start building equity as you make payments towards your mortgage. Equity is a valuable asset that you can leverage when applying for lower mortgage costs or loans for the next investment.
- You can quickly recoup your first investment after refinancing from a bank as an investor.
- You are most likely to get top-grade tenants due to the rehabbing that meets customer standards within the specific market niche. As the tenants are willing to pay top-dollar bills for the high-end property, you get an improved cash flow and often higher qualified tenants.
- Rental properties offer some great tax advantages compared with other investments.
Cons of This Method
Like any other real estate investment technique, the BRRRR method also comes with its drawbacks, including the following:
- Sometimes the distressed property can demand extensive renovations. This point means that you might end up spending more on labor, time, and generally, money. You should also be prepared for cases of poor plumbing, structural issues, or hidden molds.
- The lender’s appraisal cost determines how much refinancing amount you get in most cases. Through a licensed home appraiser, a bank will evaluate your property’s appraisal value and refinance it based on that value. In that case, you might run the risk of a lower appraised value than your initial estimation.
- As a real estate investor, you might have to wait for a long time to win a bank refinancing successfully. The reason is that most refinancing banks require investors to wait for approximately 6-12 months because of the seasoning period.
- Sometimes it is tricky to find reliable tenants who meet your precise credit and income requirements. The process can be time-consuming, and in this case, you might find yourself paying the mortgage with money from your pockets instead of the tenant’s rent.
Factors to Consider Before BRRRR-ing
Before diving into this strategy, it is essential to look into some critical factors to avoid any inconveniences that may arise along the way. We have talked about a few of these but I want to briefly touch them all and a few others.
The Short-Term Loan
If you already have the funds that can comfortably finance your initial purchase without the need to look for a lender, you are good to go. But, if you need financial reinforcement, you may have to consider the costs of getting the loan. How will the carrying costs look like if you get the loan? What will the interest rate be? Hard money and private lenders may offer you loans at a higher interest rate. Therefore, if you choose to go by any of these, you may experience reduced cash flow.
Typically, lenders, investors, and banks refinance a real estate property according to its appraisal. So, as an investor, you will always run a risk of under-appraisal. What does this mean? It means that before beginning the BRRRR method, consider this risk and work on it by running the numbers correctly.
Waiting for Seasoning
What is a seasoning period? It is when the lender or bank allows you to own the property for some time before considering refinancing it against the appraised value. So, be ready for this grace period that the lender might give you, which is usually 6 months in most cases.
Renovating houses as part of real estate is as good as it sounds. But if you are a beginner, don’t get too excited about the whole process thinking that it will be a walk in the park. It means that you might come across some challenges like absentee contractors and other headaches like asbestos. So, prepare yourself for any surprising problem.Back to top
How should you pay for your BRRRR Property?
Among the obstacles real estate investors face when starting, financing their BRRRR properties is the most difficult one. The primary reason is that you may have to finance the property a couple of times. Below are some options you can use to finance your BRRRR property.
Use a HELOC
When paying for your BRRRR loan using a HELOC, you need to know about the two phases separating borrowing and repayment: the draw period and the repayment period. When you are in the first draw phase, you can borrow from your credit line accordingly and make minimum payments or interest-only payments. However, if you reach your borrowing limit, you must pay some of the credit before you continue borrowing.
After reaching the endpoint of your draw period, you will not be able to access your HELOC funds anymore. You will have to start making total monthly payments covering the interest and the principal.
Although conventional loans used to require very large down payments, there are many lenders that will do them for less down. Conventional loans are all over the board, but it's pretty easy to find lenders that will do them for 10 percent down. The interest rate, in this case, is usually similar to the one of an owner-occupant loan. However, note that the lender might refuse to give you the loan if the property at hand is in poor enough condition.
FHA and VA
This is a great loan if you can get it. It requires very little down and they have rehab loans that can help keep your cash in hand. There is a limit to how many FHA loans you can do but it is a loan you should really look into if you are just starting out. The down payments can be 3 percent and in some cases 0. VA loans can have similar down payment requirements but are a little more strict. The benefit of VA loans is that the rate is typically excellent.
Hard Money or a Private Lender
Although hard money lenders will offer you a loan with interest rates and costs that exceed bank lenders, they are more likely to cover the improvements and repairs fully. Conversely, private lenders can be people you know, from family members, friends, and partners to investors. In private lending, the rates vary depending on multiple factors, including your relationship with the private lender and the property condition.
Some lenders have developed programs geared to fit this type of investment vehicle. They have built-in repairs and refinance options. Some lenders will do hard money loans as if it was a normal fix and flip and give you the opportunity to keep the property in your portfolio.
There are now several of these lenders to choose from, and their down payment requirements, equity requirements, as well as rent to loan payment requirements are all different. The seasoning requirements are also different. I've seen some that require very little seasoning (2 months of rental payments or less) and some that require a renter to make payments for 6 months. Lenders will be added to the resource area on an ongoing basis, so check them out.Back to top
Refinancing your BRRRR Property
As a real estate investor, you have three main ways of refinancing your BRRRR property: conventional financing, FHA, or commercial financing.
Conventional financing is a popular option because it comes with the low-interest rates and fewer restrictions than backed loans.
As mentioned above, these loans can be used to refinance properties but if you purchased a property with an FHA loan that needed repairs the refinance is probably built into the loan.
Commercial financing is not as popular as conventional financing. The reason is that it usually comes with higher rates of interest, but with fewer restrictions and qualifications. They have gotten much less expensive and are also very customizable to your needs. Lenders have all kinds of programs for properties now, especially if there is high equity.Back to top
Beyond the BRRRR Method
Although BRRRR investing is a great way to build a portfolio, it's not the easiest. Finding properties that have enough equity built in isn't easy. If you don't have that, you will need to either keep looking or use other methods.
- Turn key is a great way to grow a portfolio. It will eat up your capital, but typically turn key companies provide decent properties with decent rent-to-loan ratios. The issue is that as your capital gets used up, you will have to replace it in order to get more deals or wait until the properties go up in value enough on their own to refinance and buy more. This obviously will take a lot longer.
- Mixing flips with BRRRR can help you get back some money for your next purchase. It is basically the same method, except instead of keeping every property, you will sell some to essentially restock your capital. This will allow you to continue adding properties to your portfolio and with the right lender you might never slow down.
Key Takeaways and Summary
Although the method might come with some potential risks, the risk is much lower than many other forms of investing and can be mitigated much easier. The most important factor is to buy right. This is the same with any type of investing, but to pull money back out it's even more critical. If you don't profit on a flip (as long as you don't lose a bunch of money), you can keep going. If you don't buy right on a BRRRR, it will stop you in your tracks. Therefore, it is imperative to spot a perfect rehab project that will result in an optimal rental market. With such an investment technique in real estate, you are sure of building a booming real estate portfolio.Back to top