If you are interested in investing in residential real estate, BRRRR isn’t just the sound you make when you’re cold.
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat.
This investing strategy focuses on buying homes in poor condition and renovating them, much like house-flipping; however, instead of reselling for a one-time profit, they keep ownership and rent them to tenants. This allows property owners to profit while accumulating equity for the next purchase.
What is the BRRRR Method?
Real estate investing is a popular strategy to build wealth over time. Real estate gives investors flexibility through passive and active options, such as purchasing a stake in a Real Estate Investment Trust (REIT) or investing in a fixer-upper that you may buy for a discount and resell for a profit.
Real estate investors have successfully employed the BRRRR technique for years.
Related: Passive Real Estate Investing 2022 : Top 8 Benefits You Must Know About
How Do I Start Using the BRRRR Method?
Let's take a closer look at each step of the BRRRR technique in more detail for those looking to build a more prominent real estate investing portfolio.
1. Buy a property.
Finding affordable properties is crucial in any investment purchase, but it's especially important when employing the BRRRR strategy. Here is why:
• Since these properties are undervalued, you can add value by making inexpensive upgrades. The more you raise the home’s value, the more equity you'll have to give up in the cash-out refinancing step.
• Unless you have a large sum of cash on hand, you can look for undervalued properties and obtain a hard money loan to pay for this acquisition.
Always remember the 70% rule!
The Rule of 70% means that you shouldn't spend more than 70% of a property's after-repair value (ARV) and repair costs. For example, you shouldn't pay more than $200,000 for a $400,000 investment property that needs $80,000 in renovation.
It makes financial sense, even if it isn't a set rule.
2. Rehab the property.
- For the property to attract potential tenants, you need to renovate the property as the next phase in the BRRR process. After buying the property, calculate how much you can afford to spend on repairs and what specific repairs you'll need.
- Hire a reputable contractor. You must choose and employ a contractor that can complete the repairs accurately and stay on a budget.
- Keep on schedule and budget. These carrying charges include utility costs, property taxes, and loan payments.
- Choose renovations with the best return on investment. Even though studies have shown which upgrades provide the highest return on investment (ROI) for resale, remember that your improvements must also appeal to renters.
3. Rent the property.
This is the stage where housing flipping and the BRRRR method diverge. It is now time to find tenants and rent out your home to turn it into an asset that generates income. Your expenses are most likely eating a hole in your pocket, so you must act quickly.
TenantCloud will assist you in every way! Professional listing images may increase foot traffic, leading to higher rentals and assisting you in finding better tenants.
4. Refinance the property.
After leasing the renovated property, you may conduct a cash-out refinance, which converts your equity into cash.
Cash-out refinancing may result in cost savings, but they also have many benefits. A cash-out refinance will have a lower interest rate than a hard money loan, a home equity loan, or a home equity line of credit (HELOC). In addition, interest is tax deductible.
If you want to start building a real estate investment portfolio, you can pay off your first loan and use the money for the next stage of the BRRRR strategy with cash-out refinancing.
5. Repeat every step.
There is just one thing left in the BRRRR investing cycle. Repeat the entire process. Find another fixer-upper, breathe new life into it using the BRRRR approach, rent it out, and refinance it once you have a profit in your pocket.
Related: How to Get Into Real Estate Investing: Main Factors to Consider
What are the Pros and Cons of the BRRRR Method?
The BRRRR strategy has its benefits and disadvantages, just like any other investing approach. Consider a few things before investing:
- Purchasing a rental property at a discount, increasing its value, and then refinancing is an excellent way to generate passive income.
- Building a portfolio of rental properties is an investing technique that runs automatically.
- The benefits of scale. Once you have a few properties, you can achieve economies of scale and reduce the related risks and costs.
- Return on investment. The BRRRR model's strong ROI explains why it is so popular. By purchasing houses that require some maintenance and then renting them out, you can earn a consistent income that will grow over time.
- Reuse your cash. Your investable funds can be reclaimed multiple times, allowing you to purchase new investment properties.
- Assessment risk. The BRRRR approach has one drawback: lenders frequently refinance a property based on its assessment rather than the price of the renovation. You might not receive the property appraisal you hoped for.
- Loan. Borrowing comes with certain inherent risks. Because things may not go as planned, you must weigh your potential rewards and consider all possible outcomes. High-interest rates are generated through hard money loans, which might be costly, particularly during the renovation stage.
- Unexpected difficulties. There is always a possibility that something may go wrong and be too expensive to fix. Unfortunately, restoration is occasionally more difficult than it appears.
Related: Is Investing in Real Estate a Good Idea? Main Pros and Cons to Know