The real estate world has many acronyms and abbreviations. If you have ever considered or looked into investing in rental properties, you have probably come across the “BRRRR method” for buying real estate properties. While the acronym itself may sound a bit funny, the method it represents is a great way for investors to spend less money when buying rentals and earn a steady passive income.
BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. This popular real estate investment strategy involves buying and flipping a distressed property, renting it out, and then cash-out refinancing it in order to fund further rental property investments.
While most banks require a hefty down payment of at least 20% or more, the BRRRR method allows investors to buy a home with less than 20% down through cash or private money. With this method, investors can refinance an investment property and get most, if not all, of their money back to use towards future investments. For investors looking to boost their passive income through owning and operating multiple rental properties, the BRRRR method is an effective way to do just that.
Before you jump right into building your rental property wealth, it's important to evaluate whether or not you should use the BRRRR method for real estate investing. If you are an investor considering this type of strategy, keep reading to learn how this method works, its pros and cons, and whether or not it is the best method for your financial goals.
What is the BRRRR Method?
The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method is a strategy commonly used in the real estate investment industry. This method essentially lets investors buy a property with cash or a loan, make improvements to the property, rent out the property to tenants, and then refinance the property after the property value has increased.
Start out by finding a great deal on a rental property that you can add value to through renovations and repairs. Look for a property that is distressed and in need of some work. These types of properties will be cheaper to purchase. However, you don’t want to just purchase any property. Make sure it is a sound and profitable investment first.
The buy phase will require intensive deal analysis. This includes calculating the costs of renovations, estimating monthly rental expenses, and confirming that the rental income will provide a sufficient profit margin. To ensure strong rental success, be sure to research the best rental markets and make sure that you have enough of a buffer zone for your renovation costs. Follow the 70% rule as a guideline for determining how much you should pay.
One of the biggest obstacles investors face is figuring out how to finance BRRRR properties. This is due to having to finance the property more than once, as well as the overall costs itself being high for first-time investors. Luckily, there are some loan types that are available. These include conventional bank loans, local bank loans, private lenders, and hard money lenders. Do your research to figure out which type works best for your budget.
Once the rental property is purchased, investors will need to identify how to make their rental property a livable and functional space for tenants. Once these aspects are identified, the investor will make the repairs and renovations necessary. This includes structural, safety, and aesthetic improvements. These updates should make the space suitable to rent out to tenants, and also increase the value of the property.
A few upgrades with high return on investment (ROI) include:
- Roof Repairs: A roof repair can go a long way and one of the best ways to get your money back on a property.
- Updated Kitchens: Kitchen is the heart of the home and a feature that adds incredible value if brought up to date with modern finishes and appliances.
- Updated Bathrooms: Bathrooms are on the smaller side and their material/labor cost is fairly inexpensive. This means investors can boost the property’s value with little effort.
- Drywall Repair: Damaged drywall makes a home ineligible for financing. If this is an issue in your new property, make this repair a priority.
- Room additions: Properties that have exceptional square footage but a lack of bedrooms provide the perfect opportunity to expand and increase its value.
- Landscaping: Boost the property’s value through curb appeal. Simple landscaping projects can be done with little costs or labor meaning no need to hire a professional.
In the rehab phase, it is important not to make excessive upgrades that will cost more than what can be produced through rental income. Try not to get swayed by additional add-ons and upgrades unless they work in the budget and provide a good ROI.
After the property is all fixed up, investors will determine a rental price and rent the property out to tenants. The rent and other fees associated with renting will become passive income for the investor. Processes within the rent phase typically entail marketing the property, screening tenants, managing tenant turnover, and handling maintenance and repair requests.
It is much easier to refinance a home that has someone living in it versus a home that is vacant. Once tenants are moved into the property, investors can begin creating a plan on how to refinance the property. A cash-out refinance is the most ideal refinancing option due to its favorable interest rates, tax benefits, and speed. Refinancing allows investors to pay off the existing mortgage using the new loan terms, thereby pocketing the cash difference.
Don’t stop there! After refinancing, investors can use the cash-out refinance from their first rental property to fund the purchase and rehabilitation of their second. With the experienced from the each go-round, investors can apply what their knowledge to their future BRRRR properties to achieve even greater financial success and expand their investing portfolio with more rental properties.
Pros and Cons of the BRRRR Method
Like all big investment decisions, there are important factors to consider. While the BRRRR method might sound like a sure and sound way to invest, make sure you weigh out the pros and cons before you buy.
By far the biggest benefit of using the BRRRR method is the ability to receive a high return on investment. When the BRRRR method is done correctly, investors can purchase a distressed property, fix it up, and rent it out for a strong cash flow. Plus, with these new upgrades, investors will be able to attract high-quality tenants willing to pay top dollar to rent.
The BRRRR method is also a great way to build equity. The amount of equity investors can build up during the rehabilitation phase can help them create a cash flow much greater than what the price paid for the property.
After repeating the process several times, investors can achieve economies of scale which occurs when you own and operate multiple properties at once. Owning more properties will help investors lower their overall costs and spread out risks since there are several other properties to fall back on if something goes wrong.
The renovations and repairs that come with rehabbing a rental property can be incredibly costly and work intensive depending on the condition of the property. The rehabilitation phase involves project timelines, working with contractors, and dealing with unexpected issues that may result in additional costs. If you are willing to take on the headache, it will be worth it.
Due to the property being a rental investment, investors might not have access to traditional mortgage options. This is especially true with short-term or hard money loans which are most commonly used for these types of investments. This means investors might have to settle for a loan type that has higher interest rates. This can be a risk during the time period in which the property is not making any income.
The BRRRR method is one that requires some patience. In addition to the time it will take to complete all renovation, investors will likely also own the property for a period of time before being able to get a cash-out refinance. Finding good tenants to rent the property may take some time as well.
Does the BRRRR method for real estate investing sound like the strategy for you? If so, you’ll need an experienced agent to help you find the right property and provide advice for finding the best financing options.
With SimpleShowing, investors will have expert guidance from our local realtors, as well as have the opportunity to save even more money with our buyer refund. Let us know how we can help you through the BRRRR method!