Introduction
The BRRRR method has gained significant attention in recent years, thanks to discussions on savvy investment strategies on platforms like BiggerPockets and other investment blogs and forums. But what exactly is the BRRRR method, and how does it work?
The BRRRR strategy is a real estate investment approach that leverages forced appreciation and refinancing to enable investors to continually reinvest their funds. It’s a modified version of house flipping, but instead of selling the property, you rent it out.
Below we’ll explore the BRRRR method, its components, and why it’s a compelling investment strategy.
BRRRR Meaning
You might have seen it written as “BRRR” or “Burr method,” but BRRRR is an acronym that represents the five essential steps in the real estate investing cycle:
Buy, Rehab, Rent, Refinance, Repeat
In essence, the strategy involves purchasing a distressed property, renovating it as you would for a house flip, renting it out, and later refinancing the mortgage. In many cases, refinancing can return a substantial portion of the initial capital, allowing you to reinvest it in another BRRRR deal.
The primary advantage of the BRRRR method is its ability to help investors build a substantial portfolio with limited capital. If you’re financially constrained but have a knack for strategic thinking, BRRRR might be your ticket to success.
How Does BRRRR Work?
Let’s delve deeper into each step to clearly answer, what is brrrr?
Step 1: Buy
- Acquire an investment property using various financing options like hard money loans, seller financing, or private lenders.
- Aim to finance around 70% to 75% of the property’s cost, which means a down payment of approximately 25% to 30%.
- Keep in mind: you must buy below market value and never invest more than 75% of the property’s after-repair value (ARV).
Step 2: Rehab
- Improve the property by addressing essential repairs to make it livable.
- Focus on renovations that add more value than they cost.
- Prioritize high-value projects like roofing, hardwood refinishing, bathroom/kitchen remodels, and adding more bedrooms or bathrooms.
Step 3: Rent
- Create appealing property listings and market them on popular listing sites.
- Conduct thorough tenant screenings to secure reliable occupants. This step is crucial, since banks will want to see that the property is going to be occupied before they refinance your loan.
- Follow the 1% rule: Rent should ideally be at least 1% of the property’s original price for positive cash flow.
Step 4: Refinance
- Request an appraisal, which should reflect the increased value due to your improvements.
- Approach a bank for a more favorable loan based on the higher appraised value.
- Look for lenders offering cash-out refinancing with a short “seasoning period”, or time that you’ve owned the property.
Step 5: Repeat
- Use the funds obtained from refinancing to invest in another property.
- Repeat the BRRRR cycle, leveraging your experience for more efficient future deals.
An Example of BRRRR in Action
Let’s illustrate the BRRRR method with an example:
Step 1: Buy. Let’s say you purchase a distressed single-family home for $90,000, which is below market value. The property has a great location but needs a lot of repairs to make it profitable.
Step 2: Rehab. You spend $35,000 on renovations, focusing on high-value improvements.
Step 3: Rent. Next, you market the home by taking photographs, writing a few listings, and posting them on high-traffic websites. You find suitable tenants within a month who meet screening criteria, and you sign your lease with them.
Step 4: Refinance. As a result of your hard work and renovations, you get the property appraised at $200,000 (a $110,000 increase). You secure a $150,000 refinanced loan, leaving $25,000 in profit (the new loan value minus the initial investment and rehab costs).
Step 5: Repeat. You can now reinvest the $25,000 profit into another property, restarting the BRRRR cycle.
Tips and Common Pitfalls of the BRRRR Method
While the BRRRR method offers excellent potential, investors must be mindful of common mistakes:
- Ensure you buy below market value to make the strategy work. Think of this method as similar to flipping houses: you want a fixer-upper. The only difference here is that you are renting your home out instead of selling it.
- Choose renovations that add more value than they cost. Many people will pour money into renovations that are not the most lucrative ones for their property, and they lose out on potential value.
- Estimate rehab costs accurately to stay within budget. You should already have a rough estimate of how much you want the property to be appraised for, and how much you can afford to spend rehabbing the property.
- Seek lenders experienced in BRRRR deals if you’re new to the method. Not finding the right lenders is a common mistake of investors new to this method. Use social media like local landlord groups or forums like Bigger Pockets to get suggestions on who to work with.
Conclusion
The BRRRR method is a compelling real estate investment strategy that allows you to build a robust portfolio with limited capital. By adhering to these tips, you can join the ranks of successful BRRRR method real estate investors.