Real estate investors interested in trying a revolving style investment property technique may be interested in the buying, rehabbing, renting, refinancing and repeating the process (BRRRR) method. This strategy entails the key aspects of real estate while keeping an open-ended opportunity for more rental properties. Keep reading to learn more about how the BRRRR method could be your next venture into real estate investing.
What is the BRRRR Method?
With the BRRRR method, you purchase a distressed property in need of repair, and get it up to code, livable and inviting. Then you find the best renters for the home and refinance. With the money from the cash-out refinancing, you purchase another distressed property to rehab and the BRRRR method begins again.
Buy: When looking for the right investment property for this strategy, the key is to find a distressed property to keep the purchase price down. Make sure you are either able to do the repairs yourself or you have a trusted contractor who can stay on a schedule and within budget for repairs.
When viewing potential properties, keep in mind the rentability, location and how much work needs to be done for the property to be suitable for tenants. Talk with a professional lender who can help to guide you in the right direction as far as what kinds of loans will be possible for this type of investment property.
Do your homework on nearby comparables that have recently sold and what this property will likely be worth — the After Repair Value (ARV) — once your renovations are complete. The ARV forms the evidence the lender will need to back your prospective value, so stick to comparables with the same amount of square feet, bedrooms and bathrooms. Compare recent rentals to make sure that a rental makes sense for this area.
Rehab: Focus first on the task at hand — getting the property livable. Replace or repair major systems, take care of mold or safety hazards and bring the home up to code.
After the safety and livability issues are addressed, see what aspects are most sought after in the area where you will be renting out. Don’t go crazy with fad styles and expensive tile, but make the home desirable to the masses to ensure a quick rental for top dollar.
An updated kitchen and bathrooms are a must. Try to maintain the feel of the area. Is every home modern and high-end? Then yours should be too. Or is it a lakehouse area where the main focus is the outdoor space? Figure out what tenants will pay more to have and what will increase the value of the home.
Rent: Find suitable renters for your property. When purchasing and figuring out the ARV, you also learn the possible rental income. Does this number still make sense? Make sure that your rent price is fair yet competitive, and that you will be making a decent profit. Look at what your mortgage payment is each month on the property and subtract that from the rental price to find your monthly cash flow.
Finding the best tenants can be difficult. However, with many markets still seeing a high demand for housing, chances are several renters will be ready to check out the property. Have interested parties fill out an application. Tenants with income verification, great credit and positive references are your best bet.
Refinance: Once you have your tenants in place, reach out to your lender and begin the conversation about a cash-out refinance. Find out their requirements. Depending on the lender, you may need to hold ownership of the property for a certain period before refinancing is a possibility. Additional fees and equity qualifications may also come into play.
With a cash-out refinance, you convert your equity into cash. Buying a distressed property at a low price and then turning into a far more valuable property increases the equity. You access that equity by taking out a bigger mortgage, borrowing more money than you currently owe. The cash can be used for purchasing another property.
Repeat: Repeat the BRRRR method again. Stay in the same area or venture to other towns. As you rehab distressed properties, you not only increase your investment potential, but you increase your rental portfolio and add value to these real estate markets where you invest.
Benefits of the BRRRR Method
The BRRRR method certainly has its benefits. It is a real estate investment strategy that is possible for any investor to begin.
You can repeat the process many times: The main idea of the BRRRR method that works so well is the repeated process. Once you have a couple of successful rental properties under your belt, it gets easier to continue the process. Using the cash-out refinance from one to finance the next is key. Plus, you will grow relationships with contractors, realtors and neighbors who can help you hunt down distressed properties.
You can sell the properties at any time: The main idea is to keep your rehabbed projects as rental properties, but you do have the option to sell the properties. A sale is a one-time profit, while a rental can be higher long-term gains.
You can work according to your timeline: A benefit of this investment approach is being able to control your timeline. You have the ability to take a break once a rental property is occupied and just be a landlord for a while till the next opportunity strikes.
Access your creativity: While most investors are looking to make the most money, it is also nice to have the creative aspect of rehabbing these homes. Maybe you’re interested in rehabbing older homes to bring the character back or to spruce up run-down properties in your hometown and return them to their former glory.
Drawbacks of the BRRRR Method
As with any investment, the BRRRR method has risks. Not everyone is thrilled to be a landlord or has a trusted contractor to rehab a home on a budget.
Renting is complicated: Do your research and know the laws in your investment area. Renting is a highly regulated industry. Bad tenants can ruin not only your monthly profit but turn your entire investment upside down quickly. Make sure your lease is clear and specific, and have your attorney look it over. Even then, in many states it can be difficult to evict tenants.
Carrying costs are high: The high carrying costs are real and can be intimidating. If you can’t rent the property or find good tenants, that’s money you’re paying on the house each month with no rental income to offset your mortgage. It can take too long to rehab, you may go over budget, or your contractor could leave you high and dry. All these risk factors lead to high costs that are money out of your pocket.
Only works on distressed properties: While it’s great rehabbing distressed properties, they can be hard to find in certain markets. Other investors may scoop them up, or you may have trouble getting the loan you need for it to work as a rental investment. Distressed properties can also mean underlying structural issues, expensive repairs and unforeseen circumstances.
Compare Lenders
Benzinga is here to guide you on your investment journey. Check out these lenders that can help you explore your options and get started with the BRRRR method.
Available in: CA, CO, CT, DC, FL, GA, IL, MD, MA, MI, NH, NJ, NY, NC, OH, PA, RI, SC, TN, TX, VA, WA
Frequently Asked Questions
How do I start the BRRRR method?
The first thing to do is speak with your lender. Figure out a purchase budget and what your down payment looks like. See what options exist for distressed property loans. Then explore the towns and neighborhoods that you’re interested in having a rental property in and set out to find your first distressed property. Team up with a contractor and get started.
How do you finance a BRRRR property?
Financing methods depend on the property, the lender and your credit score. For your first purchase, a hard money loan, a rehab loan or a home equity line of credit may all be possibilities. An all-cash transaction or a cash-out refinance are also alternatives for future purchases.
What is the 1% rule in BRRRR?
The 1% rule in BRRR means that if you cannot rent the house for at least 1% of the purchase price, you should not do the deal.
