Understanding The BRRRR Method Of Real Estate Investment

If you’re interested in investing in real estate, you may have heard about the Buy, Rehab, Rent, Refinance, Repeat (BRRRR) Method. The BRRRR Method can help investors build a portfolio of rental properties. But along with the potential rewards comes potential risks to consider.

If you’re a real estate investor contemplating this investing strategy, you should understand how the BRRRR Method works, its pros, cons and whether it’s the right strategy to build your real estate empire.

What Is The BRRRR Method?

The BRRRR Method is a real estate investment approach that involves flipping a distressed property, renting it and taking out a cash-out refinance to buy other properties in need of renovations.

When you compare the BRRRR Method to conventional investment property strategies, you’ll see that the central difference is the BRRRR Method’s focus on investing in distressed properties that get refinanced to repeat the process and buy another distressed property.

How Does The BRRRR Method Work?

When employed successfully, the BRRRR Method can provide the cash flow that creates a revolving system for purchasing and owning rental property.

Review the following steps to see how the BRRRR Method works:

Buy The Property

You should purchase a distressed property. It’ll likely be cheaper because distressed properties usually need a lot of renovations. The lower price point can position you for a greater return on investment in the long term.

Rehab The Property

A distressed property will likely require extensive work to become move-in ready. The renovations can range from structural repairs to safety improvements and aesthetic upgrades. Before buying the property, weigh the possible repair costs against your profit potential.

Rent Out The Property

Once the property has been rehabbed, you can rent it and use the rental income to cover the purchase and renovation costs. Before deciding what to charge for rent, consider what’s affordable for a renter while ensuring that the rental amount provides a positive cash flow for you. To calculate this, subtract the total expenses of owning the property from the total monthly rent. You should also review comparable rental rates in the area to settle on a suitable price.

Refinance The Property

Once you make enough rental income to cover your expenses and have enough equity, you can convert the equity into cash. One way to do this is with a cash-out refinance, which swaps out the original mortgage with a larger one, letting you pocket the difference between the two as cash.

Repeat The Process

Your “final step” will be to restart the process using the funds from the cash-out refinance to purchase another distressed property to rehab, rent and refinance.

A Guide To The BRRRR Method: Tips For Each Stage

To effectively execute the BRRRR Method, it’s important to take the following steps in their exact order. Here are a few tips for each stage of the process:

1. Find Financing That Works For Your Situation

The BRRRR Method hinges on buying distressed properties. If you don’t have cash, you’ll need to rely on one of several approaches to finance the purchase.

Take Out A Mortgage

When you take out a mortgage for an investment property, you typically make a larger down payment than you would for a primary residence.

Lenders typically require good credit and proof of your ability to cover the monthly mortgage payment until you can start collecting rental income. Your lender may also request a property appraisal. Depending on the type of loan, a distressed property may not satisfy the appraisal guidelines for livability and safety, which can hurt your chances of securing a mortgage.

Borrow Against Your Current Home

If you have enough equity in your current home, consider borrowing against it with a cash-out refinance or home equity loan. Because your home secures these loans, you risk foreclosure if you can’t keep up with the payments.

Use A Hard Money Loan

A hard money loan is a short-term financing option. Unlike traditional mortgage loans you can get from a bank or credit union, private lenders usually issue hard money loans. While they provide greater flexibility, they have higher costs and greater risks.

2. Select The Right Property

You must calculate the after-repair value (ARV) of the distressed property. ARV is the estimated value of a home after renovations and repairs. To determine ARV, compare the planned final result of the home to similar homes or comparables recently sold in the area. These homes should be similar in size, number of bedrooms and bathrooms, age, building type and condition.

When deciding how much to offer on the home, follow the 70% rule and avoid investing more than 70% of a property’s ARV.

3. Make The Most Valuable Improvements

When you rehab a home, prioritize the renovations that bring the home up to code and ensure it’s safe to live in. Next, identify the improvements that will boost value, such as updating the kitchen and bathroom, improving curb appeal, installing features like energy-efficient windows or replacing appliances.

Before you start rehabbing the property, create a realistic budget and project timeline.

4. Find The Perfect Tenants

Lenders typically won’t refinance an investment property until it has tenants, so it’s critical to find renters before you refinance (the next step).

Consider these factors when vetting potential tenants:

• A history of on-time payments
• A stable job with a steady income
• A good credit report
• No criminal behavior or history of eviction
• Positive references

Have potential tenants fill out a rental application. Review their credit report, request references and perform a background check. Get their consent before you dig into their background, and check that you’re following all local and federal housing laws.

5. Shop Around For A Cash-Out Refinance

With the BRRRR Method, you use a cash-out refinance on your investment property to purchase another distressed property to flip and rent out. First, find a lender that offers a cash-out refinance with the best possible terms. You might need to compare a few lenders before you choose one that best fits your needs.

Then you’ll need to meet the loan’s requirements, which can include:

• A minimum credit score
• A qualifying debt-to-income ratio
• Sufficient home equity
• Proof of rental income

You may also need to own the property for a certain amount of time before you can get a cash-out refinance. You’ll also need an appraisal – and there may be additional fees, including closing costs, to pay.

6. Improve As You Repeat

The final step is to repeat the previous steps in the same order. To continue to improve as you repeat these steps, take notes each time you cycle through the process to learn from past mistakes.

A BRRRR Method Example

Now that you have a solid understanding of the BRRRR Method, here’s an example of it in action:

Let’s say you have $60,000 to invest in a distressed property and find one for $180,000. You estimate it’ll cost $20,000 to rehab the property and calculate the ARV to be $300,000.

Now, let’s apply the BRRRR Method.

1. Buy: With a total investment of $200,000 (the $180,000 purchase price and $20,000 in repairs), the property should provide a good return. If put at least 20% down ($36,000), you can take out a mortgage for $144,000. Your monthly mortgage payment, including property taxes and homeowner’s insurance, will be $1,000.
2. Repair: After making the down payment, you’ll have $24,000 remaining from your $60,000 initial investment. If you use $20,000 to cover the cost of repairs, you’ll have $4,000 left to cover your mortgage payments, which adds up to 4 months of monthly payments while you renovate and look for tenants.
3. Rent: After repairs, you can collect $1,500 a month in rent, earning an additional $500 a month. You’ll be able to recover your original $60,000 investment in 10 years.
4. Refinance: Let’s flash forward 1 year later. The property’s current appraised value is $300,000, and your current mortgage balance is $142,000. You can use a cash-out refinance to borrow against 80% of the property’s value, which is $240,000, leaving you with $98,000 in equity to borrow against.
5. Repeat: Use the $98,000 to buy another distressed property.

Pros And Cons Of BRRRR Investing

Before deciding on the BRRRR strategy, weigh its pros and cons to determine whether it’s the right investment strategy for you.

Pros

BRRRR Method pros can include:

• The potential for passive income.
• The potential to build equity.
• The opportunity to diversify your investment portfolio.

Cons

The BRRRR Method has risks as well. Some cons to consider include:

• The cost and work to rehab a home.
• The added costs of a more expensive or riskier loan.
• Additional risks from unforeseen issues, including higher repair and maintenance costs or problems filling vacancies.

The Bottom Line

The BRRRR Method can generate the passive income that builds your real estate portfolio. From rehabbing the home to finding tenants and securing a cash-out refinance to repeat the process, you must be willing to put in the work. Consider the advantages and potential disadvantages of the BRRR Method before you invest a dollar – a traditional investment strategy may be a better option.

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