What is the BRRRR strategy in real estate investing?
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Investors looking for a real estate investing strategy with the potential for generating steady cash flow may find the BRRRR method a perfect match. While the strategy does require some time and effort, it’s one of the few ways to invest in real estate that can run on autopilot.
So what is BRRRR? It stands for buy, rehab, rent, refinance, and repeat. That is, you purchase a property to renovate it, once that’s complete you can rent it out and refinance it at its new value and then move on to the next project. The best part of the BRRRR strategy is that because the original property requires work, you tend to get lower-priced assets.
In this article we’ll discuss what BRRRR in real estate is and how it works, to help you decide if BRRRR is a good match for your investment strategy.
What is the BRRRR method in real estate?
Although it might sound like something you would say on a freezing winter night, in the real estate business BRRRR is used to describe a potentially profitable strategy for making money in real estate. The ROI on a well-done BRRRR investment can be higher given the added value you’ve put in during the rehab portion.
In a nutshell, the BRRRR method in real estate involves locating and buying an inexpensive property from a motivated seller, doing strategic rehabbing, renting the home out to a qualified tenant, pulling cash out of the property by refinancing, then repeating the entire process.
One of the best things about BRRRR is that you don’t have to reinvent the wheel every time you buy a property. To be sure, the process may need to be fine-tuned because every home is different. But once you activate a BRRRR system that works for you, it can feel like your real estate investing business is almost running on autopilot.
How BRRRR Investing Works
Let’s take a look at the five steps to follow when using the BRRRR strategy to invest in real estate.
BRRRR Step 1: Buy
BRRRR real estate investing is centered around the concept of buying low and adding value, so that when the process is done there’s enough cash to pull out of the property and begin all over again. A useful formula to use when looking for BRRRRs to buy is calculating the after repair value or ARV:
- ARV = Purchase price + Value added by rehabbing
For example, if the purchase price of a home is $120,000 and the projected value from rehabbing is $30,000, the ARV is $150,000.
To determine the maximum allowable offer of MAO, investors often use the 70% Rule:
- MAO = (ARV x 70%) – Estimated repairs
- ($150,000 ARV x 70%) - $15,000 estimated repairs = $90,000 MAO
Note that the estimated repairs are not the same thing as value added to the property. For example, while it might cost $5,000 to install new countertops, a lender or buyer may view the renovations as being worth much more than the actual cost.
To acquire funds to purchase a distressed property, investors may speak with a mortgage broker to understand creative financing options, speak with a private lender, pull money out of an existing property by using a home equity line of credit (HELOC), or forming a limited partnership (LP).
BRRRR Step 2: Rehab
When rehabbing using the BRRRR method it’s important to look closely at the anticipated return on investment or ROI of each upgrade. This portion of the BRRRR investing strategy is very similar to flipping homes, except at the end of the renovation job you don’t sell, or flip, the property. You keep it.
A specific rehab project – such as updating a bathroom – should only be done if it accomplishes two things:
- Justifies charging a higher monthly rent
- Adds value to the property when the time comes to refinance and pull cash out
BRRRR Step 3: Rent
Once the rehab work is done, it’s time to get the property cash flowing by marketing the property and finding a qualified tenant willing to pay the asking rent:
- Perform a rent analysis by using online tools like Rentometer or Zillow’s Rent Zestimate®.
- Market the property for rent and screen tenants online with a free online listing and tenant screening service such as RentPrep or SmartMove.
- Perform in-depth tenant screening by reviewing an applicant’s credit score, employment and income history, rental history to check for evictions, and actually speaking to the prospective tenant’s references.
- Consider hiring a professional property manager to take care of the tenant and the property after it’s leased, especially if you are investing in real estate remotely.
BRRRR Step 4: Refinance
Refinancing a BRRRR and pulling cash out generally requires a waiting period. You’ll need the property to be generating solid rental income, have a tenant who has been renting for at least 6 months, and have enough equity in the property to pull money out.
Generally speaking, banks won’t lend out more than 80% of the value of the property. So, if you bought the property at $150,000, added $50,000 in rehab, but a comparable property down the road is worth $300,000, you’ll likely be able to get a maximum loan of $240,000. In this scenario, you are left with $40,000 in your pocket to move on to step 5 of the BRRRR method.
Unlike a short-term loan used to purchase a BRRRR prior to rehabbing, investors generally refinance with a long-term investment property loan. Lenders have different terms and conditions for financing a rental property.
As a rule of thumb, expect to have a credit score of at least 620, a debt-to-income (DTI) ratio of less than 50%, and have enough cash in a reserve account to cover up to 6 months of operating expenses and mortgage payments.
BRRRR Step 5: Repeat
After doing your first BRRRR you’ll have to fine-tune your processes, but that means the next one you’ll do even better. The idea is to have a BRRRR investment strategy in place that you can repeat over and over again to buy more properties to rehab, rent, refinance, and repeat.
BRRRR Method Pros and Cons
The BRRRR investment strategy can be a good fit for active real estate investors. Before jumping into BRRRR here are some of the pros and cons to consider:
Pros of the BRRRR method
- Potentially profitable return on investment by buying low, adding value, and refinancing.
- Consistent rental income by having a good tenant and property manager in place.
- Easier to scale up and grow a rental property portfolio with the BRRRR method.
Cons of the BRRRR method
- Short-term financing to purchase a BRRRR can be costly, with higher interest rates and fees.
- Underestimating the after repair value (ARV) or repair costs can reduce or eliminate any potential profits.
- May take longer than expected to build enough equity to conduct a cash-out refinance of a BRRRR.
Things to Consider Before You BRRRR
There are a wide variety of ways to invest in real estate. While the BRRRR method of real estate investing can offer a good return on investment, the strategy isn’t right for everyone.
Some other popular options for investing in real estate include buying a single-family rental (SFR) or small multifamily property, putting money into a crowdfund to own a piece of a large project like a build-to-rent subdivision or shopping center, or buying shares of a publicly-traded real estate investment trust (REIT).
How to Get Started as an Investor
Investing in rental properties is a great way to build wealth, and BRRRR investing can be a way to fast-track your rental business. Mastering the fundamentals of the BRRRR investment strategy can help create a solid foundation for your real estate business.
By understanding how to analyze a potential investment you’ll be better able to identify the deals to move quickly on, and which ones to take a pass on.
Having a system in place helps you to gain more experience faster, develop a reputation as an investor who knows how to get profitable deals done, and quickly scale your real estate investing business and grow a rental property portfolio with robust cash flow.