The BRRRR method is an acronym that stands for Buy, Rehab, Rent, Refinance, and Repeat.
It is a real estate investment strategy in which distressed properties are gained at a reasonable cost. They can be repaired and then rented for a profit. The BRRRR approach is beneficial in assisting investors in generating passive income and building their portfolios.
Investors may also employ cash-out refinancing to convert their equity into cash. The most important feature of this strategy is that you will not be out of money if something goes wrong. You will have time to turn the investment around before it becomes a major loss.
How does the BRRRR Method Work?
The BRRRR method works exactly as its abbreviation denotes. It allows novice and experienced investors to kickstart their rental property portfolios. They can simply acquire homes, fix them, and rent them out. And eventually refinance them to buy new ones and then repeat the process.
Those who use the method must have cash on hand before they begin because they will purchase an asset. It is also critical to keep finances in good shape no matter where the money comes from, be it personal funds or through a mortgage. Because this will affect the capacity to get the best interest rates, terms, and conditions when it’s time to refinance.
What are the Steps of the BRRRR Method?
The BRRRR method comprises the following five steps:
- Buy
- Rehab
- Rent
- Refinance
- Repeat
While each of these seems self-explanatory, it is imperative to comprehend each one fully. Here is a brief overview of each phase to help you out.
1. Buy
The first step in the BRRRR strategy is to buy a property. This phase is crucial as it can’t just be any type of real estate. The property has to have the potential to increase in value once rehabbed.
You can do this by purchasing a home that needs repairs. Most of the time, these are frequently sold at a cheaper cost or even below market value. However, carefully examine a few variables before making a purchase, such as assessing the after-repair value (ARV).
The after-repair value or ARV is the projected value of a property when renovations are completed. It can help determine whether the property is a good investment and whether there is space for more equity. Also, consider thoroughly evaluating the property in terms of its rental potential, as you will rent it out to generate a profit.
2. Rehab
The next step after purchasing a home is to rehab it so that its value increases. It is crucial first to consider how to repair the property to become safe and habitable. This may include checking if the structure is still in excellent condition, ensuring that essential utilities are available, and keeping the surroundings clean.
Following that, you may continue to undertake some renovations that will aid increase the overall worth of the property. This can include remodeling the entire kitchen, adding a bathroom, or creating additional bedrooms.
Try to finish the repairs as quickly as possible to keep the expenses down and to rent it out so you can start making a profit.
3. Rent
Rent is the third phase in the BRRRR method. After rehabbing the house, it’s time to generate profit by leasing it out. Determine the monthly rental rate you will charge. Consider the expenditures involved. Be sure that you are making revenue rather than leaving any opportunity for potential loss.
After you’ve determined your rental fee, start advertising your home to attract prospective tenants. Before going on to the next level, renters must occupy the residence since certain financing institutions require it.
Screen your tenants as thoroughly as possible to ensure that you have good individuals living in your house. You may define a set of requirements, such as reviewing their credit scores, determining if they have a stable job, or even conducting a simple background check. This is not only to maintain the safety of your property but also to ensure that you have good-paying renters and a consistent revenue flow each month.
4. Refinance
When the property has been inhabited for a significant period, you can move to the fourth phase of the strategy, which is refinancing. A refinance isexchanging your existing mortgage for a new one with new conditions. It will then be based on the after-repair value of the property.
Some financial institutions provide cash-out refinancing or will pay off an outstanding loan. When workable, choose cash-out refinancing so that you may use the money to create new investments and continue with the BRRRR method.
5. Repeat
The BRRRR technique concludes by repeating the entire process. After refinancing, you can purchase another distressed property, renovate it, and then rent it out to generate more revenue.
This may go on and on, depending on your preference. If everything goes smoothly, you will be able to grow the size of your rental property portfolio.
What is the BRRRR Method Example?
Here’s a simple example to show you how does the BRRRR method work
Assume you purchase a $50,000 home. You then made a $15,000 down payment and got a loan for the remaining amount of $35,000. After that, you spent $10,000 to repair the property. The total investment you made is $25,000, which includes the down payment and rehab expenditures.
Now that the house has been fixed, it is time to rent it out. You may proceed with refinancing when you have found decent-paying renters and the property has been occupied for a while or at least a year. With the property’s increased worth, you may refinance it for $80,000. Suppose the bank will lend you 75% of the assessed value, or $60,000.
You may use the $60,000 to pay off your existing debt worth $35,000, leaving you with $25,000 in cash. You may then use the remaining funds to repeat the BRRRR strategy, which entails purchasing another home, repairing it, renting it out, and refinancing it again. This simply allows you to grow your cash flow and the number of assets in your portfolio.
What are the Pros of the BRRRR Method?
There are several advantages to employing the BRRRR technique. Therefore investors, both new and seasoned, have gravitated to it. Among the benefits are the following.
- You don’t need a lot of money to get started: most distressed properties have a lower listing price. You can buy it outright, make a down payment, or take out a loan. Regardless of your option, it will not cost you a huge amount upfront.
- Delivers passive cash flow: When done correctly, the monthly rental revenue may offer you a steady source of cash.
- Helps build equity: Rehabilitating properties contributes to your long-term equity growth. You may use this to obtain a loan and use it to make new investments, or for other purposes.
- Increase your portfolio: You’re adding more assets to your rental property portfolio when you repeat the BRRRR process and acquire new homes to renovate and rent out. Increasing both your investments and your cash flow.
What are the Cons of the BRRRR Method?
As with any investing approach, there are certain downsides to the BRRRR method. Some of the disadvantages include:
- The expense and time of rehab: Any necessary repairs may require time and money. Even more so when unforeseen events add up. This may cause a delay in the timeline you had in mind.
- Some renters can be difficult to deal with: It is tough to find renters, and things do not always go as planned. Some renters might be a nuisance because they cannot pay their rent on time or cause property damage.
- Refinancing might take time: Most banking institutions demand renters to have stayed with the property for at least a year. Some may have additional criteria. This might take a lot longer than thought to refinance.
Who should Use the BRRRR Method?
Both novice and experienced investors may use the BRRRR method. It is a great way to get started in real estate investing since it does not require a large sum of money, given the lower price point of distressed houses. The BRRRR method also enables them to have a passive income flow while increasing their rental property portfolio.
How Much Can You Make from the BRRRR Strategy?
By using the BRRRR method, you may earn twice as much as you invest. When everything goes right, buying more homes will even yield a greater return on investment.
However, it is crucial to remember that some variables might impact this. For example, if the property requires extensive renovations, it may take some time to rent it out. It might be tough to refinance your property when you don’t have renters. Your monthly cash flow might be a major issue if you don’t choose the correct pricing that will yield a profit.
What are the Alternatives to the BRRRR Method?
Other real estate investing techniques can be used as an alternative to the BRRRR method. Most people use the Fix and Flip strategy. The Fix and Flip method, often known as house flipping, is a strategy in which investors buy a property, improve it, and then sell it. Unlike the BRRRR approach, the property is for sale rather than rented.
For refinancing, investors might use a HELOC or Home Equity Line of Credit. It is a credit line that allows investors to borrow up to a certain amount of their home equity. They can also repay the money gradually. These alternatives aid investors in expanding their portfolios and cash flow opportunities.