What is the BRRRR method?
BRRRR stands for "Buy, Rehab, Rent, Refinance, Repeat".
With this real estate investment strategy, dilapidated houses are refurbished, rented and then your next property is bought with home equity from the rental.
Many investors have found that using the BRRRR method they can build a small empire of rental housing, continuous passive income, and growing net worth over the years.
But of course, real estate investments – not to mention renovating older homes – aren't for everyone. So you should understand all the pros and cons before you start.
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Via the BRRRR method
Before we get into the advantages and disadvantages of the BRRRR method, let's determine what the acronym stands for:
Obtain – Find and buy a distressed or underpriced home for saleRehab – Bring the house on the code so it's safe. Then renovate to make it attractive to tenantsRent – Find and check a creditworthy, reliable tenant to pick upRefinancing – Carry out a cash-out refinancing of the property with the tenant in the residenceRepeat – Use the proceeds from your cash out refinancing to find and buy another distressed home at one low cost. And repeat as often as you can
Of course, the BRRRR method sounds a lot simpler than it is. It will take a lot of time, money, and work to get started and grow your investment portfolio.
Those who are successful are likely to be hardworking risk takers with business acumen, building skills, and real estate skills. You should also be familiar with times of financial stress (e.g. when you are spending cash on buying and renovating real estate but are not yet receiving rental income).
However, if that sounds like you, the BRRRR method could be your ticket to real estate wealth.
Step-by-step guide to the BRRRR method
First, let's examine what the BRRRR methodology really involves at each step of the process.
To begin, you need to find a home that you can add significant value to in rehab.
Ideally, the property is one where most of the work is either minor or cosmetic: for example remodeling the kitchen, laying new floors, improving energy efficiency, and so on. However, certain structural issues are fine, provided you can see the full extent of the damage present and the cost of fixing it.
When thinking about repair costs, consider increasing your rehab budget by 10% or 20% as overruns are common.
At this point you need to know:
How much you will pay for both the house and the rehab project to make it safe and attractive to potential tenants How much post-rehab rent you can charge when the first tenant moves in Cash-out refinancing
Get quotes from at least three contractors for rehab expenses. And if you are concerned about potentially expensive structural defects, seek professional advice: a house inspector, structural engineer or other expert.
When evaluating the likely rental and sales values of the home, do not trust your gut or your real estate listings. Pick the heads of the local real estate agents. They won't mind sharing their expertise if they think you could become an important customer.
This is the time to think about your project in business terms.
Create a table of all the numbers showing the cash outflow during the purchase and rehab phases and the potential cash flow during the rental and refinance phases.
Also, be sure to include cost overruns and schedule delays in your estimates. Because you will be very lucky if you escape this one.
The more work you can do yourself, the less you pay professionals. And the greater your profit will be.
However, don't take on assignments unless you are 100% sure that you have the required skills and knowledge – otherwise, you will end up wasting both time and money.
Also, think about what mortgage program you are going to use to buy the home. Many rehab loan programs will only allow you to do the renovations yourself if you are a licensed, professional contractor.
Don't forget that you don't turn around here. So don't save. You have to code the house and make it secure. If not, you (as the landlord) could expect bills for further repairs later. And you could even face liability that could result in legal action.
You also need to decide how elaborate or simple the cosmetic aspects of your rehab should be. Discuss it with a local real estate agent.
Based on the neighborhood and the characteristics of the home, should you choose finishes that will attract young professionals, established families, or other types of tenants? This can make a huge difference in the types of features and upgrades you add.
The rehab is complete. And you are ready to show the house to potential tenants.
That may sound like the easy one. But that's not always the case. So, read our complete guide to becoming a landlord for more information.
Also read “Tips for Landlords: How to Set Your Rent”.
These contain a wealth of information for new landlords. And remember, landlords have a number of legal responsibilities that can be based on federal, state, city, or county laws. Therefore, find out about the rules that apply where you work.
Once you have a tenant, you have a source of income. And you can apply for cash-out refinancing from lenders.
Be sure to get quotes ("credit estimates") from at least three lenders. Because that's the best way to get the lowest price and the best overall deal.
Note that not all mortgage lenders carry out cash out refinances on investment properties. So you may have to look for a willing lender and a low interest rate.
Even then, some require you to own the home for a period of time before you can refinance (often 6 months or more). And expect higher mortgage rates and stricter eligibility criteria than a home loan.
And you're gone! Things should get easier over time as you will gain experience, confidence, and skills over time. And you will make contact with real estate agents who will remember you if you have particularly tempting offers.
Equally important is that banks and mortgage lenders be more confident about lending to you as you will be able to have an increasingly impressive track record.
Why use the BRRRR method?
Why use the BRRRR method? Because it works, if not for anyone who tries.
The big advantage of BRRRR over house flipping – the main alternative – is that you get a lot of the wealth you create when you upgrade a house.
With the fix-and-flip, you sell the property immediately, collect part of the profit and reinvest the rest in your next project.
But with the BRRRR method, you keep the house and rent it out. And you finance your next project with a cash-out refinancing.
The big advantage of BRRRR over fix-and-flip is that you keep much of the wealth you create in your homes.
Over time, this can turn into a snowball that leads to an ever-growing real estate portfolio that generates significant income from rental income.
In fact, Business Insider recently interviewed Samuel Pimm, who successfully uses BRRRR. He started his first project at the age of 26 and is now 33 years old. He and his business partner are currently co-owners of 167 rental units, 85 of which are houses and 82 apartments. Impressive! He built this impressive portfolio in just seven years.
But maybe even he would acknowledge that luck played a role. Because there are many obstacles that could be difficult for new investors to overcome.
Is the BRRRR method worth it?
The method clearly works for a specific type of person. You have to be adventurous enough to take advantage of opportunities. But careful enough to avoid pitfalls.
And you need to realize that these endeavors are all about numbers. If you get these wrong just one too many times, your empire could collapse.
Advantages of the BRRRR method
Here are some advantages of the BRRRR method of real estate investing:
You're buying investment property at a lower price because it's run down Rental income can help you pay your mortgage and generate passive cash flow. Home remediation increases their value, and therefore your home equity, You can use that home equity to buy new real estate and build your portfolio on. Your net worth should go up slowly at first, but then faster as your mortgage balances go down and the value of your homes goes up. You are using other people's money to eventually get rich, with luck
That all sounds pretty good. But of course there are also disadvantages.
Disadvantages of the BRRRR method
The method has many pitfalls, especially if you are inexperienced.
Today's difficult real estate market could make it difficult to find affordable, upscale homes. And you pay for your borrowing as the project drags on. Finances can get tight when you're between tenants – or when a tenant is behind on their rent.As a landlord, there are costs too, including repairs, maintenance, and tenant finding and checking. Rent and resale markets are constantly changing. Worst-case, if you decide to go to a city or neighborhood that is or will be in economic trouble, your rental income could shrink or dry up while your selling price (the fire exit) goes down
All of these could bring down your real estate empire, especially if it occurs during your first or early project. So do what you can to protect yourself from them. You can see why luck can play a role in BRRRR success.
How do I start the BRRRR method?
If you're serious about trying the BRRRR method, here are five tips to get you started:
Get your personal finances in top shape. You will borrow a lot of money. So increase your credit score as high as possible. Save a huge down payment on your first property. And pay off other debts (especially credit card balances) before submitting an application. This will give you the lowest mortgage rate and the best mortgage programConsider finding a business partner. You may find it easier to borrow if there are two of you. It also means you can share the workload and stress. If you can bring on board someone who is a contractor, landlord, real estate professional, or civil engineer, their skills could be invaluableDevelop your business and management skills. Brush up on your spreadsheet skills, read all about rehab and construction, study the local real estate market, and discuss your plans with real estate professionals. Then write a detailed business plan (it doesn't hurt to work with a financial advisor)Align your funding. Make sure you Get pre-approval and have a mortgage loan ready when you find your first property. You don't want to be eliminated in a bidding war because you weren't preparedBe ready to go away. Don't think you can get a project up and running. Only act when you are absolutely certain that you know all the numbers and that you are making a decent profit
For the right person, the BRRRR method could be a one-way street to financial independence. But it takes a lot of planning, strategy, and patience. So learn all you can and do it carefully.
Ready to start? Talk to a lender about your options today.
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