The Ultimate Guide to BRRRR Investing

Start your journey with BRRRR investing

The BRRRR method is a real estate investment strategy that has powered novice and established investors alike to incredible wealth. Don’t be thrown by the recent hype, the fundamentals of BRRRR investing were established long before its newfangled moniker. How do you know if BRRRR-ing is the right thing for you? Where do you get the money for it? What do you need to know before getting started? These are all questions that we will be addressing in this BRRRR guide to help simplify the process for you and get you on the road as quickly as possible. Let’s begin!

What is the BRRRR Method?

The BRRRR method is a multi-step investment strategy in the great big world of real estate. It is an acronym that stands for Buy, Rehab, Rent, Refinance, and Repeat.

The concept is pretty straightforward. It involves using cash or any short-term financing source to purchase a fixer-upper. You then rehab that property to bring up to code and consequently, increase it's value. Once your rehabbed property is ready for tenants, you rent it out and eventually refinance it to recoup your investment. In some cases, your return is larger than the cash put into the deal in the first place

The BRRRR strategy is great for investors who are just getting started in their real estate journey and want to take their portfolios to the next level in a short amount of time. You are able to leverage your limited capital into a limitless number of deals.

Now, this may seem exciting. And it is. There is nothing like watching a property transformed as a result of your efforts. However, before embarking on this venture, it is important to be aware of the fundamentals of BRRRR to ensure you avoid any potential pitfalls. For this purpose, we will have an in-depth look at the five steps involved in the BRRRR method.

So, How Do I Begin Investing with the BRRRR Method?

The first step of the BRRRR investment strategy is to buy the appropriate investment property, not just ANY investment property.

The BRRR method is not a get-rich-quick scheme. It is, however, an incredible way to build a real estate portfolio with relatively little money. If you understand the 5 steps, the path toward success is straightforward. Understand the process and you’re on your way to building massive wealth through the BRRRR method:

Buy

The first step of the BRRRR investment strategy is to buy the appropriate investment property, not just ANY investment property. There’s a common adage that goes something like “You make your money at purchase”. That is to say, making sure your deal is a “good” deal at signing, will make every subsequent step that much easier.

You’ll want to find a property that is priced below market value with the potential to increase its value to market value through rehab. This includes distressed properties such as foreclosures and short sales. To figure out how much you should pay for a property, you have to know your numbers. One of the simplest ways to judge the value of a property is by using the 1% rule. Keep in mind, this is a rule-of-thumb, but a great way to filter out the properties that will simply waste your time. Here’s how the formula checks out:

Let’s say you have narrowed your search down to a house that is listed at a selling price of $100,000. You plan to use the BRRR strategy and turn that property into a rental. Your rent should equal around 1% of its purchase price. In this case, $1000/mo would be your target rent. If you can't get at least 1% of your total money back per month, it is your cue to look elsewhere. This is market-dependent. The 1% rule in San Francisco may be an incredible deal, but only so-so in a smaller market. Find what works for you!

Rehab

So, you’ve bought the rental property. Now comes the most important step: rehab! The goal of this step is to add value to the house and increase its equity. Your inner interior designer may want to go crazy here but, as a beginner investor, you don’t need to spend too much time and money on rehabbing the property in the BRRRR method. This is a little different from how you would do things in a fix-and-flip. Instead, try to focus on the necessary renovations that would make the house livable and would drive its value up while making it easier to find tenants.

Concentrate on value-adds such as:

• Replacing the heating system
• Fixing a leaky roof
• Renovating the kitchen
• Repairing broken fences and gates
• Hardwood floor refinishing
• Basement renovations
• Landscaping

Consider the time you put into your rehab. As they say, time is money, and this is especially so in the case of BRRRR investing. The longer you take in rehabbing a property, the longer it takes before you can earn your money back and expand your investments.

Whether you go the DIY route or hire a contractor for rehab, the same rules apply. It boils down to the time you have and your skill level. If it is going to take you a month or more to make the repairs that a skilled professional could perform in a day or two, then by all means hire a contractor. You may save some money doing it yourself, then lose all those savings from the rental payments you would otherwise have received. In short, do the math and be honest about your abilities and time!

Rent

In this step, you market your newly rehabbed property and attract the best tenant to your property. The higher the rent, the better your refinance terms will be. Consider this when you set your pricing, as you’ll want to take your rental contract to your bank when you want to refinance.

The contract proves to the bank that you are actively making money on the property. The more money the property generates each month, the more likely the bank will refinance for you. Here, the concept of positive cash flow plays a vital role. Cash flow is the money left after you subtract the operating expenses from the total rental income. For positive cash flow to occur, your rental income should be able to cover your operating expenses and leave some extra cash on the table once everything is said and done. Looking at real estate comps in your area helps in finding the right rental rate to charge tenants and generate a good passive income from your BRRRR investment.

Refinance

Refinancing is where you will find out how well you did as a BRRRR-er. Once your property has been renovated and rented, you can then go for a cash-out refinance. This is your home’s equity being converted into cash. In refinancing, you need a home appraisal. The key here is to get a high appraised value to be able to make as much money back as you can in order to repeat the process successfully. One thing that is imperative to your BRRRR methodology is that you do not want to put a lot of money in a real estate deal and not be able to earn it back. To avoid this from happening, talk to lenders before making an offer on a rental property. Talking to lenders ahead of time to know about the interest rates, closing costs, LTV (loan-to-value) offers, and their seasoning period length is good practice. Generally, the seasoning period for BRRRR investing is 6-12 months before you can refinance the property. A good tip is to find lenders that offer higher LTVs as the more money you put in refinancing, the more you can refinance later on.

Repeat

The final step of BRRRR investing is to simply repeat what you have done, right from the very beginning. Repeating the entire cycle is going to hone your BRRRR skills, make you a better real estate investor, and add value to your real estate portfolio. Take what you have learned from the first experience and incorporate it into your new cycle. With each iteration, you will be able to fine-tune your BRRRR methodology to make it more and more profitable.

Advantages of the BRRRR Strategy

The BRRRR strategy is designed in a way that keeps on growing your money if done right. Here are some of the reasons why that is possible:

• Large rental portfolio with far less money invested than the traditional method
• High return on investment
• Tax advantages of owning rental real estate
• Building equity
• Paying less for properties

Where Do I Get the Money to BRRRR?

When it comes to BRRRR, paying outright cash is always the best. But you may not have a large capital, to begin with, especially if you are new to the game. For you, here are some options to pay for your BRRRR:

• Bank loans. This is not the ideal approach for BRRRR but it also is not completely infeasible, either. Keep in mind, though, that conventional bank loans severely limit the type of properties you can own.
• Local bank loans. These provide greater lending flexibility and usually don’t have fine print that will make you lose sleep, something that conventional bank loans can often do.
• Hard money lenders. Interest rates and costs may be higher with hard loans but they specialize in lending for ventures such as BRRRR and home flipping, making them a great choice.
• Private lenders. This is money you get through the people you know. This could mean your family, friends, colleagues, or business partners.

What to Consider Before BRRRR-ing

As a beginner, there will be many strategies that will seem lucrative to you. But every investing strategy promises its own advantages and risks. Before diving in, consider approaching BRRRR from all angles. In that pursuit, I have listed a few considerations that should be kept in mind before BRRRR-ing.

• ‍Appraisal Risks. In BRRRR, refinancing involves home appraisal. However, the process involves a fair bit of math and if you’re no math wizard, you’d have to be very careful as to not miscalculate your ARV (after-repair-value). Otherwise, you will have a hard time repeating the deal.‍
• Rehabilitation Pains. Renovating homes may sound like fun but the rehab stage is nothing like what you've seen on T.V. or the movies. There are many headaches, such as absentee contractors, that you’ll have to deal with. While it is certainly not a deal-breaker, it is something to be aware of. Rehabbing is not a lazy person’s playground.‍
• Loan Headaches. If you need financing to support your BRRRR strategy, you have to consider what the costs look like and the kind of rates you will receive. Oftentimes, hard money or private lenders charge relatively high-interest rates. How quickly will you refinance out of those high interest loans? Assess your financial risk factors before jumping in headfirst.

Final Thoughts

BRRRR is a great real estate investing strategy for beginners and experienced investors alike. Requiring relatively smaller initial capital, BRRRR is especially beneficial for those who want to own multiple rental properties, but are starting out with limited capital. When done correctly, you can turn a single deal into many deals with the same initial capital investment. In the end, it all comes down to how committed you are and the investment style that tickles your fancy.

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