As you pursue your education in real estate, you should have come across the BRRRR method. The initials BRRRR simply represent; Buy, Rehab, Rent, Refinance, and Repeat. We can refer to this as a smart investment cycle for investors.
When you traditionally buy a rental property, you will get financing like a mortgage, rehab, rent, and then repeat the whole process. You can refer to this as BRRRR: Buy, Finance, Rehab, Rent, and Repeat. However, no one calls it that way yet several people use that approach to purchase a property.
The traditional method to buy a property is popular because of its high level of convenience. In this case, you get a bank loan to purchase a property. With financing, you don’t have to work hard to save for the purchase.
You can buy your home easily through the BRRRR method. However, easy things are not always the best in life. Through this method, you will quickly purchase homes, use rehab to add value, rent to build cash flow, and then refinance for a better financial position and then repeat the entire process. It will help you build a real estate portfolio that will envy your fellow investors in the long run.
Below is a breakdown of the BRRRR method:
Here, we have broken down the BRRRR method into its different elements and have given significant descriptions regarding those elements.
Investors believe that they make money when they buy and this is a fact. However, the best deals involve good purchases even though all deals have their own bad sides. Most lenders finance 75% of the value of the property.
Therefore, you should be ready to finance the other portion of the home. You will have to meet refinancing costs like the loan processing fees, title work, appraisal, and all these will eat away at your margin.
When you aim for 75%, it will not offer any contingency. Most of the time, people go over the budget and not under, and hence building in a little bit more of a margin is the best idea unless you will be going for volume.
Several options will help you buy the BRRRR property like
- A private loan
- Seller financing
- A hard money loan
- Or even cash
Each financing option comes with varied holding and acquisition costs. You need to account for all these to analyze a deal to be able to hit the 75% goal.
Thus, the key to the success of the BRRR method is to buy a property under the market value. You should not invest over 75% of the after-repair value (ARV) of the property. It will make sure that you don’t run out of capital and hence you will continue purchasing forever.
An experienced lender or agent will give you a conservative value for the ARV. If you pay so much for the property, there is little that you can do to recover from the associated problems or surprises.
When rehabbing a rental property, there are two important things that you need to keep in mind. The first is the thing you need to do to make the house functional and livable. Secondly, look at the rehab decisions that you can make that will add more value than the cost.
Rehabbing properly means adding more value to the property and hence you will recover the money. Unless you are dealing with luxury rentals, there is no need for chandeliers, hot tubs, skylights, bay windows, high-end stainless-steel appliances, Brazilian hardwood floors, and granite countertops among others. Make changes that will make value to your property without compromising on the quality of life.
No one will rent your property if it is in bad shape. Some of the common problem areas include the roofs, unfinished kitchen, drywall damage, horrific landscaping, outdated bathrooms, and too few bedrooms. You can target such properties and make relevant repairs at below market value to add big equity to the deals. Here are a few changes that you can make in the rehab phase-
Roof Repairing: You must repair the roof before selling the property. If you think about their expenditure, the prospects are likely to return the repairing cost while purchasing.
Backdated Kitchen: An old kitchen will work just fine. But you should know that the women have a large portion of say when purchasing a house, and women know their kitchens better than you do. So try updating the kitchen with the latest equipment to ensure financing the property.
Update The Bathrooms: No one wants to buy a house with a damaged and backdated bathroom. However, a backdated bathroom may decrease the chance of your property selling out.
Banks are rarely willing to give a refinance to a project that is not yet occupied. Therefore, renting the house comes as a priority. You need to screen carefully so that the tenants that you get will pay monthly. However, it is also crucial on the side of financing. The appraiser should not pay so much attention to how pleasant or clean the appraiser appears to be because everyone is human. However, the first impression makes a big difference.
You should notify the tenant early before the appraisal. Don’t choose an appraiser who will downgrade your property unfairly. You have to follow the local laws during the appraisal process. Tenants are not supposed to be present but inform them to keep the house clean during the appraisal period. Therefore, rent is a critical component of the BRRRR method.
Read Also: 5 Smart Reasons To Get Renters Insurance
A few years ago, it was nearly impossible to get a bank that is willing to refinance rental properties for single families. Currently, it is now easier to get refinancing for your rental property. However, there are a few things that you need to consider when looking for such a bank.
Check if they will only pay off the debt or they also offer cash out. If the bank does not offer cash out, it is more advisable to move on. The next thing to look at is the seasoning period that they need. This is the period that you will own the property before the bank lends on the appraised value instead of how much you have invested in. You have to borrow on the appraised value for the BRRRR method to work.
Nowadays, there are banks that lend on the appraised value immediately a property is rented or rehabbed. It is good to look for such banks. You can ask around, especially from investors, for the best BRRR banks. There is a high possibility that a bank that is lending to another investor will also lend to you.
However, you have to give the lender clear and thorough information. Remember you are dealing with human beings and not machines and this information will help them to make quick decisions. The secret here is to get the highest possible appraisal value. The success factors are how strong your initial comps are and how you rehabilitated your property. You should not put so much money in a deal and then fail to pull it out. It is wise to get a loan pre-approval before you can make a purchase.
The most fun part of the BRRR cycle is the repeat section. Take everything that you have gained, learned, and improved upon and then put it back into action. The other thing that you need to do is work on building the systems. Systems will help you accomplish your goals by repeating the process over and over again. Systems cut down on stress and mistakes. If you have systems that are more documented, you will miss less about missing out, forgetting, or overseeing something.
BRRRR Method Pros & Cons
Every method or strategy has its advantages and disadvantages. You must consider both the advantages and disadvantages of any method before applying that to your use. The BRRRR method also has its pros and cons.
Return Potential: Utilizing this method has return potential. Investors would be interested in buying these properties at relatively low cost and repairing and renting it for a higher price.
Top-paying Tenants: If you make substantial rehabilitation to the property, some high-paying tenants may choose it for specific features they find interesting.
Economies of Scale: Once you utilize the Brrrr strategy, you will achieve ‘economies of scale.’ In this case, owning multiple properties of the same category will help you lower the cost per property and lighten the risk.
Expensive loans: Financing such properties requires short-term loans that sometimes make the investors feel over-leveraged, and these loans are often expensive.
Rehabilitation project: Taking up a large property for rehabilitation is expensive and comes with extra headaches and worries.
Time intensive: Brrrr method is a time-intensive strategy. The rehab phase takes a lot of time for a property to get ready for potential tenants or buyers. First, you have to wait for the rehab and then wait for a tenant or a buyer to purchase the property finally.
Case study on a BRRRR:
To Wrap It Up
The most efficient way to invest in real estate is through BRRRR investment. It is so powerful that most investors cannot buy a property without considering the BRRRR method. It is something that will have a significant impact on your wealth and change your investment life.
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The “Buy, Rehab, Rent, Refinance, Repeat” (BRRRR) Method: