Have you heard people talking about the BRRRR method? What does “BRRRR” mean in real estate, and is it a reasonable strategy or too much of a risk?
The BRRRR method (“Buy, Rehab, Rent, Refinance, Repeat”) involves fixing up distressed properties and then renting them out to tenants. Once enough time has passed, and you’ve built up enough equity, you can then get a cash-out to refinance to purchase another run-down property in order to start the cycle over again.
“BRRRR” means “Buy, Rehab, Rent, Refinance, Repeat.” This is a method of real estate investing that focuses on rehabbing properties that need some TLC, renting them out, and then doing a cash-out refinance to start the process all over again with a new property.
While this strategy is similar to house flipping, BRRRR investors don’t fix up distressed houses to put them back on the market and make a one-time profit. Instead, they generate income by renting the properties out and use that equity to buy the next rental for their portfolio.
There are five steps in the initial cycle of the BRRR method, which are:
Let’s take a closer look at the specifics of each stage of the process.
If you want to become a successful BRRRR investor, you’ll first want to find the right property to buy. A part of this strategy depends on finding a distressed property that is cheap to purchase because it requires some work in order to get it ready to rent out.
You’ll want to look for property that is both a sound investment and needs some work. It’s absolutely essential to do your due diligence and determine how much work and what type of work will need to be done in order to rent the property out. Of course, there’s always the chance you’ll get surprised by any property, but a lot of problems can be avoided by thorough research ahead of time.
Before you buy a property, you’ll also want to create a timeline for how long renovations will take and when you can realistically start collecting rent. Consider both the best and worst-case scenarios here to ensure that you are taking on a financial burden you can handle.
Quite a bit of work is often required to get a distressed property up to code and ready to rent to tenants. Of course, you’ll want to be well aware of the type of work you’ll need to do before purchasing, as distressed properties can often take extensive work.
This is when you’ll make improvements to the property in terms of its structure, systems, safety, and aesthetic appeal.
A property that seems like a good investment can soon become a nightmare if you misjudge the types of repairs that are necessary, the costs of these repairs, and how long it will be before you can rent out the property.
There will also be the question of what types of renovations to engage in. Of course, you’ll need to bring the property back up to code and provide a healthy and safe living environment for your tenants. With less necessary and more aesthetic efforts, though, you’ll want to focus on renovations that give the highest return on investment and make sure any updates you do are worth it in terms of the neighborhood and local area.
Once your property is all fixed up and ready to go, it’s time to find tenants. You’ll want to determine an appropriate rental price that doesn’t leave money on the table but also keeps your vacancy rate low. It’s also essential to engage in thorough, legal tenant screening in order to reduce the risk of problematic tenants that don’t take care of the property, don’t pay rent on time, or otherwise cause headaches.
You’ll also want to decide whether you’re going to self-manage your rental or hire a property manager. Hiring a property management company is going to eat into your monthly profit, but being a hands-on landlord can be a big-time investment and require a laundry list of skills.
The fourth step in the BRRRR cycle is to do a cash-out refinance on the property. This basically transforms the equity you have in the property into cash.
Unlike a second mortgage, this doesn’t mean you now have an additional monthly payment to worry about. Instead, when you do a cash-out refinance, you take out a larger mortgage that pays off your existing mortgage and leaves you with the difference as cash in your pocket to use however you please.
How long you need to own the property before you get a cash-out refinance is going to depend on the lender you’re working with. The same goes for how much equity you’ll need to have accrued before applying.
Now that you’ve accessed the equity from your property, it’s time to buy another property. The process then ultimately starts from the beginning with another house or apartment building.
You can decide how many times, if any, you want to repeat this cycle. Some investors choose to accrue as many properties as possible, while others might stop after reaching the number of properties they can manage on their own.
As with any real estate investing method, there are pros and cons to the BRRRR strategy.
As far as advantages go, there’s a reason that so many people are drawn to the BRRRR method. If you’re successful, you can enjoy the following benefits:
Don’t just stop reading here and start looking through foreclosure listings, though. There are also some reasons why you might not want to choose the BRRRR method for buying real estate, including:
In relation to that last point, it’s important to recognize that BRRRR involves making a lot of educated guesses that could turn the whole situation sour if you’re off-base. For example, you could run out of funds if you underestimate how much it will cost to renovate the property or how long it will take, or you could struggle to rent out the property in a timely fashion. There are also many risks inherent in being a landlord and property investing in general that you will want to consider before using the BRRRR method.
If you don’t think the BRRRR method is for you, consider researching the following alternatives:
No matter what method you’re using to invest in real estate, finding a property that will predictably help you meet your financial goals is essential. Whether you’re planning on building a real estate business through the BRRRR method or you’re thinking about buying one single-family home to rent out and generate a little extra income, use our rental property calculators to help you make sure all the numbers lean in your favor.