The BRRRR method is a real estate investment strategy that involves flipping distressed and off-market properties. The main idea behind the BRRRR strategy is to buy properties at a low price, renovate them so that you can rent them out for a good price, and quickly refinance the equity to repeat and purchase another similar kind of property.
The BRRRR strategy works effectively as a rinse and repeat real estate investment strategy that can help you quickly scale your real estate business.
- Buy a Property
- Rehab the Property
- Rent Out the Property
- Do a Cash-Out Refinance
- Repeat the Process
1. Buy a Property
The first step of the BRRRR method is to purchase a distressed or off-market property that needs minor to significant repairs. One of the reasons why investors buy this type of property is because they are usually offered a lot lower than the market price.
To determine if the BRRRR method will work for the property, do the math to ensure the purchase price (including closing costs) can cover your expenses to rehabilitate. Since the BRRRR method relies on buying a distressed property, most traditional loan lenders may be unwilling to finance it. In terms of financing the entire process, you should consider reaching out to hard money lenders or getting a HELOC. You should also consider the after repair value (ARV) and never offer more than 70% of the property ARV.
2. Rehab the Property
Since the properties in a typical BRRRR are distressed, you may need to carry out some aesthetic and structural rehabilitation to make them ready for renters. However, you should only execute renovations to increase the property value and command a higher rent. More importantly, you should draw up a realistic budget and timeline for the project.
3. Rent Out the Property
Once rehabbed, the next step is to rent the property out to qualified renters. The money you receive in rental income will help you make the necessary monthly mortgage payments, thereby increasing your equity in the property.
Setting the right affordable rental price but yet able to provide you with a reasonable rental income is the key to succeeding with the BRRRR method. You may decide to handle the property management yourself or hire the service of a property management company if you want an entirely passive investment.
4. Do a Cash-Out Refinance
Once you have acquired a considerable amount of equity in the property through regular mortgage payments, the next step is to do a cash-out refinance. A cash-out refinance allows you to convert your equity into cash.
You access your equity by taking out a bigger mortgage and borrowing more money than you currently owe. The cash can be used for anything, including purchasing another property. Before doing a cash-out refinance, ensure that you have owned the property for the legally required seasoning period, which could be anywhere from 6 months to 2 years.
5. Repeat the Process
As the name implies, you can repeat the process by using the realized cash from the refinance process to purchase another distressed property or multiple properties, rehab, flip into a rental, and refinance it.
BRRRR Method Pros
- BRRRR Investing Requires Less Capital
- Passive Income Source
- Economies of Scale
1. BRRRR Investing Requires Less Capital
If done correctly, BRRRR investing makes it possible for newbie real estate investors to purchase a property without significant upfront capital. Typically, you will need just enough money to cover the cost of the down payment and closing costs (if the loan amount approved is unable to cover the closing costs).
2. Passive Income Source
Once you have reached the rent step of BRRRR, you will start earning passive income via the rent you collect. You might even decide to hire the service of a professional property management company to relieve you of all forms of landlord-related duties.
3. Economies of Scale
Once you hit your BRRRR stride, you can achieve something called economies of scale, where owning and operating multiple rental properties at once can help you lower your costs overall by reducing your average cost per property and spreading out your risk.
BRRRR Method Cons
- Extensive Renovations May be Required
- Appraisal Risk
- There May be a Long Seasoning Period
1. Extensive Renovations May be Required
When combined with the cost of renovations, distressed properties can be expensive, labor-intensive, and time-consuming. Whether you choose to rehab the BRRRR property yourself or work with professional contractors, you should prepare for the unexpected, like bad plumbing, pest disaster, or major structural issues.
2. Appraisal Risk
Lenders predominantly refinance a property based on its appraisal, not on the money put into it to rehab. That means there is a risk the property valuation will be lower than you estimated from the get-go.
3. There May be a Long Seasoning Period
Most refinance lenders or banks have a dedicated seasoning period. A seasoning period is the number of months an investor is expected to own a property before refinancing. Most will likely require you to wait up to 12 months before refinancing. Thus, you will have to wait a year or longer to access equity to finance your next property.
Yes, the BRRRR strategy works and can be very profitable if you do the proper research before buying. Of course, it takes some experience, but BRRRR investing can provide you with an excellent passive income and an easy way to diversify your real estate portfolio.
As with all investment strategies, the BRRRR method has some risks, the most common being cost overruns to rehab the property and low appraisals once the renovations are complete. However, you can mitigate the risks by doing your due diligence before buying and ensuring you don't overpay for the property.
The BRRRR method of real estate investing can provide passive income and grow your real estate portfolio. However, it requires enough time to achieve the desired financial gains from such a type of investment. Therefore, before venturing into real estate investing using the BRRRR method, you should consider the pros and cons and discuss them with an expert investor.