By Joe Dyton, WCI Contributor
“Real estate is a great investment” is a common refrain in financial circles. The fact is that it certainly can be, but there’s more to real estate investing than purchasing a property, finding tenants, and collecting rent checks. First, you have to decide how you want to invest in real estate because you have a number of options at your disposal, including the BRRRR method—which has nothing to do with chilly temperatures.
What Is the BRRRR Method in Real Estate?
BRRRR is an acronym. It stands for, “Buy, Rehab, Rent, Refinance, Repeat.” The method involves buying a distressed property, renting it, and then refinancing it to get money to fund another rental property (and another, and another).
The BRRRR method may sound like traditional real estate investing, but there are two key differences. The first is that the properties acquired are distressed and need work. The second is the owner refinances their property so they can buy another one and repeat the BRRRR method over again. If you’re a potential or current real estate investor, let's talk about the BRRRR method and if it is a good strategy for you.
BRRRR for Beginners
The BRRRR method can serve as a way to generate additional investment income and build a vast real estate portfolio depending on how many times you decide to repeat the process.
Here’s a detailed look at all five steps:
- Buy: Purchase a distressed property that needs some work so it’s up to code and attractive to potential renters. The reason you’re buying a less-than-perfect property with the BRRRR method is because it will likely be less expensive than something that’s move-in ready.
- Rehab: You purchased a distressed property, remember? Now’s the part where you get the place fixed up. This might include structural renovations, making the property more visually appealing, or doing what’s necessary to ensure it’s a safe place to live. The key is you don’t want anyone to look at your property and think “distressed.”
- Rent: Before you get to the next step (refinance), you have to show banks that your property is generating income. That’s where renters come in. Once your property is presentable, you’ll want to decide your rental price, find good tenants, and start collecting income. You may want to consider hiring a property manager to save you time once you have tenants.
- Refinance: You specifically want to do a cash-out refinance on your property. This allows you to turn your equity into cash. Equity can be gained by taking out a larger mortgage—more money than you actually owe on the property. Once you have the cash on hand, you can use it to buy your next property.
- Repeat: Now you start the process all over again. Take the cash from your refinance and buy your next distressed property. You’ll then rehab it, rent it out, refinance it . . . get the picture? The BRRRR method can be used for various rental properties, including single-family homes, duplexes, and apartment buildings.
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Example of the BRRRR Method
Now that you have an idea of how the BRRRR method works, let’s see it in action:
First, you’ll find a property to purchase that will be worth your ideal value once it’s been rehabilitated (say $300,000). The money you put in should be less (about 70%) of the property’s value, so you have the cash to take out when you get to the refinance stage of the BRRRR method. When it’s time to rehab the property, you have to create a budget for repairs, including materials and labor. Working off that $300,000 property value, the 70% you’re working with totals $210,000. Determine how much you want to spend on repairs, and the remainder is what you can offer the property sellers.
Once the sellers accept your offer and your mortgage payment is in place, you can start renting the property. The monthly rent checks will provide you with a healthy, sustainable cash flow, which is necessary for when you’re ready to refinance. Your bank will let you refinance your mortgage for a percentage of your rehabbed property’s value—ideally, the value is what you were aiming for when you bought it. Following the cash-out refinance, you can repay the money you put into the property and take what’s left to invest in another property (repeat).
Here’s a simplified version of the BRRRR method (we're not including fees or taxes in this example):
- Buy a $300,000 house ($60,000 down payment; $240,000 loan)
- Spend $60,000 Rehabbing the property ($60,000 down payment + $60,000 rehab costs = $120,000 total investment)
- Rent the property for $1,500 per month.
- Refinance the property. It now has an appraisal of $480,000. You can take out a bank loan for 75% of the appraised value ($480,000 x 0.75 = $360,000).
- Now, you Repeat the process. You pay off the original loan of $240,000. That leaves you with $120,000 to find and buy the next property (which happens to be the same total investment you made on the original house).
The method can be applied to multi-family properties with bigger numbers, and you can still cash-out refinance and use the money to buy your next property.
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Is the BRRRR Method a Good Approach?
The BRRRR method has worked well for real estate investors, but no approach is without its faults. Here are the advantages and disadvantages to consider before you try the BRRRR method:
- In the right market (where property values consistently increase), you can quickly build equity and cash flow.
- Find good, long-term renters and your mortgage payment will be covered, the property will remain in good shape, and the utility bills will be paid.
- Once you’ve successfully gone through the first four steps of the BRRR method, you should have a down payment and repair capital for the next property.
- You can build a vast real estate portfolio quickly, depending on how soon you refinance.
- You need some cash on hand. Remember you've got to purchase the property and rehab it before you can refinance it. This is not a “zero-down” technique. Even if you get a steal on the property, you won't get a loan for more than the purchase price.
- It can be tough to find ideal BRRRR method properties when the market is down.
- You might have trouble at the refinance stage if the property doesn’t appraise well.
- There could be a lot of potential work to deal with in the rehab stage; unexpected repairs can quickly deplete your rehab budget.
- Bad renters lead to property damage and additional repairs or more time spent on finding replacements if they don’t stay for long.
- You remain highly leveraged as long as you are actively acquiring new properties since you strip all the old ones of their equity as much as possible. Leverage works both ways.
Who Should Use the BRRRR Method?
The BRRRR method of real estate investing can be rewarding, but it’s not for everyone. It takes patience; remember the idea isn’t just to find a property to rent. You want to find one that’s distressed but one that has the chance to go up in value once it’s rehabilitated. Not only do you have to do your homework (or perhaps hire someone to help you), you’ll also be spending time fixing up the place. If you believe you’re up for putting in that much time and effort before seeing a return on your investment, then the BRRRR method could be for you. It’s also ideal for real estate investors who are comfortable with some risk and have the funds available to make that first down payment.
While it may sound boring, using BRRRR to invest in real estate can actually be quite profitable when done correctly. Real estate investors who want to work hard and grow their portfolio quickly may find BRRRR to be an ideal real estate investing strategy.
Who Shouldn’t Use the BRRRR Method?
The BRRRR method probably isn’t the best fit for real estate investors who want to see returns right away. Once you acquire a property, it could take a while for it to cash flow, depending on how long the rehab stage takes. If you want to start collecting rent checks more quickly, you might want to look for a property that’s closer to being move-in ready. The downside is the better shape a property is in, the more it will likely cost.
There are plenty of potential upfront costs involved with the BRRRR method. Besides the down payment, you also have to pay for renovations. You could go through a significant amount of money only to find out the property didn’t appraise for what you were expecting. It could also take longer to find renters than you hoped, putting you on the hook for mortgage payments until you fill those vacancies.
If you don’t have the capital to handle all of these upfront costs or lack the appetite for risk, the BRRRR method might not be the best fit.
Also, if you have plenty of capital that you need to put to work, this may not be the best method. If you have enough for a down payment or more on all of the properties you want to acquire, there's no need to be stripping equity out of the other properties.
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Alternatives to the BRRRR Method
The BRRRR method is a real estate strategy, not the only real estate strategy. If you feel it’s not for you, there are more options for you to explore. You could get an installment loan to buy a fixer-upper and then implement the BRRRR method down the road. This is a good alternative if you don’t have a lot of upfront capital.
You could also buy a single-family home that’s mostly move-in ready but could use some updating on the inside. Then, you can rent it and refinance it after a year. This way, you don’t have as much cash tied up in the property. There’s also the “traditional” method of simply buying a property and renting it.
While not for everyone, the BRRRR method offers an opportunity to build and expand a real estate portfolio in a faster manner because you don’t have to save up to buy properties one at a time. The BRRRR method is just further proof that there are many ways to be clever using leverage and strategy in real estate. The key is to be smart and plan for contingencies—just like you would with any other investment.
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Have you used the BRRRR Method? How did it work out for you? Do you think the BRRRR Method is a viable method to make money in real estate investing? Comment below!