BRRRR is a relatively newly coined acronym that stands for Buy, Rehab, Rent, Refinance, Repeat. The term has gained substantial popularity in the real estate investing community over the years. It is easiest to think of this method as a hybrid of buy and hold and fix and flip. This method combines the best of both worlds where the property is purchased below market value to fix up and force equity appreciation, however, you retain property ownership to rent out while pulling cash out to continue buying more. Below we take a deep dive into the BRRRR real estate investing method.
What is BRRRR Real Estate Investing?
BRRRR is an acronym for Buy, Rehab, Rent, Refinance, and Repeat, which is a real estate investment strategy that involves buying a distressed property, rehabbing it, renting it out, cash-out refinancing newly appreciated equity, and repeating the process to acquire more rental properties. The process is a common technique for investors to systematically grow their rental portfolio, as well as build wealth and cash flow through real estate.
What is the Difference between BRRR and BRRRR?
BRRR and BRRRR are acronyms used in real estate investing, which both describe the same strategy of “Buy, Rehab, Rent, Refinance”. They both refer to the same fundamental strategy, but the acronym BRRRR is more commonly used, which adds an extra R that stands for “Repeat”. This added step of Repeating emphasizes the importance of using the refinanced capital (see step #4 below) to continue investing and building wealth.
Important BRRR Investor Terms
After Repair Value (ARV) – After repair value (ARV) is a term used in real estate investing to refer to the estimated value of a property after it has been fully renovated or repaired.
Cash Out Refinance – Cash out refinance is a financial real estate strategy where an investor refinances an existing mortgage, taking out more than the original loan amount and using the excess cash to fund new investments, renovations, or other expenses.
Can you BRRRR a Commercial Property?
Short answer – Yes. Although this method is commonly used for residential properties such as single family rentals or multifamily units,it can also be used for commercial rental properties such as retail shopping plazas, rental office buildings, and industrial rental properties. Commercial properties are very different from residential properties, so it is best to review and understand the different approaches to commercial property management, buying and selling commercial real estate, leasing out commercial real estate, and obtaining a commercial mortgage, before attempting to execute the BRRRR strategy on a commercial rental property.
How to do the BRRRR Investing Method?
The BRRR method is quite similar to the buy and hold investing method, but requires a few different steps after renting the property out. Below we take a look at each step of the BRRRR to understand each step required to take.
In order to start the BRRR process you will first have to purchase a rental property. Before actually purchasing the property, several prerequisites need to be met such as having already identified a target property, having sufficient down payment capital, good credit, and a solid business plan. When buying the property, the goal is to purchase the property below market value at 75% or below the property’s ARV (After Repair Value). Hitting this target ensures that there will be sufficient equity in the property after the rehab to satisfy lender requirements to do the cash out refinance. Below market value properties typically need updating and/or repairs, which we will cover below.
When rehabbing a rental property, it is good practice to first plan out, budget, and get bids from contractors. Prioritizing any structural and safety repairs first (e.g. roofing, electrical, plumbing) should be a priority and are usually the most costly. Once any major repairs are taken care of, performing improvements that increase the most property value can be addressed. Value-add improvements include curb appeal jobs such as paint, landscaping, and other larger upgrades such as a new kitchen in multifamily rentals, windows, and parking lot. When rehabbing a rental property, the goal is to try to stay within your initial budget. It is very easy to go over budget, which can jeopardize the Refinance step of the BRRRR process.
Since banks and lenders typically prefer to lend on occupied properties, it will be important to rent out vacant units before refinancing (next step). The tenant selection process will depend if you are self managing or will hire a property management company. If self managing the rental property, then becoming familiar with self-management practices can be very valuable to selecting the most qualified tenants. If hiring a property management company, then they will handle the rental process for you, but will charge a fee for their services. In the rental step of the BRRRR process, it is important to ensure that the rent covers all expenses such as mortgage payments and any other overhead such as maintenance, property taxes, etc. Showing strong cash flow will greatly help you when you reach the Refinance step. When leasing out rental properties, the primary goal is to try to get the highest market rent from the most qualified tenant.
Once the property has been rehabbed and successfully rented, you can proceed to the Refinance step of the BRRRR method. Refinancing involves a type of long-term loan called “cash-out refinance” that allows the investor to withdraw their equity and use that cash to the last step of the BRRRR method – Repeat (i.e. purchase another property). Different lenders will have different sets of requirements, however meeting basic criteria (depending on property type) should increase the odds of loan approval. Some basic criteria that a lender will look at includes borrowers credit score, ownership of the property for a minimum time period, possessing signed lease agreement(s), debt-service-coverage (DSCR) ratio, loan-to-value (LTV) ratio, and many other possible factors. When refinancing rental properties, the primary goal is to get the highest appraisal value of the property, while getting the best rate and terms on your loan.
The final step of the BRRRR investing method is to take the newly obtained capital from the Refinance step, and use it to start the process all over again. This step is critical to continue building wealth, as it will be tempting to use that liquid capital to acquire non-appreciating assets such as a new car or extended luxury vacation. The good news is that now that you have experience with the process, each subsequent go around should be easier as you can improve on past mistakes made in the process. Implementing systems such as property management softwares and strengthening contractor relations will only make this process easier.
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BRRRR Real Estate Investing Tools and Resources
The BRRRR 70% Rule
In the BRRRR strategy, the 70% rule is a common metric that states an investor should pay no more than approximately 70% of the home’s after repair value (i.e. the price it would likely sell for once rehab is completed).
Buy, Sell & Lease BRRRR Properties →
In the BRRRR strategy, buying undervalued properties, rehabbing them, and leasing out to tenants for rental income creates a steady cash flow, while selling after value appreciation can provide capital for further investments.
Mortgages for BRRRR →
When utilizing the BRRRR strategy, obtaining a mortgage with favorable terms is crucial, as it allows investors to refinance and leverage the increased property value to access additional capital for reinvestment in new properties.
BRRRR Construction →
In the BRRRR strategy, efficient and cost-effective construction during the rehabilitation phase is vital, as it increases the property’s value while minimizing expenses, ultimately maximizing the return on investment.
BRRRR Property Management →
Effective property management is essential in the BRRRR strategy, as it ensures well-maintained properties, satisfied tenants, and a consistent rental income, all of which contribute to the long-term success of the investment.
All Real Estate Investor Tools →
Investor tools, such as property software and financial calculators, can greatly aid in the BRRRR strategy by streamlining the evaluation process and help investors accurately project potential returns on investment.
Pros and Cons of the BRRRR Investing Method
While there are several benefits to the BRRRR real estate investing strategy, there are also some potential drawbacks that investors should be aware of. We take a look at the pros and cons of both below.
Pros of the BRRRR Real Estate Investing Method
- Monthly Cash Flow Income – Once the property is rented and stabilized, it should be generating (relatively) passive income. Thanks to the newly rehabbed condition, maintenance expenses should be minimized. Furthermore, if the initial analysis was performed correctly, the rents should be toward the top end of the market and ideally providing a profit every month.
- Build Wealth – The forced appreciation that was created by purchasing below market and rehabbing to improve the condition, should have created significant new equity in the property. If you continually execute step #5 of the BRRRR method – Repeat, then the amount of equity you can build up over many properties and years can grow to a sizable amount.
- Paying Less for Properties – Overall, if the BRRRR strategy is done correctly, you should end up paying less for a property than if you had bought it normally such as in a buy and hold. The imputed discount comes from 2 places: 1. Purchasing a distressed property at below market value, ideally at 75% of ARV. 2. Once you complete step #4 – Refinance, you pull back most of your initial capital, only leaving a small portion of your capital in the deal.
Cons of the BRRRR Real Estate Investing Method
- Rehab Efforts – Simply put, rehabbing a property is not an easy venture. Even for experienced practitioners, unexpected things always come up because each property is different with its own history. From finding qualified contractors, to discovering unexpected repairs such as mold or asbestos, property rehabs require dedication and perseverance.
- Difficult to Get Purchase Loan – Since BRRRR properties are usually in rough condition at the beginning, they are often more difficult to get conventional purchase loans. This leads many investors to turn to shorter term loans such as hard money loans. These “investor loans” often come with higher interest rates, which can push the property’s already negative cash flow even further downward.
- Longer Timeline – The whole BRRRR process takes time to see through – typically from 8 months to 18 months. Even in the best case scenario for a quick rehab, most lenders require a seasoning period of 6-12 months which lenders want to see proof of ownership and stabilized renters. This contrasts other quicker real estate investment strategies such as turnkey or house hacking.
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