The BRRRR investing strategy has become popular with new and experienced real estate investors. But how does this method work, what are the pros and cons, and how can you be successful? We break it down.
What is BRRRR Strategy in Real Estate?
Buy-Remodel-Rent-Refinance-Repeat (BRRRR) is a great way to build your rental portfolio and avoid running out of cash, but only when done correctly. The order of this real estate investment strategy is essential. When all is said and done, if you execute a BRRRR strategy correctly, you may not have to put any money down to buy an income-producing property.
How BRRRR Investing Works…
- Buy a fixer-upper property below market value.
- Use short-term cash or financing to buy.
- After repairs and renovations, refinance to a long-term mortgage.
- Ideally, investors should be able to get most or all their original capital back for the next BRRRR investment property.
I will explain each BRRRR real estate investing step in the sections below.
How to Do a BRRRR Strategy
As mentioned above, the BRRRR strategy can work well for investors just starting out. But as with any real estate investment, it’s essential to perform extensive due diligence before buying to ensure you are getting an income-producing property.
B – Buy
The goal with a real estate investing BRRRR strategy is that when you refinance the property you pull all the money out that you put into it. If done properly, you’d effectively pay nothing for a property. Plus, you still have 25 percent built-in equity to lower your risk.
Real estate flippers tend to use what’s called the 70 percent rule. The rule is this:
| (After Repair Value X 0.7) – Repairs = Maximum Purchase Price |
Most of the time, lenders are willing to finance up to 75 percent of the value. Unless you can afford to leave some money in your investments and are going for volume, 70 percent is the better option for a couple of reasons.
- Refinancing costs eat into your profit margin
- Seventy-five percent offers no contingency. In case you go over budget, you’ll have a little more cushion.
Your next step is to decide which type of financing to use. BRRRR investors can use cash, a hard money loan, seller financing, or a private loan. We won’t get into the details of the financing options here, but remember that upfront financing options will vary and come with different acquisition and holding costs. There are important numbers to run when analyzing a deal to ensure you hit that 70—or 75—percent goal.
R – Remodel
Planning an investment property rehab can come with all sorts of challenges. Two questions to remember during the rehab process:
- What do I need to do to make the property livable and functional?
- Which rehab decisions can I make that will add more value than their cost?
The quickest and easiest way to add value to an investment property is to make cosmetic improvements. Finishing a basement or garage typically isn’t worth the cost with a rental. The property needs to be in good shape and functional. If your properties get a bad reputation for being dumps, it will hurt your investment down the road.
Here’s a list of some value-add rehab ideas that are great for rentals and don’t cost a lot:
- Repaint the front door or trim
- Refinish hardwood floors
- Add tile
- Improve curb appeal
- Add shutters to front-facing windows
- Add window boxes
- Power wash the house
- Remove outdated window awnings
- Replace ugly light fixtures, address numbers or mailbox
- Clean up the yard with basic lawn care
- Plant grass if the lawn is dead
- Repair broken fences or gates
- Clear out the gutters
- Spray the driveway with weed killer
An appraiser is a lot like a potential buyer. If they pull up to your property and it looks rundown and unkempt, his first impression will undoubtedly impact how the appraiser values your property and affect your overall investment.
R – Rent
It will be a lot easier to refinance your investment property if it is currently occupied by renters. The screening process for finding quality, long-term tenants should be a diligent one. We have tips for finding quality tenants, in our article How To Be a Landlord.
It’s always a good idea to give your tenants a heads-up about when the appraiser will be visiting the property. Make sure the rental is cleaned up and looking its best.
R – Refinance
These days, it’s a lot easier to find a bank that will refinance a single-family rental property. Having said that, consider asking the following questions when looking for lenders:
- Do they offer cash out or only debt payoff? If they don’t offer cash out, move on.
- What seasoning period do they require? In other words, how long you have to own a property before the bank will lend on the appraised value rather than how much money you have invested in the property.
You need to borrow on the appraised value in order for the BRRRR strategy in real estate to work. Find banks that are willing to refinance on the appraised value as soon as the property is rehabbed and rented.
R – Repeat
If you execute a BRRRR investing strategy successfully, you will end up with a cash-flowing property for little to nothing down.
Enjoy your cash-flowing property and repeat the process.
Real estate investing strategies always have advantages and disadvantages. Weigh the pros and cons to ensure the BRRRR investing strategy is right for you.
BRRRR Strategy Pros
Here are some advantages of the BRRRR strategy:
- Potential for returns: This strategy has the potential to produce high returns.
- Building equity: Investors should keep track of the equity that’s building during rehabbing.
- Quality tenants: Better tenants usually translate to better cash flow.
- Economies of scale: Where owning and operating multiple rental properties at once can lower overall costs and spread out risk.
BRRRR Strategy Cons
All real estate investing strategies carry a certain amount of risk and BRRRR investing is no exception. Below are the biggest cons to the BRRRR investing strategy.
- Expensive loans: Short-term or hard money loans usually come with high interest rates during the rehab period.
- Rehab time: The rehabbing process can take a long time, costing you money every month.
- Rehab cost: Rehabs often go over budget. Costs can add up quickly, and new issues may arise, all cutting into your return.
- Waiting period: The first waiting period is the rehab phase. The second is the finding tenants and starting to earn income phase. This second “seasoning” period is when an investor must wait before a lender allows a cash-out refinance.
- Appraisal risk: There is always a risk that your property will not be appraised for as much as you anticipated.
BRRRR Strategy Example
To better illustrate how the BRRRR method works, David Green, co-host of the BiggerPockets podcast and real estate investor, offers an example:
“In a hypothetical BRRRR deal, you would buy a fixer-upper property for $60,000 that needs $40,000 of rehab work. Throw in the same $5,000 for closing costs and you end up with a total of $105,000, all in.
At a loan-to-value ratio of 75 percent, if the property appraises for $135,000 once it’s rehabbed and rented out, you can refinance and recover $101,250 of the money you put in. This means you only left $3,750 in the property, significantly less than the $50,000 you would have invested in the traditional model. The beauty of this is even though I pulled out almost all of my capital, I still added enough equity to the deal that I’m not over-leveraged. In this example, you’d have about $30,000 in equity still left in the property, a healthy cushion.”
Final Thoughts
Many real estate investors have found great success using the BRRRR strategy. It can be an incredible way to build wealth in real estate, without having to put down a lot of upfront cash. BRRRR investing can work well for investors just starting out.
To learn more about different real estate investment strategies, check out all the free resources in RealWealth’s Learning Center.
