Buy, rehab, rent, refinance, repeat, known as BRRRR, is a popular real estate investment strategy. It entails buying a property below market value, fixing the property in a cost-efficient yet value-laden way, renting the property, getting a cash-out refinancing for the property, and using your earned capital to repeat the process. Let’s break down each step further.
BRRR Investing Method: Buy
In real estate, they say you make your money when you buy. How do you do that? By purchasing properties that are below market value and never investing more than 70% of your property’s after repair value (ARV).
To get the ARV for your property, you first need a conservative estimate of how much your purchase will appraise after it’s repaired. Take that figure and multiply it by .70. Your goal as an investor is to make the cost of repairing your home and the amount you bought your home add up to your ARV. Many investors shoot for 75%, but that may not leave you enough budgetary wiggle room (especially when you factor in the costs of refinancing, vacancies, and the possibility of your home being appraised for less than you expected).
A good tactic is to purchase homes that need significant repairs because other buyers will be less likely to want to invest, and you can also negotiate the price down. The following are examples of repairs that make for a good investment because you’ll be able to get a good deal for your home.
- Roofs: A roof in need of repair will add to your home’s value when it gets appraised.
- Unfinished Kitchens: If the kitchen is in shambles, then a bank won’t offer a conventional loan for financing, which means you’ll be more likely to buy it with cash.
- Drywall Damage: Bad drywall will also make the property ineligible for financing and will deter many investors. But not you because you know that drywall isn’t expensive to fix!
- Bad Landscaping: An overgrown lawn will also scare away investors while being inexpensive to fix.
- Outdated Bathrooms: Since bathrooms tend to be small, the material and labor costs will run between $3,000 and $5,000. But the return is much higher because a beautiful enough bathroom lets you compete with homes in your area with a higher AVR.
- Too Few Bedrooms: Adding a third or fourth bedroom to a home that’s greater than 1,200 square feet is a simple way to increase the value of your investment and will also help it compete with pricier properties nearby.
BRRR Investing Method: Rehab
Two principles should guide how you rehab your investment.
- How does this house become more livable and functional after this repair?
- What sort of rehab adds more value than it costs?
Some of the following can be useful additions, although they’re not necessary.
- Stone countertops
- Hardwood or laminate floors
- High-end stainless steel appliances
- Washer and dryer
- Bay windows
- Storm doors
- Sliding doors
- Hot tubs/ Whirlpools
- Patios or decks
- Walk-in closets
- Extra closets
- Covered porches
When it comes to rentals, a finished basement or an additional garage isn’t as useful as a great paint job, nice floors, or new bathroom tiles.
BRRR Investing Method: Rent
This step comes before refinancing because banks tend not to offer to refinance rental properties that aren’t occupied. You’ll want to screen your tenants thoroughly so that you can maintain an income, be eligible for refinancing, and keep the property looking nice so as not to detract from the appraisal.
Let your tenants know when the appraisal is going to happen to make sure everything is neat. Give tenants a reminder call the day before and let them know that they don’t have to be there. You’ll want an interior appraisal instead of a drive-by one since a drive-by one may lead to your house being valued for less.
You have to keep an eye on your tenants and property since your income is the lifeblood of BRRRR. So, take the following steps:
- Be strict with your tenants.
- Charge late fees to encourage timely rent payment.
- Check on your property. Checking the smoke detectors, furnace filters, and other acts of quarterly upkeep are a great way to get a look around.
- Don’t let the desire for a higher monthly income stream deter your tenants. Instead, charge less to get someone who will be consistent rather than settling only for those who can afford the higher rent.
- Make your lease agreement solid and be knowledgeable about your state’s landlord/tenant laws.
BRRR Investing Method: Refinance
You’ll want a cash-out refinance on your home, which is when you get more money than the value of your property. That money will increase how much you have to pay back, but it’ll also be more useful to you than the equity you have on your property. Although, do keep in mind that your cash flow will take a hit since your monthly mortgage payments will be greater.
When looking for refinancing, make sure your lender offers cash-out refinancing. Ask them what their “seasoning period” is, which is how long you need to own a property before the bank lends based on the appraised value rather than the purchase value. For BRRRR to work, you need to borrow based on the estimated value. The best banks for you are ones who are willing to go based on the appraised value right after your property has been rehabbed and rented.
How do you find the best banks for you? Ask your network! Every successful real estate investor has a network of professionals, including attorneys, contractors, and other real estate agents. Your network helps you find deals, endorses contractors when you need them, and lets you know the best banks to use for your situation.
You can also use websites like ListSource or CoreLogic to search for every loan issued in your city to non-owner occupants and their price range. This search will likely cost a few hundred dollars, but it’ll let you know which banks lend to investors at the price point that suits your needs.
When you contact your lender, be thorough and precise with your information. This will ingratiate you and make them more likely to make a quick decision in your favor. It can also be helpful to get preapproval for your loan.
BRRR Investing Method: Repeat
By repeating, you have the advantage of having learned from your previous go around. Eventually, you should have a documented system in place that reduces any stress or mistakes. It’s essential to document your process so that you can check in as necessary to avoid forgetting any crucial steps.
BRRRR Pros and Cons
- Earning Expectation: If done right, BRRRR can have a high return on investment. It’s possible to find properties below market value, rehab them intelligently, and rent them out to generate a reliable revenue stream.
- Equity: In addition to making monthly money, you’ll also be earning equity in your home, particularly during the rehab portion. You make your investment more valuable and are then able to profit from that value when you get your cash-out refinancing.
- Top Tenants: If you rehab your property enough to become competitive against other properties in your area with a higher ARV, you’ll be able to attract better tenants. That’s because these tenants will be invested in maintaining the quality of their homes. After all, what attracted them in the first place are all the renovations you’ve made. When coupled with thorough screening, this should provide you with a trustworthy and reliable income stream.
- Economies of Scale: Economies of scale is when owning and operating multiple rental properties concurrently helps you lower your cost overall by reducing the average cost of each property and spreading out risk.
- Expensive loans: If you choose to use short-term or hard money loans to buy your property, then the high-interest rates can eat into your profit and investment capital. If you’re going to get such loans, you need to know how to make payments while not generating an income during the rehab phase.
- Rehab: Rehab is full of surprises. Timelines, interacting with many contractors and sub-contractors, unexpected issues. This is where you gain much experience, but without already having that experience, you need resources and contingency plans to bail you out in the event of an emergency.
- Waiting: The BRRRR method has two built-in waiting periods. First, there’s the rehab portion where you have to make all of your changes to the home before getting tenants. Next, there’s the seasoning period – when you own your property long enough to meet the stipulation that you own your property for a certain period before you can get refinancing.
- Appraisal: When your property is refinanced, it’s based on the appraisal, which means that an assessment that underestimates the value of your property will constrict the funds you have available when you get to the “repeat” portion of BRRRR. Thus, being as accurate as possible with your calculations in advance of the appraisal is super important.
Who is BRRRR For?
BRRRR is for investors who are on board with the entire BRRRR process. If you only want to generate passive income, then the whole process is not for you and neither is BRRRR. But if you’re comfortable with risk, have the resources, and are willing to do all the work that BRRRR demands, get-going!
Who is BRRRR is Not For?
You can count yourself out if the rehab part of BRRRR isn’t for you. This is the most challenging portion because it makes use of all your skills and resources. You need time, dedication, a network, and capital to finance the repairs and keep making mortgage payments. Although, you could put together a team and delegate responsibility to someone who can handle the rehab for you, either a business partner or a contractor who can handle most of the rehab themselves.
If you’re up to the challenge of BRRRR and have the resources to make it happen, you could be on the receiving end of considerable wealth. With each time around, you’ll get better and better, while also benefiting from a more robust network and economies of scale.