The BRRRR method stands for Buy, Rehab, Rent, Refinance, Repeat. It’s an approach to real estate investment that REIs use to flip a distressed property, rent it out, get a cash-out refinance, and use the profits for their next purchase.
What sets this method apart from other investment strategies is that it focuses specifically on distressed homes and refinancing loans. If you are a real estate investor and want to explore this strategy, you’re in luck. Below, we break down how the BRRRR method works, the benefits and disadvantages, and whether it’s a good fit for your goals as an investor.
How Does the BRRRR Method Work?
When used well, this method has the potential to provide passive income as well as a consistent means to buy and own rental properties.
Here’s how it works.
- Buy the property: Ideally, you purchase a distressed property at a reduced price because it needs repairs and renovations. Your goal is to bring it up to code as a rental.
- Renovations: Any distressed property needs rehab, but some require extensive repairs. Here is where you renovate the property to make safety, visual, and structural improvements so that it is appealing to your ideal renters.
- Rent it out: Determine a rental price that will work for the type of renters you want.
- Cash-out refinance the property: With this type of loan, you turn the property’s equity into cash. You take out a bigger mortgage and borrow more money than you currently owe. Then, you use the cash for anything you need, including buying your next investment property.
- Reinvest: Lastly, you start the process again as you reinvest the difference into a new property. Find your next distressed property and renovate it before you rent it out and refinance it.
Benefits & Disadvantages
Before you dive into your own BRRRR investment strategy, it’s important to weigh the pros and cons. It can be a solid strategy for investors, but it’s not for everyone.
- Start a passive income stream
- Build your rental portfolio
- Grow equity through renovations
There are a few cons to consider.
- Cost and labor of renovations
- Risk in continuous investment
- Requires patience
In some cases, it takes time to build equity in a property. Additionally, it’s not always easy to find good tenants. Luckily, we have a few tips to follow at each step of the process.
Tips for Using the BRRRR Method
As you work through the BRRRR strategy, it’s important to follow the steps in the right order. Below, we provide a few tips to help you along the way.
First, this strategy requires you to purchase a property that needs extensive repairs and renovations. Unfortunately, that makes it more difficult to get a traditional mortgage. There are a few reasons banks are wary of this.
Generally, mortgage companies and banks require property appraisals. However, it’s more difficult to assess the value of a distressed property. Certain mortgages also have specific guidelines for approval that this type of property won’t meet.
Still, there are other options for financing, including fix and flip loans specifically meant for real estate investors. When you purchase a distressed property, it requires a careful calculation of the value after repairs, or after-repair value (ARV). You can estimate the ARV by comparing the end result with similar properties in the area.
For a proper estimate, look for properties that have a similar size, number of bathrooms and bedrooms, type of build, condition, and age.
Rehab & Renovation
When you renovate a property, you have to bring the home up to code so that it is safe to live in. Next, find the improvements that increase the value of the property.
- Update the kitchen and bathroom
- Improve the curb appeal with visual enhancements
- Install energy-efficient appliances and windows
Before you start your rehab, put together a realistic budget and timeline. Leave a decent cushion for unexpected issues as well.
Rent It Out
As you reach the Rent stage of the BRRRR method, you want to find renters before you attempt to refinance the property. Generally, lenders prefer that a property have tenants before they approve a refinance.
So, how do you choose the right renters? There are a few qualities to keep in mind.
- Consistent record of on-time payments
- A solid credit report
- Steady income from a stable job
- Positive references
- No criminal record or history of eviction
Usually, you can learn this information when you meet potential tenants and have them fill out a rental application. Then, you can review their credit report, call references, and perform a background check. Of course, you also want to ensure you have their consent and follow housing laws.
Additionally, you need to determine a rent price that falls into your ideal range. Find a price that is fair for your tenants while providing a cash flow for your BRRRR strategy. One way to calculate this is to deduct the expenses of owning the home from the total amount of rent you plan to charge each month.
For example, if you plan to charge $1500 for rent, and your mortgage is $800, you’d have a cash flow of $700 each month. Alternatively, you can look at similar rental properties in the area to find competitive rates.
Refinance Your Rental
The next step of the BRRRR method is a cash-out refinance on your rental property. This allows you to use the difference to purchase your next rental investment. To do this, you need to work with a lender who offers cash-out refinance and meet their qualifications.
Every private lender has their own set of guidelines, which may include credit score requirements, debt and income ratio, and equity. Additionally, you may need to own the property for a specific amount of time before you are able to refinance it.
Repeat the Process
Finally, you use your refinance to start the process from the beginning. Follow the same set of steps as before. If you want to continue using the BRRRR method, it’s a good idea to keep notes every time you use it.
Examine your process every time and learn from any mistakes or problems you encountered.
Ready to Start Your Own BRRRR Strategy?
The BRRRR method is a great way to increase your passive income and build your REI portfolio over time. However, it requires a good amount of patience to renovate the property, find good tenants, and build equity before you refinance.
Before you plan your next move, weigh the pros and cons and find a lender that will work with you throughout your investment journey.
Partnering with a Trusted Lender
Partnering with a trusted lender like King James Lending can provide real estate investors with access to various financing options, including hard money loans, fix and flip loans, and bridge loans. Our team of experts can help you navigate the financing process and find the best solution for your investment needs.
The BRRRR method is a powerful real estate investment strategy that can help investors build wealth and achieve financial freedom. At King James Lending, we understand the challenges and opportunities of real estate investing and offer various financing options to help investors achieve their goals. Contact us today to learn more about our services and how we can help you implement this method in your real estate investment portfolio.