Investing in real estate is one of the best ways to achieve financial independence. But that doesn’t mean it’s easy to get from point A to point B. How do you decide in which properties to invest? Where do you get the money? And, just as important, how do you build your portfolio once you have taken care of that initial investment?
You need a strategy — especially if you’re just starting out as an investor. The BRRRR Method is just that: a specific, tested, and sustainable investment strategy that can get you from point A to point B and beyond. Let’s break it down, step by step, and compare it to some other popular investment strategies.
How Does the BRRRR Strategy Work?
BRRRR stands for “Buy, Repair, Rent, Refinance, and Repeat.” This real estate investing method describes a strategy and framework used by investors who have the desire to build passive income streams over time through collecting rents from tenants and building equity in properties. The specific steps involved in the BRRRR strategy include:
- Buy: Purchase an undervalued asset that appreciates in value using a hard money loan
- Repair: Renovate and improve the property to max out its value and make it tenant-ready
- Rent: Turn the property into a income-generating asset by renting it out at market rates
- Refinance: Use a cash-out refinance to pay off your initial hard money loan with enough money left over for a down payment on a new property
- Repeat: Do it all over again with a second (and third and fourth) property
That’s the BRRRR method in a nutshell, although it’s not as simple as it may sound. Buying real estate acts as one of the best investments for young adults because it stores value in a non-market correlated fashion, appreciates in value and generates cash flows across long periods of time. Personally, I’ve purchased two rental properties and rented them for positive cash flow.
At some point, I may want to expand on these holdings and would consider the BRRRR Method. For those interested in building a sizable investment real estate portfolio, let’s look at each step in more detail.
The video below provides a high-level overview while the article provides greater explanation and detail.
Looking for undervalued properties becomes an essential step for any wise investment, but it remains especially important when it comes to the BRRRR method. This holds true for two reasons.
First, because these property values come below market, you can boost their value with reasonably priced renovations. The more you can up the property’s value, the more equity you’ll have to cash in during step 4 — the cash out refinance.
Second, you seek out undervalued properties because, unless you already have a lot of capital on hand, you’ll want to finance this buy with a hard money loan.
A hard money loan comes from a private, non-bank lender, and the process for getting one is a lot different, and simpler, than getting a bank loan. When you request a loan from a bank, the primary factor in its decision is going to be your creditworthiness; with a hard money loan, the property acts as the collateral. That means the bank will just look at the investment value of the property. If it’s a good investment, you’ll get your loan. Therefore, you’ll need to make a strong case for yourself.
Of course, certain drawbacks exist for using hard money. Although the approval process comes at a faster pace and with a simpler application than a bank loan, hard money loans come with an interest rate that often carries a higher level than would a conventional mortgage.
Hard money loans can carry an interest rate as high as 15%, with a range of 7.5% to 15%. These loans also come with a slightly lower loan-to-value (LTV) ratio than a conventional loan as well as a shorter repayment term, usually one to three years.
Hard money loans count as short-term money, used mainly by BRRRR investors and house-flippers. In fact, the first two steps of BRRRR essentially use the house-flipper formula, without the “flip.” With that in mind, one good way to make sure you look at a quality investment includes using the house-flipping standby, the “Rule of 70%.”
The Rule of 70% states that you shouldn’t pay more than 70% of a property’s after-repair value (ARV), minus repair costs. In real terms, that means that if you look at an investment property with an ARV of $200,000 that needs $40,000 in repairs, you should pay no more than $100,000 for the property.
Although this doesn’t serve as an ironclad rule, it makes good financial sense. In the case above, after you spend $40,000 on repairs, you’ll still have $60,000 of breathing room to absorb cost overruns, market fluctuations or other unforeseen complications.
Once you’ve bought your property, you’ll have a good idea of how much you can afford to spend on repairs, as well as what specific repairs you’ll need. The difficulty here arises in two ways:
First, you’ll need to find a contractor who can perform those repairs competently and within your budget. That can be harder than it sounds. By the time you’re rehabbing your fourth or fifth or tenth property, you’ll have found people you can trust. But in the beginning, it can be challenging. If you know other investors, ask for referrals.
Second, every day you own the property costs you money. These carrying costs include utilities, property taxes and even loan payments. So even if your repairs come in under budget, if they take longer than scheduled, that can cost you extra money, too.
As for what repairs you should undertake, there are a lot of great guides to what home repairs have the best return on investment.
If you were a house-flipper, this is the point where you’d sell your home. But with the BRRRR method, it’s time to turn it into a cash flow-generating asset. That means renting it out.
Renting out the property is your endgame for the property, so that means in your initial buying process, you should evaluate the property as a rental. For the BRRRR method, a property in a great, active rental market comes as a preferable choice to one that may be slightly more undervalued but carries less attractiveness to renters.
For example, think of a condo or apartment near a university, which will have a constant amount of demand versus a suburban property in a cul-de-sac that might have more raw value but is located in a market more geared to buyers.
Also keep in mind that any time your rental property doesn’t have a tenant, the costs essentially eat a hole in your pocket. Research vacancy rates when you consider properties and screen your tenants carefully. When you run projections, don’t forget to take property management fees into account — these can usually amount to around 10% of rents collected.
Here’s where the BRRRR method really shows its value. Once your property has been renovated and rented, you can proceed with a cash-out refinance, which basically converts the home’s equity into cash.
Cash-out refinances can free up some cash, but they also have a lot of other advantages as well. You’ll get a much better interest rate on a cash-out refinance than you would on a home equity loan or a home equity line of credit (HELOC), much less another hard money loan. And you can deduct the interest on your taxes.
With your cash-out refinance, you can settle your initial loan and use the cash for the next step.
The cash from the previous step would make a perfect down payment on another property. And this time, you’ll have experience under your belt, a growing network of contractors and a cash-generating rental property. With careful planning, you could use the BRRRR method to build a sizable portfolio of rental properties; the sky’s the limit.
It’s not easy — if it were, everyone would have half a dozen rental properties. It takes a lot of careful research and planning on the front end; the initial step — the purchase — has outsized importance compared to the other steps. But if you get that right, the rest of the puzzle can fall into place.
In the end, the BRRRR method is the only real estate investment strategy that can take you from no money down on your first investment to a healthy portfolio of cash-generating rentals in less than a decade. The sooner you get started, the sooner you can realize your investment dreams.
This post was previously published on youngandtheinvested.com.
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