BRRRR Meaning: The BRRRR method is a real estate investment strategy hinged on using cash or short-term financing to buy a distressed property or a property under foreclosure. It stands for buy, rehab, rent, refinance, and repeat.
Investors using the BRRRR strategy will make the necessary improvements, bring the property to code, and increase the property’s value. Instead of reselling the property, BRRRR investors rent them out and accumulate rental income before refinancing for their next purchase.
The BRRRR method surfaced in early 2017 and was coined by investor Brandon Turner. Since then, it’s been adopted by real estate investors everywhere. The idea behind this strategy is to find a distressed property and learn how to make it profitable as a source of passive income. The main idea of financing the purchase of the property is by using a third party.
The BRRRR method is a fairly new strategy and is suitable for seasoned and new real estate investors alike. Building an investment portfolio with the strategy is lucrative since it generates passive income and requires significantly lower capital. Below is an overview of how the strategy works.
The first step for real estate investors using the BRRRR strategy is to get a good deal on a property under fair market value. The plan is to purchase a property that is distressed under present market conditions. The valuation of the property should be such that investing in the property will lead to an increase in its market value. Contrary to how most people buy real estate, the BRRRR method has you specifically looking for those homes with “good bones,” or the ones with some warts that may scare away other buyers.
Once the property has been acquired, investors fund the improvement of the property. The goal of rehab is to make the property rentable. The less money spent on this part of the stage, the better the investment, but you want to be sure to tackle any issues that may present a health or safety concern.
Next, investors rent out the rehabbed property at a reasonable price. Finding a reliable tenant will help you start building a steady cash flow with minimal headaches, and it all starts with a solid screening process. Moreover, the rental income you generate can help pay off third-party financiers as well as mortgage financing.
After acquiring tenants for the rehabbed property and starting to generate income, investors can apply for refinancing from third parties through options such as mortgage lenders. The financing value should be at least equivalent to the after-repair value.
The last step of the process is to use the cash out to invest in other projects. Rather than repeatedly saving the amount to invest, investors can purchase other properties with the amount they received from the refinancing process. The BRRRR method can be repeated by recycling the capital after each rehabbing, renting, and refinancing.
Peter spots a distressed rental property with 10 units. Peter had been saving and was in the market for an investment opportunity. Upon further investigation, Peter found out that the property had not been maintained for quite some time and had accumulated unpaid property taxes. While the property is distressed, Peter found that it’s in a prime location and could fetch a good rental income after renovation.
Furthermore, with new companies moving into the area, Peter was convinced the property would have a solid return on investment. After talking to a real estate agent, he discovered that the rental property had a market value of $400,000, and the outstanding taxes are $5000, bringing the cumulative total to $405,000. Peter tapped into his savings and found he could comfortably afford three-quarters of the amount, $303,750. Peter had to brainstorm on how he would raise the remaining $101,250.
After discussing the investment opportunity with him, Peter’s friend agreed to finance the remainder, $101,250, as a short-term loan. Peter promised to pay back the total amount in 18 months.
After six months of renovations, the total property cost came to $420,000. Peter had to borrow an extra $15,000 from his cousin and promised to pay the amount in the first three months after completion of the renovation.
Once the renovation was completed, Peter received applications from three tenants. One was moving from out of state, and Peter didn’t have enough information to verify their credibility. Peter moved forward with the other two tenants as the first residents in the newly renovated property. With several referrals from the tenants and his friends in the next two months, Peter managed to fill all 10 units and charged $2500 monthly for each unit.
After collecting rent for three months, Peter paid his cousin the $15,000 loan with $1000 interest. After a year, Peter qualified for a refinancing loan. The bank offered 85% of the appraised value. Since the appraised value for the property was $430,000, Peter received $365,500 after signing the agreement.
He paid back the $101,250 to his friend and put the remainder on a new, less strenuous project. Peter now gets multiple passive income streams and has equity from his properties, thus increasing his overall net worth. This summer, Peter plans to undertake a third BRRRR project.
The significant difference between house flipping and the BRRRR method is that BRRRR entails holding on to the property and generating rental income, while flipping is carried out with the end goal of selling the property and cashing out. The fundamental similarity is that they both consist of undergoing renovations and improvements to increase the market value of a piece of real estate.
BRRRR is arguably one of the most cost-effective real estate investments to build your portfolio and increase equity. While the process can take a long time, it is a great way to supplement your income in the long term because you’ll end up with multiple income streams that could last a lifetime.
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