BRRRR Method of Real Estate Investment
Building your asset portfolio one rehab, rent or refi at a time
BRRRR is an acronym for Buy, Renovate, Rent, Refi, Repeat. Many property investors like the BRRRR approach as they can recoup initial investment costs and build passive income at a fast and predictable rate. In fact, according to Mashvisor of all the real estate investment types, the BRRRR method is one of the best ways to build wealth. It is no wonder this approach attracts so much attention!
BRRRR is also accessible to investors with moderate cash reserves. This makes it alluring to investors who lack liquid assets or want to conserve them. Finally, BRRRR appeals to investors who are not looking for a ‘one and done,’ deal, but a process that is scalable, methodical, and iterative.
So how does BRRRR work? And what specific actions, considerations, and costs are associated with this approach? Evaluating BRRRR property deals expertly is the first step towards building a strong real estate investment portfolio. Let’s explore.
BRRRR – A Process that Pays, and Pays You
Breaking Down the Buy
What to Keep in Mind: Smart financing and accurate cost projection are just as important as the property itself. The bedrock of a good BRRRR deal is the numbers. Make sure at the outset to calculate all property costs, loan fees, rehab expenses, holding estimates and loan calculations to ensure the property is worth your time and effort.
Also – fully explore borrowing options. Cash, hard money, asset-based lending, seller financing and private loans offer varying and unique benefits. Selecting a preferred financing option should be a function of your overall investment goal. For example, a $200,000 loan on a property using traditional financing might cost $960 and $3,000 in closing costs. However, using seller financing that $200,00 loan may cost $980 per month and $1,300 in closing costs. If the hold time for this scenario is six months, this amounts to an overall savings of $1,580 as a result of seller financing. A financing selection will result in different financial performance, so choosing the optimal method is key. Additionally, do not underestimate holding costs, which many investors fail to accurately project and can diminish realized profits. In addition to financing-specific costs, consider use of the 70% rule. Investors rely on this rule to project the repair costs, after repair value and purchase price.
Implementing a Successful Renovation
What to Do: Once you secure the property the next step is to renovate it.
What to Keep in Mind: Key components of a renovation which force the most equity are updated kitchens, rehabilitated bathrooms, and additional bedrooms. Adding square footage also skyrockets appraised property value but is not always worth the price. We recommend only adding square footage by focusing on already-constructed space, such as porches or garage conversions. Key components that reduce equity are foundation and roof issues – if they exist.
Renting 101
What to Do: Next, rent the property yourself, or identify a property management company to rent it for you.
What to Keep in Mind: Although many investors opt to identify tenants and manage properties personally there are numerous benefits to working with a savvy, well-established property management company. Property management companies typically charge 8-12% of rental income, and serve an important function to include:
(1) Saving valuable time that can be spent prospecting or implementing the BRRRR strategy. Freeing up hours each week to focus on your investment portfolio is key – and trumps the standard price.
(2) Insulating you from the liability and stress of personally managing the property. Although legal issues may arise regardless, you are more likely to have fewer headaches with professional management.
(3) Ensuring identification of quality tenants and production of accurate accounting based on rent and property rental repairs.
Producing higher occupancy rates and tenant retention.
We also recommend investors create an LLC for each property in their BRRRR portfolio. This will assist in short-long term management of BRRRRs, as well as layered liability protection.
Recognizing a First-Rate Refi
What to Do: Once the property is rented out it is time to refinance. Your goal should be to recoup the total initial investment. This includes the property’s down payment, closing costs, and total renovation/holding costs.
What to Keep in Mind: An important consideration when refinancing is seasoning. This is a term used by lenders to describe the period required to establish a chronic rent roll (the monthly rental income paid by your tenants). The average seasoning period is 6 months, but every lender is different. This tenure can be longer or shorter depending on the property type, investor experience, and relationship with the lender.
Repeating – the Right Way
What to Do: Finally, repeat this process using the funds refinanced from the refinanced property.
What to Keep in mind: Over time many investors develop a BRRRR competency. This empowers them to shift their property acquisition approach at the ‘buy,’ stage from single family homes to multi-family properties or small apartment buildings. The ‘repeat’ stage is a good juncture to assess the BRRRR timeline, partnerships, and management systems.
Summing it up
Scaling your long-term BRRRR portfolio goals with intention is important. Although many early investors initially think they will be satisfied with 2-3 rentals, over time they expand their goals. With hard work, smart budgetary planning and creativity the BRRRR method is a solid strategy to build sustainable wealth.
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