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What Is The BRRRR Strategy For Real Estate Investors? A Complete Guide

By December 16, 2020 January 7th, 2021 Investor Top Picks, Real Estate Investor Tips

The BRRRR Strategy (also called the BRRRR Method) is one of the easiest ways for both new and experienced real estate investors to build wealth.

Like any form of investing, it does have it’s risks (which we’ll discuss) but it also is relatively easy to learn and is a great method for building massive wealth rapidly, over time.

In this BRRRR Strategy guide we’ll review:

  1. A high level overview of the BRRRR Strategy
  2. A deep dive into each component of this Acronym
  3. What could go wrong in BRRRR Investing
  4. How to get started

The acronym BRRRR stands for: Buy – Rehab – Rent – Refinance – Repeat

BiggerPockets coined the term and this strategy is used by experienced investors as a method of real estate investing.

Using the five components together creates a way to maximize wealth with minimum capital.

Let’s jump into a high level overview of how the BRRRR Method works and then dive deep into each component.

A High Level Overview of the BRRRR Strategy

The premise of BRRRR investing is to:

Buy: Buy a property that with some repair will be worth much more than total cost of the property and rehab together. Ultimately if you can purchase the property at a discount from an eager seller, even better.

Repair: Go in, roll up your sleeves and make the property a home by repairing both inside and outside. This may mean turning a 2 bedroom, 1 Bathroom into a 3 bedroom and 2 bath by converting a sunroom or another area of the home.

Rent: Once your repairs are done and you’ve turned this into a beautiful home, you can now find a renter and get a lease signed.

Refinance: When a lease is signed and in-hand, you can now refinance the property based on the new ARV (after repair value). You can pay off the original loan used to buy the home and profit the difference.

Repeat: Now you can use that profit to find your next property to repeat this BRRRR Strategy.

When you refinance this property you may be able to borrow up to 80% of the new LTV (loan to value) with some hard money lenders.

Let’s dive deep now into each of these steps to show you how easy this can be, even for a new real estate investor.

A Deep Dive Into the BRRRR METHOD of Real Estate Investing

Buy

To maximize profits and wealth, you must find the right property to buy. This is where you make your money.

Find a property that needs repairs, you can do this by leveraging wholesalers, the MLS or your local real estate agent.

There are three key things you must look for (we will explain why shortly):

  1. Find a property that the seller is prepared to sell below the as-is value
  2. Make sure it’s in an area where you can maximize the after-repair value (ARV)
  3. The property needs to be located in a strong rental market

Why are these important?

It has to do with financing options and profit. We will cover these in more detail under Financing.

Once you have found the perfect property, there are a few things you should do.

Perform a deal analysis. There are a number of tools out there, we like DealCheck. It’s a free tool that will provide you necessary metrics and a Purchase Criteria Analysis to assess your deal.

This will include calculating the cost of renovations, estimating monthly rental expenses, and ensuring that the resulting rental income will provide a sufficient profit margin. You need to aim for at least 10% profit per month to ensure you meet long term financing criteria.

Rehab

By the time you purchase the house, you should know exactly what you need to do. Make sure the inspection covers costly items such as water heaters, HVAC, roofs and plumbing.

Two things to remember:

  1. Don’t over invest in the property. Only rehab the property inline with nearby comparables
  2. Use professional contractors to do larger jobs

Ok, so how do you figure out what improvements are necessary? Look at the local demographics, are they families, students, commuters, young professionals? Research nearby properties, what’s just sold, how do they look, has another flipper been successful in the area? What did they do? Choose a style for your flips, think of it as your brand.

One way to create a quick estimate is to split the house into interior and exterior.

Interior consists of, paint, windows, electrical, plumbing and HVAC. Then break down the interior into various rooms. Bedrooms may need new flooring, casing, doors and fixtures. Bathrooms, shower enclosure, cabinets, counter-top and sink. Kitchens will include additional items like appliances. Garages, epoxy and garage door.

Exterior upgrades could include a lick of fresh paint, landscaping, roof, patio, pool and decking.

Here’s a rough estimate many real estate investors use to calculate rehab costs. It’s a sliding scale.

Less Expensive Finishings: $2.00 / sqft

Mid-Range Finishings: $4.00 / sqft

High-End Finishings: $6.00 / sqft

How long will it take to complete the flip? When using hard money you typically have an interest only loan, therefore, there are monthly carrying costs, which we will cover in the Refinance section below.

One way to calculate time and cost is by assuming $1,000 per day. If the rehab budget is $25,000 it will take roughly 25 days to complete. This does not take into consideration contractor availability and schedules.

Rent

You should plan to find a renter before your rehab is complete.

We have a cool story about an investor who keeps in touch with tenants when they move out.

He emails them fairly regularly and if they are moving back, he offers them one of his properties.

He knows them, they know him. What a great risk free way of landing a long term lease.

To maximize wealth, passive income and cash out options, monthly rent needs to be as high as possible (obviously within reason and in line with rental comps, you need a renter).

Rent has a big impact on refinancing options. Rent covers your principal, interest, taxes, and insurance (PITI). You need to cash flow at LEAST 10% each month.

Meaning, if your PITI was $900, rent should be at least $1,000. The higher the percentage, the better refinancing options are.

So, how do you find and manage a renter as a landlord?

You can advertise on real estate sites such as Realtor.com or Zillow. You could hire a property manager to take care of the entire process, but be ready to give up 6%-12% of your monthly rent.

This might be helpful when you have multiple properties and property managers can make your life much easier.

Make sure you have all the necessary paperwork ready. Leases, deposits, agreements, walk-through checklists….they’re all important.

You can find templates online.

You can also use professionals to help you through the process.

Refinance

The fun part.

Once you have a renter in place and lease in hand you can refinance into a long-term, 30 year fixed rate rental loan.

Certain lenders can provide up to 80% loan to value (LTV) cash outs. Most programs can only provide this on properties up to 4-units.

Another benefit, there is NO seasoning. You can cash out the new market value as soon as you have a renter in place.

What does this mean? It means you can get 80% of the new market value of your property out, cash. You pay off your outstanding debt (hard money loan), and the money left over is yours.

Yes, really….

Use this cash windfall for your next flip.

Let’s explore in more detail. Are there any catches? What are the qualifications?

We’ve been subtly leaving clues throughout this post, you might have caught them.

1) The new market value of the property HAS to be above $100,000

2) You need a 650 credit score

3) You have to cash flow at LEAST 10% (the higher the better, I’ll explain why in a moment)

(Have more questions? Scroll down for FAQs)

Sounds great, what are typical interest rates?

This depends on the LTV percentage you want to cash out. The max is 80% and scales down. The higher the cash out percentage the higher the rate (7.5%-8%). The lower the percentage the lower the rate (6%-7.5%). Secondly, it depends on your credit.

What are the other drivers?

Rent. To maximize the LTV you need to have high positive cash flow. The minimum is 10%. The higher the percentage, the more cash you can pull out.

Appraised value. The higher the appraised value, the more equity you have built into the asset. Buying at a discount (below as-is value), finding a property well below nearby comparables all help boost after-repair value of the property.

The difference between your outstanding debt (hard money loan) and new appraised value is your profit, and accessible for the 80% cash out.

Let’s run a quick scenario:

You buy a house for $100,000 (purchase price)

Your hard money lender provides 90% of the purchase price, so your loan is $90,000 and you put down $10,000 cash.

The property is worth $120,000 (as-is value)

You spend $30,000 in renovations (rehab)

Your lender provides 100% rehab financing.

The value of the property after the rehab will be $220,000 (after-repair value)

Once you have a renter in place and meet all requirements, this is what could happen…

Outstanding debt is $120,000 (purchase price + rehab)

The appraisal comes back and the new market value is indeed $220,000 as predicted.

You can cash out 80% of the $220,000. This is $176,000.

Subtract outstanding debt, $120,000 from $176,000.

$56,000!!!

That’s how much cash you will walk away with before closing costs! That doesn’t even include the monthly cash flow you will receive…

Sounds pretty good. I bet you might have a property in mind. Get a quote here.

It get’s better. Here are other reasons why real estate investors use this loan.

There is no asset verification needed, there are no caps on how many loans you can get (banks have debt-equity ratios, once you hit this, no more low rates for you, or perhaps even loans), no seasoning period, quick (within 23 calendar days), and high LTV cash out.

A couple of things to look out for.

Be sure to know any prepayment policies. Typically, it is a 3 year, 2 year, 1 year step down. It would cost you 3% of the outstanding loan in year one, to payoff the loan in full. In year two, 2%, year three, 1%. Anytime after that, you can pay off without any penalty.

Let’s talk about closing costs, the elephant in the room – what to expect.

Well, 2%-3% origination fee is likely, appraisal costs usually run between $400-$800. There will most likely be a small fee for background and credit checks, and a standard underwriting and document prep fee.

Be careful when choosing a lender, ask them what all the fees are… HIDDEN fees that surprise you at closing kill deals and reputations.

Transparency is key. Find a trusted lender.

Repeat

Quite simple really…

Use the cash proceeds for the down-payment of your next buy and hold.

Find the perfect property and rinse and repeat.

What Could Go Wrong in BRRRR Investing

There are a couple of things that could jeopardize your BRRRR project. Albeit, these can all be avoided.

Rehab timeline and costs – have you worked with your contractor before? Do they meet deadlines? Every day counts. You have to pay your interest only hard money loan each month.

Appraisals – this is probably the biggest risks. The market value of your property drives profitability and cash out opportunities. You have invested time and money into your property, if it fails to appraise at the target value, you could lose all profit margins.

Time to fill vacancies – typically it takes two weeks for a property management company to find a renter. However, if it’s an inexperienced team, or you try to do it yourself, it could take more time than expected. Again, every day counts.

Rent Amount – if you didn’t accurately project monthly rent, it might take longer to find a renter if rent is too high. Don’t forget, lowering rent affects your cash out options. It might even disqualify you.

Conclusion: How to Get Started with the BRRRR Method

Following the BRRRR Strategy with real estate investing is no different than anything else in life.

Always remember that all experts were once beginners and that imperfect action will always beat perfect inaction.

Get active in your local community real estate investor Meetups (click-here to find one in your area).

Definitely join the BiggerPockets community. It’s free, very informative and there are over 1,000,000 members like you who are interested in Real Estate Investing.

Try to listen to a few podcasts a week around real estate investing. BiggerPockets has a great one and there are several others (we’ll have a post on the top real estate investor podcasts shortly).

Pick up a few real estate investor books, find a few mentors, speak to several realtors and heck give us a call if you’d like us to explain how real estate lending works. Knowing what access you have to lending will make it easier to search for the right property.

If your still nervous or uncertain, I get it. Your about to make a big investment.

One thing we’ve seen in helping and speaking with thousands looking for real estate investor lending is that sometimes partnering with someone on your first deal can help. Find someone who has a few properties already and find a way to collaborate with them.

It might mean giving them 50% of the deal for no investment and just mentorship in return. It could even mean giving them a percentage of future deals, but it’s well worth it. Your taking a shortcut to success by learning from someone else’s real life experience.

So are you ready? What questions do you have?

Drop a comment below or if we can help in any way give us a call.

Schedule a call with us now.