The BRRRR Method, or Buy, Rehab, Rent, Refinance, Repeat, is an investment strategy in real estate that entails flipping a distressed property, renovating it, renting it out, and subsequently refinancing it to generate funds for additional property investments.

Diverging from conventional investment approaches, the BRRRR Method focuses on purchasing distressed properties and leveraging refinancing to acquire real estate assets.

For investors contemplating this strategy, it is essential to delve into the mechanics of the BRRRR Method, assess its advantages and disadvantages, and determine its suitability for their financial and real estate investment objectives.

How the BRRRR Method Functions

If executed correctly, the BRRRR Method offers a stream of passive income and a continuous approach to acquiring and managing rental properties. The method involves the following steps:

  1. Property Purchase: Buy a distressed property that requires renovation to meet code standards and become suitable for renting. The property’s lower cost is often due to its current condition.
  2. Property Rehabilitation: Given the distressed state of the property, substantial renovations are typically necessary. This phase involves making structural, safety, and aesthetic enhancements to prepare the property for rental.
  3. Property Rental: Determine an appropriate rental price and secure tenants for the property.
  4. Cash-Out Refinance: Engage in a cash-out refinance to convert equity into cash. This involves obtaining a larger mortgage, exceeding the current outstanding amount, and using the cash for various purposes, such as purchasing another property.
  5. Utilize Refinance Funds for Property Purchase: In the final step, leverage the funds obtained from the cash-out refinance to repeat the process. Buy another distressed property, undergo rehabilitation, rent it out, and proceed with refinancing.

Advice for Each Step:

Buy

The success of the BRRRR Strategy relies on the purchase of a distressed property requiring updates and repairs, making it challenging to obtain a traditional mortgage. Several factors contribute to this difficulty. Most lenders typically mandate an appraisal for the property, yet assessing its value proves complicated in the case of a distressed property. Additionally, depending on the loan type, the property must meet specific requirements to qualify, which a distressed property is unlikely to meet.

Before dismissing financing options entirely, it is advisable to consult with a lender to explore potential alternatives. While using a home equity line of credit (HELOC) or a hard money loan may be possible, these options come with inherent risks and are often discouraged.

When purchasing a distressed property, a crucial aspect is calculating the after-repair value (ARV). ARV represents the estimated value of the home post-renovation. To determine ARV, compare the planned final condition of the home with recently sold comparable properties in the area, considering factors like size, bedrooms, bathrooms, age, type of construction, and condition.

In determining the offer for the property, it is important to adhere to the 70% rule in real estate. This rule advises against investing more than 70% of the property’s ARV. For example, if the ARV is $300,000, the suggested maximum purchase price would be $210,000.

Rehab

When undertaking the rehabilitation of a home, your primary focus should be on essential upgrades that bring the property up to code and ensure habitability. Subsequently, prioritize improvements that genuinely enhance its value, such as updating the kitchen and bathroom, enhancing curb appeal, and installing energy-efficient elements like windows and appliances. Prior to starting the project, it is crucial to establish a practical budget and timeline to guide your efforts.

Rent

Ensuring the property is occupied by renters before proceeding to the next step, which is refinancing, is crucial because lenders typically require a property to have tenants before considering refinancing.

When selecting tenants, it is advisable to seek individuals with specific qualities:

  1. A reliable track record of on-time payments
  2. Stable employment with consistent income
  3. A favorable credit report
  4. No history of criminal behavior or eviction
  5. Positive references

This information can be gathered by meeting with potential tenants, having them complete an application, reviewing their credit report, requesting references, and conducting a background check. It is essential to obtain their consent and adhere to all housing laws in the process.

Determining a fair and profitable rent involves subtracting the total homeownership expenses from the monthly rent amount. For example, if you charge $1,500 per month for rent and your mortgage payment is $800, your monthly cash flow, excluding other expenses, would be $700. It is advisable to assess comparable rental rates to arrive at an appropriate and competitive price that benefits both you and the tenant.

Refinance

In the BRRRR strategy, a critical step involves engaging in a cash-out refinance on your investment property to obtain funds for buying another distressed property for renovation and rental purposes. To accomplish this, it is necessary to identify a lender offering cash-out refinance options and fulfill the eligibility criteria for the loan.

While specific requirements may vary among lenders, there are general prerequisites, including meeting a minimum credit score threshold (typically around 620 for a cash-out refinance), adhering to a maximum debt-to-income ratio (usually around 50% or less), and possessing equity in the property. There might also be a condition regarding the minimum duration of property ownership before being eligible for a cash-out refinance. It’s important to note that an appraisal is typically required, and additional expenses, such as closing costs, may be applicable for the loan process.

Repeat

During the final step of the BRRRR Method, you will repeat the preceding steps in the same sequential order. For those intending to persist in this approach, maintaining detailed notes during each iteration is advisable. This practice facilitates learning from prior experiences and avoiding repetition of mistakes throughout the process.

Pros and Cons To BRRRR

Pros

Some advantages of the BRRRR Method is the potential to generate passive income, expand your rental portfolio, and accrue equity while undergoing the rehabilitation phase.

Cons

There are a few downsides to consider. First off, there’s the whole cost and effort involved in fixing up the home. Since snagging a traditional mortgage might not be in the cards, you might end up with a pricier or riskier loan. And what if, when you’re all set to refinance, you qualify for less cash than you had in mind?

And then there’s the waiting game. Besides waiting for the renovations to wrap up, you might find yourself twiddling your thumbs longer than you thought before you can pull off that cash-out refinance. Plus, scoring great tenants to rent your place could also take a bit of time. So, it’s not all smooth sailing.

Alternatives to the BRRRR Method

If you find that the BRRRR Method doesn’t align with your real estate investment goals, there are alternative strategies worth exploring. The conventional investment approach entails acquiring a property in good condition (either through a traditional mortgage or cash payment) and renting it out to generate rental income. The rental income typically covers your mortgage, and any surplus funds can be allocated as desired, with the choice of increasing mortgage repayment.

You might delve into crowdfunded real estate investment. This modern approach involves gathering funds from a diverse group of investors who pool their resources to collectively purchase real estate. This enables individuals to participate in investments with lower financial commitment and effort while still enjoying the associated benefits.

Conclusion

The BRRRR Method has the potential to generate passive income and expand your real estate portfolio gradually. Nevertheless, the process involves patience, including the rehabilitation phase, tenant search, and waiting period before a cash-out refinance becomes feasible. Weighing these advantages and disadvantages is crucial before deciding on your next steps.