BRRRR stands for Buy, Rehab, Rent and Repeat. BRRRR is an acronym for Buy, Repair, Rent, Finance, Repeat.
This is a way to build a portfolio of rental properties that allows you, when done well, to reuse the capital for multiple properties instead of saving for a down payment on each.
It has existed in different forms for many decades, but gained popularity online over the last ten years due to an explosion of real estate investment content. While the idea is simple, it’s important to go beyond watching a YouTube video or Instagram Reel.
The basics of each step are:
Buy
BRRRR is based on the principle of purchasing property at a price below its market value. It is not negotiable. This strategy is based on the creation of equity, both in the price paid and through rehabbing the property.
The process begins with buying at discount.
BRRRR properties are usually distressed. These properties will have cosmetic problems, deferred maintenance or outdated systems. Motivated sellers may also be involved. They don’t look good and scare away traditional buyers, who prefer a property that is ready to move in. This is what gives rise to the price opportunity.
After the renovation is completed, the purchase price must include the costs of rehab and the holding costs. However, there should still be enough equity left in the home to allow for a refinance. As a guide, most investors follow the 70-percent rule. The purchase price and rehab costs cannot exceed 70% of the value after repairs.
This margin makes all the other strategies viable.
Rehab
Inexperienced investors often get in trouble during the rehab stage.
It is important to get the property in a state that will maximize its value, and make it appealing to tenants.
Here, scope control is important. Remember that this is not your dream house.
It’s important to create a property for rental that is reliable and appraises well. You should focus your attention on the kitchens and baths that add most to an appraisal. You can also make functional upgrades to your electrical, HVAC, and plumbing systems. This will save you money on future maintenance.
It’s good to get detailed quotes from contractors prior to closing on a rehab project.
Add a buffer for contingencies of between 10 and 20 percent, then closely monitor spending throughout the entire project. If a rehab runs 30% over budget, it can make a BRRRR deal profitable into one that is a loss.
Rent
The property will need a renter once the renovation is completed. The cash flow generated by this step will make the property into a functional investment, rather than an asset.
A professional property manager can be very valuable, especially if you have more than one or two rental properties. Good property managers handle tenant screening, placement, rent collection and maintenance coordination. They also deal with the issues of being a landlord.
A property manager charges a certain percentage of the monthly rent. This is usually between 8 and 12 percent. However, for those who do not want to manage their properties or live in another market, this can be worth it.
Refinance
The BRRRR approach is different than a normal rental purchase because of this step. You refinance the property based on the new value of it, not what you paid originally.
You bought a $120,000 property and invested $40,000 in the renovation, making your investment $160,000. The property is appraised at $200,000 after the renovation. Cash-out refinances are available at 75% of appraised value. This gives you an additional loan of $150,000.
This $150,000 will pay off the original financing for your purchase and give you most, or in an ideal scenario all of your investment.
Repeat
If the refinance goes according to plan and you receive your capital, then you can use that money to start over on the next property. You can add a property each cycle to your rental portfolio, without having to start from scratch with a down payment.
This strategy is appealing because of the compounding effects. You now own five properties that generate monthly cash flow after five BRRRR cycles. All of these rentals were acquired with the same capital. You have grown your net worth by increasing the equity of each property and you’ve grown your monthly income by increasing the cash flow generated by each rental.
Is the BRRRR method still effective?
BRRRR is now in a more difficult environment than five or seven years ago. Short answer: yes, the BRRRR method works.
The margin of error has shrunk, so deals that succeed now require greater discipline and execution. BRRRR investors who are successful in this environment have a tendency to be very precise and will walk away from a deal if necessary.
