The profession of real estate investing is a diverse one which involves many varied approaches and strategies. An individual may find success pursuing one track, but another may fail doing the same.
It’s up to each individual investor to identify the system that works best for his or her situation, but there are at least a couple of tactics that have proven to work for nearly everyone. The BRRRR strategy is one of them.
What is the BRRRR Strategy?
BRRRR is an acronym that stands for Buy, Rehab, Rent, Refinance, and Repeat. The concept was coined a few years ago by Brandon Turner at BiggerPockets, but in truth, savvy investors have employed it for decades to build a portfolio of rental properties without tying up a ton of cash.
Here’s an overview:
- The first letter stands for buy. You’re looking to purchase a property that (a) needs work, (b) has potential, and (c) can be purchased for less than it’s worth. This is by far the most time-consuming and challenging step in the process. You’ll have to conduct intensive deal analysis to calculate the cost of repairs, the monthly rental income, the value of the property after repairs, and so on. When accounting for repairs, many investors use the 70 percent rule. It states that an investor should pay 70 percent of the after-repair value (ARV) on a property minus whatever repairs it requires. If a home’s ARV is $150,000 and it needs $25,000 in repairs, the maximum purchase price would be $80,000. This ensures a healthy cushion to fall back on.
- The rehab phase is arguably the most stressful. It’s during this stage of the process that you have to make the property livable and functional, but also reset the value (which will help when it comes time to refinance the property). When you’re rehabbing, the goal is to make the property safe and attractive to your target market of renters. Make sure you don’t go overboard. If you’ll be renting the unit(s) for $900 a month, you don’t need to appeal to renters who have a monthly budget of $2,500. Of course you want to do a good job, but don’t throw money down the drain!
- Once the property has been rehabbed and it’s ready to live in, you put it on the market and begin looking for a renter. You want someone who is reliable (meaning that he or she has good references and no history of late payments or bankruptcies). A vacancy is the worst result of pursuing the BRRRR strategy. By thoroughly screening your tenants, you’ll reduce your chance of having someone walk out on you.
- After the property has been purchased, rehabbed, and rented out for a few months, you can shift your attention to refinancing. This is where the magic happens. A conventional lender will come out and order a new appraisal. It will be able to offer you 75 percent of the updated appraisal value, and a new maximum loan amount … and that will almost certainly be more than your current loan amount. Thus, when you refinance the loan, you can take out the difference between the old and the new, which is cash in your pocket.
- Done well, this strategy enables you to buy and rehab a property without losing any money. You’ll get it all back at the end when you refinance. Instead of having all your capital tied up in a single piece of real estate, you should be able to repeat the process over and over with multiple properties.
The BRRRR strategy isn’t foolproof. It can involve both opportunities and challenges. The inexperienced investor may encounter an array of setbacks, but this isn’t any reason to give up.
“Cash out deals can be a terrific part of your real estate strategy, or they can turn into a house of cards that come crashing down on your head,” Candice Elliott writes for Money Matters. “Run and re-run the numbers and make sure they work out before making any decisions.”
The Pros of the BRRRR Strategy
The BRRRR strategy can be appealing for a number of reasons. As you consider whether it will fit within your approach to real estate investing, think about the following pros:
- High returns. People use the BRRRR strategy because it usually works. When it’s done right, you have the potential to enjoy massive returns. And the refinance-and-repeat facet of the strategy means you get to enjoy recurring, robust returns (on top of monthly cash flow).
- Liquid strategy. Unlike other buy-and-hold investments in which you tie up your cash for years, this strategy is comparatively liquid. You’re in a position to pull out your money within just a few months.
- Quality final product. In conclusion, a rehabbed property is in much better condition than one that’s falling apart. You complete the process owning a quality property that could be dependable and marketable for years to come.
The Cons of the BRRRR Strategy
The BRRRR strategy isn’t for everyone. There are a number of risks, including potential negatives such as:
- Double the closing costs. As a feature of refinancing step, you’ll have to pay closing costs twice for each property. If you aren’t strategic about that, it can put a drain on your investment capital.
- Risk of becoming over-leveraged. The BRRRR strategy can become addictive. If you aren’t careful, you could end up overextending yourself and shouldering too much debt.
- Appraisal issues. The BRRRR approach relies heavily on the refinancing phase. If the appraiser comes back and tells you the property is worth less than you anticipated, you have a problem.
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Jorge is one of Green Residential’s Realtors. He is responsible for overseeing various leasing and sales activities. He has worked in the customer service and sales industry for 15 years.
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