If you are interested in investing in residential real estate, you may have heard of the BRRRR method. An acronym that stands for buy, rehab, rent, refinance, repeat. Similar to flipping houses, this investment strategy focuses on buying and repairing properties that are not in good condition. But instead of reselling for a one-time profit, you rent it out, generating income while building capital to put into your next purchase.
What is the BRRRR method?
The BRRRR method is a method of investing in real estate. The name identifies the steps an investor must take to make money using this method. With this investment strategy, investors focus on buying real estate that needs business. Then they rehabilitate, rent them out to cover the mortgage, refinance the cash, and use their earnings to replicate it again with another property. It’s not for beginners – BRRRR is complex and requires experience, knowledge and ingenuity.
Buying a house at a discount is the key to making a profit using the BRRRR method. “All the money you make you’ll get on buying,” says Todd Baldwin, an experienced real estate investor who teaches online financial courses. “Rehab, renting, refinancing, and even selling a property are all great things, but money makes when you buy. If you can get a property on terms or for less than market value, you are doing a great job.”
What does BRRRR stand for?
This acronym shows each step the method requires, in order: buy, requalify, lease, refinance, and iterate.
Investors using this method should not purchase any property. It is important to focus on real estate that needs business, but it will also be a sound investment – in other words, it should be a good deal. Do your research and make sure you know exactly how much work the property will require. Create a schedule for when renovations will be completed and when you can start renting the property. You must fully understand what you are signing up for.
Determine your method of renovating the property. Will you do the work yourself or hire professionals? Determine the best ways to make your property livable and attractive to tenants within an efficient schedule.
“For BRRRR specifically, you need to have a clear understanding of the scope of work that is required to be done for rehabilitation,” Baldwin says. “You want to know your exact cost as well as the time it will take to complete the work. You can lose money very quickly if you do not have a solid understanding of these two aspects.”
Investors should focus on home renovations that provide the highest return on investment. This usually means updating kitchens and bathrooms as needed, and obviously making sure any risks are removed. Keep your budget in mind as you plan: A kitchen remodel can cost anywhere from $13,471 to $38,252, according to HomeAdvisor.
When the rehabilitation is complete and the property is livable, rent it out as soon as possible. The idea is to set a monthly rate that covers the mortgage payments — or more, we hope. You will also need to decide whether you will be managing the rental yourself or using a property management company. The sooner you rent it, the faster passive income will begin to emerge.
Once you have a strong tenant in place, it becomes a waiting game as you build your stakes in the property. This is because the next step is refinancing, and BRRRR is specifically focused on cash refinancing. A cash back allows you to take advantage of your home ownership to withdraw cash for any purpose. Different lenders will have different guidelines about how long you must own a property, or how much equity you must have accumulated, to qualify for this type of refinancing. The money you withdraw, in this case, is also the last step in the process.
This last step is what makes BRRRR so attractive – and potentially profitable. With the cash from refinancing, you invest in a new property and start the whole process over. By default, investors can repeat the process over and over again, continuously making profits from each new property.
Who is the best BRRRR method for?
“No investment comes without risk,” Baldwin says. The BRRRR method is not suitable for everyone – it is best for those who have solid knowledge and experience in real estate, and can accurately measure market values, renovation costs and more. Miscalculation of price or budget, or failure to secure the tenant at the right time and price, can result in significant financial losses.
The BRRRR investor should have enough time to dedicate to this process. Finding and renovating properties and working as an owner (possibly for multiple units) is a major time commitment.
Pros and Cons of BRRRR
This investment method offers great benefits, but there are definite drawbacks as well.
- You earn passive income: BRRRR investors can create a system that allows them to generate passive income, either as an additional income stream or to live from.
- You are building equity: buying and holding many properties means that your capital will continue to rise.
- It’s Repeatable: Unlike house flipping, the BRRRR method is not a one-stop process – you can keep iterating on the strategy and build a fortune exponentially as you go.
- Rehabilitation can be expensive and time-consuming: high-quality renovations usually aren’t cheap or fast. Supervising work can be stressful. Depending on the amount of repairs required, you may need to take out a rehabilitation loan. These loans usually have higher interest rates and can be expensive.
- It takes time to make a profit: BRRRR does not offer quick cash. It’s a slow and steady strategy. You have to put in the work and time before you start making money.
- Being a landlord is demanding: Finding and managing tenants can be difficult. The more you repeat the process, the more tenants you have.
- There are financial risks: There is a lot of educated guesswork in BRRRR. Whether you’ve incorrectly valued a home after rehab, overestimated the amount of rent you can charge, or underestimated your renovation budget, there’s always a chance that you’ll lose money.
Before you decide to jump into BRRRR real estate investing, research well and talk to other people who have done so. Baldwin even suggests finding a mentor, if you can. This method can be very profitable, but you need to know what you are doing – novice investors can be in a difficult situation.